Why Does Reform Always Seem to Favor the Wrongdoer?

Spending the last 14 years (4 of them as an attorney) working on behalf of benefit plans across the United States, it has always been a little perplexing to see some of the actions taken by State Legislators and Insurance Commissioners to make it more difficult for benefit plans to cost effectively offer comprehensive health benefits to their employees.  Despite the ever increasing cost of providing medical care, states continue to attempt to pass laws intended to negatively impact the ability of an employer to provide affordable benefits to its employees.  They seemingly will stop at nothing to preclude benefit plans from holding those responsible for the injuries they cause, rather than have those benefits issued from a health insurance policy or a self-funded benefit plan.

To truly understand the problem, we must first understand the difference between an “insurance company” and a “self-funded benefit plan”.  Insurance companies are organizations that enter into the business of risk with the intent to make a profit.   These companies tend to be very large organizations with millions of members who get their insurance through their employer who then sells that risk to an insurance company in exchange for premiums.  One need not research very much the profits of some of the largest insurance companies in America.

What, then, is a self-funded benefit plan, and why is it pertinent to the discussion?  Recall above that many Americans get health insurance benefits through their employer.  Many of those employers enter into insurance contracts to provide those health benefits.  In so doing these employers are at the mercy of the insurance company.  The employer has no control over the benefits, or the cost of providing those benefits to its employees.  Self-funded benefit plans offer a mechanism which allows an employer to take an active role in both the provision of benefits to its employees but also the management of the benefit plan.  These companies have essentially decided that they want to take on the financial risk of providing health benefits to their employees; in exchange, the government tends to provide special protection to these organizations.  The key difference between a self-funded plan and a health insurance company is that the self-funded plan is not entering in the business of risk, they are simply finding a way to provide the same health benefit, but with the added benefit of control over the benefit offerings are able to provide benefits much more affordably to their employees.  In fact, a majority of employees who receive health benefits from their employers in America do so through a self-funded benefit Plan; 78.5% of large employers offered self-funded plans in 2016 and 57.8% of all employees in American were enrolled in self-funded plans in 2016.[1]

Why is all of this relevant to the discussion of states limiting the ability of insurers to recoup funds paid by benefit plans from third party’s responsible for causing the injury or illness?  Because unlike “insurance companies” who enter into the business of risk and earn hansom profits for doing so, self-funded benefit plans are unable to profit from the benefit plan; all contributions to the fund used to pay medical benefits are made by either the employer or the employee and are held by the plan for its use to pay and administer the health benefits being offered.  No one at the employer making money off of the funds set aside for benefits.

Imagine the following example; hypothetical school district A in the state of New York hires actuaries to analyze whether it would benefit from switching its health insurance from a fully insured arrangement to a self-funded one.  After months of analysis and discussion it is decided that the benefits the employer can provide at a much lower cost render this worthwhile venture and they decide to proceed.  Everything is going completely according to plan until year 3 when a plan participant has an automobile accident with a commercial vehicle and suffers significant injuries, incurring $800,000.00 in medical bills.  Fortunately, the commercial company has a very good insurance policy with $5,000,000.00 in limits. Even though the commercial company was undisputedly at fault for the accident and has insurance sufficient to cover all the damage it caused, the State of New York lets them off the hook.  This is because the State does not allow the school district to seek reimbursement from the commercial company for those medical benefits it paid on behalf of the injured plan participant.  The practical impact of that is potentially two-fold: 1) there are less funds now available in the benefit plan to use to pay for the medical bills of the other beneficiaries who are ill through no fault of anyone else, and 2) the benefit plan may now need to increase the contributions of the employees going into the following plan year.

While this hypothetical is fake, or at least loosely based on several true stories, the reality is not.  Several states across the United States have or are attempting to enact laws which are intended to preclude a benefit plan and/or insurance company’s ability to hold tortfeasors responsible for their actions.  These laws take on many forms.  Some states limit the ability of an insurance company or benefit plan to obtain reimbursements altogether.  Others limit the ability of a benefit plan or insurance company to recoup losses from an at-fault party only when that at fault party has insufficient insurance or assets to compensate injured party in full for their losses.  Finally, some states allow the responsible party to avoid liablity, allowing the injured party to be compensated for its damages but not allowing the health insurance providers to recover their losses.

Now, in the case of an “insurance company”, who as was discussed above enters into the business of risk for the purpose of making money, it is objectively a bit more understandable that a state may force these large organizations to shoulder that burden; because, they say, that’s what they signed up for.  For perspective, The Department of Labor’s Employee Benefits Security Administration (“EBSA”) completed a study and estimated that private health insurers spent about $848 Billion in 2010 in health claims and obtained an estimated recovery of about .2 or .3% of those payments, or between $1.7 and $2.5 billion in 2010.[2]  Certainly, those companies have the resources to be able to take those losses.  However, school districts and all different kinds of municipal entities have entered into self-funded benefit plan arrangements because they find them to be better avenues for providing comprehensive, cost effective health benefits to their employees, and their legislators are actively impacting their ability to do so, and the benefits of their constituents, negatively.

Now, many will argue that these laws are designed to protect plan beneficiaries from benefit plans who are coming after their injury settlement money, and in many cases, that is true.  This article isn’t intended to argue the merits of that cost containment strategy, even though it is a strategy that the Supreme Court of The United States has signed off on many times over in cases like Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006) and US Airways, Inc. v. McCutchen, 133 S. Ct. 1537 – 2013.  It is also noteworthy that the example cited above was one where the third party tortfeasor who had the means to pay everyone back, in full, for the damages they caused was allowed to avoid the damages caused to the self-funded benefit plan by their negligence.   Some version of this hypothetical occurs regularly in the United States and benefit plans are left holding the bag while negligent parties in several of these states are allowed to avoid responsibility.  The practical impact of this is higher health insurance premiums for hard working Americans, many of whom are already struggling to survive financially.

America has become a very polarizing place; middle grounds are tough to find.  Often, the topics that must be discussed are completely off the table because folks are incapable of opening up their minds and considering views other than their own.  This dynamic is destructive in every possible context. We must be able to sit back and view issues objectively so that we may find the best possible solution.  Completely outlawing parties from holding each other responsible certainly does not seem to be the answer to the insurance rate conundrum in America, and even if it is, does it really make sense to attack organizations who are trying desperately to do right by their entire employee population and provide them, good, affordable benefit packages?  Apparently states with laws like some of the ones discussed above have decided that the rights of the wrongdoers should be protected over the rights of those injured by the wrongdoers.  Perhaps it is time we revisit that construct.

[1] Paul Fronstin, Ph.D. Employee Benefit Research Institute Issue Brief.  Self-Insured Health Plans: Recent Trends by Firm Size, 1996-2016. Feb. 27, 2018 No. 442. https://www.ebri.org/pdf/briefspdf/EBRI_IB_442.pdf

[2] Trends and Practices in Healthcare Subrogation. https://www.dol.gov/sites/default/files/ebsa/researchers/analysis/health-and-welfare/trends-and-practices-in-healthcare-subrogation.pdf

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