Health Insurance

Don’t Bet On Out-Of-State Health Insurance For Small Business Just Yet

Back in the late 1970s and early 1980s, if you wanted to make a quick buck and didn’t care how much damage you did, you sold health insurance to small businesses. You formed something called a multiple employer trust, which collected the insurance premiums from the small businesses and their employees. You paid yourself handsome sales commissions and bloated administrative expenses out of the trust. And with the money that remained, you paid claims. These were Ponzi schemes; eventually the money ran out and small businesses and their workers were left owing doctors and hospitals money their insurance should have paid out.

These self-destructing trusts — incompetent at best and fraudulent at worst — could flourish in these years thanks to Employee Retirement Income Security Act of 1974, which governs both retirement plans and “employee welfare benefit plans,” including group health insurance coverage. Crucially, ERISA bars states, which traditionally regulated insurance companies, from interfering in these plans. States could continue to set rules, like minimum capital requirements, for the insurance companies that provided services to an employer health plan but they could not regulate the plan itself. And the law made clear that a state could not call an employee benefit plan an insurance company and then regulate it.

But even as ERISA stripped from states the right to regulate employer health insurance plans, the law created virtually no parallel federal enforcement as an alternative. Self-insured multiple employer trusts operated in a regulatory vacuum, with predictable results. In California, 45 trusts, providing insurance to thousands of the state’s small businesses, went out of business between 1977 and 1982. The biggest debacle was a plan known as American Benefit Limited Trust, which enrolled 70,000 employees from 1979 to 1982. Then it collapsed, and left $4 million in claims unpaid.

Health Insurance

I don’t know much more about American Benefit Limited Trust. I read a thumbnail history of it in a 1998 book called Broken Promises: Fraud by Small Business Health Insurers, by a professor named Robert Tillman. I mention this only because the very fact that there is a whole book devoted to the subject tells you just how fraught health insurance can be for small business owners, who are often too focused on running their companies to master the complexities of a whole other industry.

American Benefit vanished more than three decades ago, yet its ghost still haunts the Trump administration’s new plan to allow trade associations to sell health insurance to small business owners across state lines. The idea, according to the administration, is to make insurance cheaper for small companies, in large part by allowing them to avoid, in the executive order’s phrase, the Affordable Care Act’s “costly requirements” — the market rules that require small-group plans to provide certain benefits and meet other standards. The White House has given the Department of Labor two months to come up with new regulations that would give association health plans freedom from both state regulations and Obamacare.

The proposal alarms state insurance regulators — as I reported last week, the acting insurance commissioner in Pennsylvania criticized the Trump plan in part by noting, “My department has previously had to shut down association health plans due to millions of dollars of unpaid claims.” And American Benefit’s legacy may make it difficult for the administration to realize its expansive ambition by regulation alone.

Here’s why. In 1983, Congress attempted to fix the mess ERISA created out of multiple employer trusts. It renamed them “multiple employer welfare arrangements,” or MEWAs, and it gave states the right to regulate them. (States got broad authority to regulate self-insured MEWAs, like the trusts that had imploded, and more limited authority to regulate arrangements that purchased insurance on behalf of its member companies.) These reforms didn’t actually end the fraud associated with MEWAs; Tillman’s book chronicles two more decades of egregious malfeasance, and as recently as 2010, the Affordable Care Act gave the Labor Department more power to rein in MEWAs operating in bad faith. But even so, the 1983 amendment doesn’t give the Labor Department much space to carve out an exemption for association health plans from state regulation.

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