In the latest battle over the appropriate classification of “medical stop-loss” or “medical excess loss” coverage, a Texas appeals court (the “Court”) has ruled that such coverage is reinsurance and not direct insurance, a classification that is critical because the Texas Department of Insurance (the “Department”) has only indirect regulatory authority over reinsurance, but has extensive authority over direct insurance, including the ability to impose certain fees and approve policy forms. In American National Insurance Company et. al (“American National”) v. Texas Department of Insurance 2009 WL 4878676 (Tex.App. Austin), the dispute concerned the appropriate classification of medical stop-loss coverage issued in connection with self-funded medical benefit plans.
What are Self-Funded Medical Benefit Plans
The Court described a self-funded medical benefit plan as one that operates by maintaining a pool of funds that are contributed by an employer or its employees, or by both, from which the plan pays covered medical expenses of the employees and their dependents. The plan assumes the risk of paying covered employees’ (and their dependents’) expenses rather than shifting the responsibility for payment entirely to a third-party insurer. Many of these plans qualify as “employee welfare benefit plans” as defined by the Employee Retirement Income Security Act of 1974 (“ERISA”).
What is Medical Stop-Loss Insurance
The Court described medical stop-loss insurance as coverage that allows a self-funded medical plan to shift some of its (or the sponsoring employer’s) risk to an insurance carrier. Such policies often contain both specific and aggregate coverage. With specific coverage, when a claim exceeds the specific attachment point (often called a specific deductible expressed as an amount per covered life per plan year), the stop-loss insurer reimburses the plan or the sponsoring employer for the amount of the claim that exceeds the specific deductible. Aggregate coverage is triggered when all claims paid during the plan year (excluding amounts reimbursed under the specific coverage) exceed an attachment point, which is generally expressed as an amount in excess of 120 percent (or other percentage) of anticipated annual claims, subject to the policy limit. Although self-funded medical benefit plans protected by stop-loss insurance always select specific coverage, some of these plans do not purchase aggregate coverage.1
A medical stop-loss insurance policy is a contract between the insurer and the plan or the sponsoring employer; the stop-loss insurer has no contractual relationship with employees covered under the self-funded medical plan.
The Texas Appeals’ Court Decision
Self Funded Medical Plans are Considered Insurers Capable of Purchasing Reinsurance
American National had always treated medical stop-loss insurance policies as reinsurance, but the Department claimed that such policies were direct insurance, not reinsurance, principally because of the Department’s position that only insurers can purchase reinsurance, and the Department’s view that self-funded plans are not “insurers” under Texas law. However, pursuant to the Texas statute requiring a license for any entity engaged in the “business of insurance,” which is the linchpin of state insurance regulation, a self-funded medical plan qualifies as an “insurer.” Although the Texas Insurance Code does not specifically define “reinsurance,” it does provide a contextual definition by stating that “any insurer authorized to do the business of insurance in [Texas] may reinsure in any solvent assuming insurer, any risk, or part of a risk which both are authorized to assume….”
American National contended that self-funded medical plans meet the definition of “insurer” engaged in the “business of insurance” under the Texas Insurance Code and qualify under the contextual definition above to buy reinsurance as any other insurer. Therefore, American National argued, it is permitted to classify medical stop-loss coverage sold to self-funded medical plans as reinsurance.
The Court agreed that self-funded medical plans are “insurers” because, among other activities, these plans engage in the business of insurance by making insurance contracts, receiving insurance applications, receiving premiums as consideration for insurance and delivering insurance contracts. Because the selffunded medical plans are “insurers,” by purchasing stop-loss coverage they were purchasing reinsurance. The Court also concluded that nothing in the Texas Insurance Code limited the purchase of reinsurance to “authorized insurers.” The statute quoted above was merely permissive, giving authorized insurers the right to purchase reinsurance without prohibiting self-funded medical plans from doing the same. Moreover, the Court ruled that self-funded ERISA plans do not need the state’s permission to reinsure, and any attempt to prevent them from doing so would be preempted under ERISA.
Medical Stop-Loss Insurance is Appropriately Classified as Reinsurance
In buttressing its conclusion that medical stop-loss coverage is reinsurance, the Court noted the following two facts. First, under Texas statutes, health maintenance organizations, which are not licensed as health insurers by the Department, are specifically permitted to purchase “reinsurance;” and second, medical stop-loss insurance meets the definition of reinsurance as the insurance coverage issued by American National had the classic characteristics of reinsurance: (i) American National has no contact with the individuals insured by the plans; (ii) all losses are handled by the plans and then sent to American National for indemnification; (iii) American National does not make coverage decisions with respect to individuals insured by the plans; and (iv) American National has no contractual relationship with the individuals insured by the plans and cannot be sued by them.2
It is unclear whether the Department will appeal this decision as a spokesman for the Department has stated that it is “currently reviewing the Court’s decision and will make a determination about possible next steps at the appropriate time.”
Analysis of the Court’s Decision
The Court cited decisions from other courts it claims are in accord with its decision, including Brown v. Granatelli, 897 F.2d 1351 (5th Cir. 1990), which analyzed the substantially similar predecessor to current Texas law and determined that stop-loss insurance purchased by a self-funded plan was not direct accident or sickness insurance, but rather reinsurance; United Food & Commercial Workers & Employers Ariz. Health & Welfare Trust v. Pacyga, 801 F.2d 1157, 1161 (9th Cir. 1986) (holding stop-loss insurance is not equivalent to direct health insurance); Cuttle v. Federal Employees Metal Trades Council, 623 F.Supp. 1154, 1157 (D. Me. 1985) (“Stoploss insurance is not group health insurance providing insurance to individuals through a sponsor group. Rather, it is insurance obtained to protect self-insurers from risks . . . .”).
However, the Court fails to mention contravening authority in other jurisdictions that have found stop-loss coverage is direct insurance and not reinsurance. For example, in 2008, the Seventh Circuit Court of Appeals agreed with the Wisconsin Department of Insurance in holding that stop-loss insurance is not reinsurance. Edstrom Industries, Inc. v. Companion Life Insurance Co., 516 F.3d 546 (7th Cir. 2008). The Seventh Circuit reasoned that a contrary “[i]nterpretation would not only strip the purchasers of stop-loss insurance, even when they are small companies, of the extensive protections that Wisconsin law provides to insureds…but it would disrupt the Wisconsin Health Insurance Risk Sharing Plan. The [Wisconsin Health Insurance Risk Sharing Plan] provides health insurance to persons who cannot obtain private coverage, and finances the program by imposing fees on health-insurance companies including companies that sell stop-loss insurance to employers who sponsor self-funded employee welfare benefit plans.”
In supporting its conclusion in Edstrom Industries, the Seventh Circuit cited a number of cases, including Kitchell v. Public Service Co. of New Mexico, 972 P.2d 344, 348 (N.M. 1998); South Carolina Property & Casualty Ins. Guaranty Ass’n v. Carolinas Roofing & Sheet Metal Contractors Self-Insurance Fund, 446 S.E.2d 422, 424-25 (S.C. 1994); Stamp v. Department of Labor & Industries, 859 P.2d 597, 540-44 (Wash. 1993); Iowa Contractors Workers’ Compensation Group v. Iowa Ins. Guaranty Ass’n, Inc. 437 N.W.2d 909, 914-16 (Iowa 1989); Zinke-Smith, Inc. v. Florida Ins. Guaranty Ass’n, Inc., 304 So.2d 507 (Fla. App. 1974); and Tennessee Department of Commerce and Insurance, “Regulation of Excess Stop-Loss Coverage,” Tenn. Ins. Bulletin 7-1-94 (1994). A New York Office of General Counsel Opinion (OGC Op. No. 09-04-08) last year also reaffirmed that medical stop-loss insurance is not reinsurance and thus is subject to New York state insurance regulation.
Uncertainty as to whether medical stoploss coverage is direct insurance or reinsurance can be eliminated by a precise definition in state insurance codes. For example, the Illinois Insurance Code defines “stop-loss insurance” as “insurance against the risk of economic loss issued to…an employee welfare benefit plan as described in 29 U.S.C.10001 et seq.”3 However, where state insurance codes are not clear, the ultimate determination will be left to state insurance commissioners and the courts to conduct their own analysis and draw their own conclusions. The analysis can be complex and the conclusions from one state to the next can seem inconsistent.