Who is Your Health Insurer?

Who is your health insurer? If you live in the United States, the answer may not be the company on your health insurance card. Yet the true identity of your insurer may impact the scope of benefits and health care costs for your plan.

Many employers self-fund health insurance by taking on the risk themselves, becoming the insurer instead of paying premiums to an insurance company. In a self-funded plan, third-party administrators assist employers in the business of insurance without taking on any risk. Third-party administrators are the companies on insurance cards that offer a network of providers and process claims, while your employer pays for its share of the claims and passes on costs to workers.

Self-funded plans have become increasingly common over the last 15 years. Sixty-four percent of workers in the United States have a self-funded health plan.

These plans, however, lack state law protections. The Employee Retirement Income Security Act (ERISA) exempts self-funded plans from state regulations.

Through ERISA, Congress sought “to minimize the administrative and financial burden of complying with conflicting directives among states or between states and the federal government.” Although states traditionally played the preeminent role in insurance regulation, ERISA modified states’ position in regulating many health insurance plans—particularly self-funded plans.

Through a mechanism known as ERISA preemption, federal law now overrides state law. To create reliability and uniformity in the insurance market, states are prohibited from regulating self-funded plans.

But this prohibition on state regulation only increases health costs, according to scholars. In addition, ERISA preemption may also affect workers’ health benefits and protections from certain billing practices.

To control surprise medical bills, for example, many states passed statutes to protect consumers. But for people with self-funded insurance, the state laws addressing surprise medical bills through insurance reform do not provide protection because of ERISA. It was not until the federal No Surprises Act took effect this year, instituting a nationwide solution to surprise medical bills, that workers with self-funded insurance gained protection.

ERISA preemption may also decrease the scope of benefits individuals receive. For example, ten states and the District of Columbia have expanded contraceptive coverage beyond what federal regulations required. In 2016, Maryland legislators passed a law that allows an individual to receive six months of birth control at one time, which is more generous than coverage required under federal regulations. Unfortunately, individuals with self-funded plans in Maryland do not benefit from the statute unless their employers choose to provide them.

Despite the potential of increased costs and fewer benefits for workers, employers continue to self-insure because it can be burdensome to comply with the regulations of different states, especially for large employers operating in multiple states. Self-funding insurance also allows employers to bypass state health insurance premium taxes. But even with tax savings and fewer benefits, costs may increase because employers do not have the tools to monitor how third-party administrators make billing decisions.

With self-insurance, employers pay third-party administrators to develop provider networks and process claims. The third-party administrator, the company on an individual’s insurance card, negotiates rates with providers and ensures that the billing codes for claims are correct, telling the employer how much it owes and taking an administrator fee.

Employers sometimes struggle to hold these third-party administrators accountable. Even sophisticated large employers may miss false charges. A federal court of appeals recently held that Aetna, a third-party administrator, unjustly enriched itself by charging Mars, a self-insured company, a dummy billing code to hide the fact that Aetna had subcontracted with another company to manage chiropractic services.

According to an attorney that frequently handles cases against third-party administrators, employers report that the system is too complicated to question charges from third-party administrators. And individuals on these plans are in a different regulatory scheme than people who are not covered by self-funded insurance plans, making it more difficult to appeal decisions made by a third-party administrator.

In the absence of more extensive federal regulation, and because current federal law and regulation encourage employers to self-insure, the majority of workers in the United States who are on self-funded plans face potentially higher costs, reduced benefits, and a more difficult claim appeals process.

But one recent U.S. Supreme Court decision held that ERISA does not preempt state regulations of the rates that health care providers and other entities charge for drugs or other items and services. Because this case did not explicitly confront the issue of self-funded insurance, scholars still advocate that states regulate self-funded insurance plans directly.

In the meantime, employers will continue to struggle to comprehend the billing practices of third-party administrators, and workers will not benefit from state regulations that protect consumers covered by other health insurance plans.