Is your self-funded health plan safe?

Business & Health, May, 1991 by Mark Lutes, Lynn Shapiro Snyder

State legislatures are awash with proposals to regulate managed care health benefits programs and provider contracts. Interest groups supporting such proposals include health care provider associations, which argue that licensure requirements or other legal barriers to managed care contracting are essential to safeguard quality of care as well as to protect a consumer's freedon of choice with regard to a provider.

On the other side of the fence are employers, insurers, and managed care companies asserting that anti-managed care laws are unjustified, consitute regulatory overkill, and are a barrier to future growth of managed care. They also allege that onerous regulatory requirements may only decrease the cost effectiveness of these managed care initiatives when consumer harm has not been adequately demonstrated. Indeed, from their perspective, provider groups' testimony about quality may merely mask the provider's desire to protect income levels and autonomy.

Hiding behind ERISA

Employers with self-funded benefits plans may be unaware of the imminent threat to managed care arrangements posed by these anti-managed care state legislative proposals. They may also be relying on the protection of ERISA's preemption clause as justification for not participating in the anti-managed care polict debate.

ERISA's preemption of state law is extremely effective in disposing of both common law and state statutory benefit claims actions, as well as attempts by state legislatures to directly regulate the content of self-funded health benefits. But preemption is not all-powerful. Self-funded plans may be subject to state regulation indirectly under the guise of state insurance law in a number of areas. Thus, state legislative proposals designed to regulate managed care must be monitored, and state legislatures must be made aware of self-funded employers' interest in impending legislation. Otherwise, self-funded plans may lose their ability to contain escalating health care costs because of managed care erosion.

Courts waffle

The courts are consistently holding that an insurer's furnishing of administrative services to a self-funded plan will not subject the plan to state regulation. Yet the results are mixed on whether a plan's purchase of stop-loss insurance will deprive the plan of ERISA preemption protection. Thus, plans that purchase stop-loss insurance, particularly where the coverage has low attachment points or where the benefits are payable to the plan participant rather than to the plan itself, may find themselves unprotected from state insurance regulation of managed care activities.

State limitations on the ability of self-funded plans to enter into cost effective contractual relationships directly with health care providers may also survive ERISA preemption. For instance, it is not clear whether capitation and withhold arrangemets, by which self-funded plans share risk with health care providers, will be immune from state regulation. Likewise, a self-funded plan's ability to utilize organizations providing or arranging for dental, mental health, and optical services is likely to be sharply curtailed by state regulation of these managed care entities. Moreover, state regulation of provider charges or rates has been found to be beyond the scope of ERISA's preemption despite its usually adverse effect on the cost containment efforts of self-funded plans.

Self-funded plans' flexibility with respect to provider contracting may be subject to other state law limitations as well. For instance, some legislatures have mandated that insurers, HMOs, and non-profit service plans must contract with specified classes of providers (e.g., podiatrists, chiropractors and psychologists). A number of states also require that insurers or service plans enter into contract with any provider "willing" to meet the payer's terms, possibly precluding selective contracting by these entities--an essential component for some managed care programs. Self-funded plans wishing to avail themselves of the provider networks established by such entities could be adversely impacted by these new policy initiatives.

Self-funded plans also may not be beyond the impact of new state legislation regulating utilization management. For example, as part of a new licensure requirment for UR activities, state legislation might require that all utilization decisions (prospective, concurrent and retrospective) must be made by physicians who are board certified in a particular specialty and/or that the decisionmaker be a resident of the state in which the treatment would be provided. Likewise, this legislation may seek to prescribe the frequency and type of utilization review, and even the content of UR criteria.

These state UR licensure laws may be preempted when applied directly to a self-funded plan's UR policies and procedures. However, when these and other rules of this type of applied to organizations offering UR services to self-funded plans, preemption may or may not occur. Thus, even organizations offering UR services exclusively to self-funded plans may need to be vigilant with respect to state legislative activities in this area.