Self-Funding of Health Plans: One More Thing That Should Keep Risk Managers up at Night
Just in case risk managers don't have enough to handle on the property/casualty side of insurance, here's something new to think about: Do corporations that self-fund their health plans in order to save money on insurance premiums do their jobs correctly, and does anyone fully appreciate the exposure if they don't?
These questions are important because self-funding can be like anesthesiology: 99 percent boredom and 1 percent sheer terror. Some parts of the job involve fairly routine record-keeping, of little interest to anyone outside of HR. But other parts require a tremendous amount of insurance sophistication and expertise. If the management falls short, the consequences can be great, triggering legal liability, employee relations issues, financial exposure and considerable legal complexities.
One self-funded company learned this lesson the hard way when it decided to switch at the end of a policy/plan year to a new stop-loss insurance company and third-party administrator. To assess if the time was right for such a drastic change, the company asked the existing TPA if any substantial risks were in the pipeline.
The TPA advised the company about a few upcoming risks, but somehow neglected to mention the largest one of all. The company innocently relied on that incomplete data--failing to appreciate that, by withholding information about that claim, the TPA was enabling the stop-loss insurer (which happened to be its sister company) to avoid the obligation to pay it.
It took about a year for the disastrous financial impact to hit the self-funded company. That happened when the claim finally came in after the company had switched to a new TPA and stop-loss insurer. The claim was denied by the original stop-loss company on grounds that the company had switched insurers. But it also was denied by the new stop-loss company on grounds that it was pre-existing.
The company conducted an investigation into how it ended up without stop-loss coverage for this substantial claim, despite having paid premiums continuously. It eventually discovered the historical nondisclosure of the claim by the sister TPA at the key decision point. It took about three years in heated litigation for the company to right the wrong.
But even a jury verdict in the company's favor, and the award of legal fees, was slim compensation for the aggravation in between.
Don't be fooled by the absence of the word "insurance" in "self-funding." And don't be fooled by the role of the federal government and federal statutes in the regulation of self-funded benefits plans. Insurance is the very foundation of these plans. Any risk manager who thinks otherwise is likely, someday, to have a big surprise.
The following, accordingly, is a list of some issues that risk managers should consider when thinking about self-funded benefits plans:
Is the risk management department and/or corporate law department sufficiently involved in the systems used by HR and benefits personnel to operate self-funded benefits plans? Especially since the passage of the Sarbanes-Oxley Act, it has become increasingly risky for companies to have limited review and oversight in this arena.
To have adequate controls, risk management departments and corporate law departments should have clear understandings of the differing legal obligations and exposures involved in being: (a) self-administered; (b) self-funded; (c) self-insured through a captive insurance company; (d) or whatever combination of these approaches that has been selected by that corporation.
Appropriate controls may involve periodic reviews of the various HR forms, revising as necessary to achieve accuracy, consistency, lack of ambiguity and conformity with the underlying plan documents and insurance policies. Other controls may involve conducting spot-checks of randomly selected employees, to verify that all paperwork is being handled properly for those employees and they are getting all the benefits to which they are entitled.
Still other controls may involve periodic audits of the payment and coverage practices of the plan's TPA and the stop-loss insurer, to ensure that all plan and policy provisions are being complied with fully.
POTENTIAL FINANCIAL EXPOSURE
Once a mistake is discovered, all efforts should be made to locate any others, and to put a dollar sign on the company's exposure. Although tedious, this task must be undertaken promptly, as it will enable risk managers and corporate counsel to assess the severity of a situation and the resources that should be devoted toward finding a solution.
It also will enable public companies, in conjunction with their lawyers and accountants, to assess the need, if any, for disclosures of potential exposure in upcoming public filings.
POTENTIAL LEGAL EXPOSURE
Conducting an immediate search for any comparable errors, as described above, has legal benefits in addition to financial ones. Specifically, if a second mistake is made, after a corporation has arguably been placed "on notice" of the problem, the corporation's legal exposure will be higher than it was for the first mistake.
But it would be a valid defense for a corporation to show that it took steps immediately to avoid other mistakes and that, although those steps may have failed to prevent the second mistake, they may have succeeded in preventing a third one.
At all levels of a corporation--from top executives to mailroom personnel--employees can be extremely touchy about the possibility of errors in their health benefits. Rumors and unrest, along with a decrease in productivity, can spread quickly at the mere thought of problems.
Unfortunately, this sensitivity was heightened by the collapse of Enron Corp. and the substantial amount of publicity accorded to employees who witnessed their 401(k) funds fall victim to abject corporate mismanagement.
In recognition of this environment, risk managers and corporate counsel would be well-advised to move HR problems to the front burner as soon as they are identified, and to resolve them as quickly and quietly as possible.
Problems that arise in connection with benefits can be exceedingly complex as a legal matter. These complexities arise from the juxtaposition of ERISA, HIPAA, IRS codes and regulations, state insurance laws and state unfair trade practices acts, among other things.
To cite but one example, if an employee sues an employer for the wrongful denial of a health benefit, that suit ordinarily would arise under ERISA, which would preempt both state law and the jurisdiction of state courts. If the same employer sues its stop-loss insurance company for wrongful denial of a claim, that suit could arise under state common law for breach of contract, and the state courts could have jurisdiction. Thus, whenever there is a discovery of a potential problem in HR, careful consideration should be given to which procedural and substantive laws would apply.
Self-funding of health benefits offers many potential advantages to corporations, particularly in terms of the bottom line. Risk managers should remember, though, that this alternative is not for the unsophisticated, or for the faint of heart. When problems arise, as they inevitably will, quick thinking by risk managers can prevent this cost-saving measure from turning into a financial sieve.
RHONDA D. ORIN
is the managing partner of the Washington, D.C., office of Anderson Kill & Olick. She specializes in representing policyholders in connection with their insurance coverage needs, including the representation of corporations with self-administered insurance plans and self-funded benefits plans.
June 1, 2008
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