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STOP-LOSS Fraud

Do I have your attention? Good. Every TPA and Stop-Loss Service Partner needs to read this carefully and then double-check that none of their policies are unintentionally guilty of fraud. This is not in any way legal advice, but......Everyone needs to be absolutely positively clear that the ownership + premium-payment source + beneficiary of Stop-Loss policies is consistent. In over half of my conversations with TPAs and Stop-Loss, the answer is "I don't know" or there is a clear conflict (which the government would enforce as criminal fraud).

In the old days, Stop-Loss policies were usually written with the plan itself (the trust fund) as the named owner of the policy. Premiums for Stop-Loss were paid by a check from the plan trust. The beneficiary (Stop-Loss reimbursements made payable directly to) was the plan (trust).. That's fine and consistent. Because the Stop-Loss involves plan assets, that kind of Stop-Loss arrangement is subject to ERISA fiduciary responsibility.

In recent years, there seems to have been a change. Many Stop-Loss vendors prefer or demand that the Stop-Loss policy be issued with the employer/sponsor as the owner of the policy and the employer/sponsor as the beneficiary of any payment from the Stop-Loss policy. This strategy takes the Stop-Loss one step removed (but not totally immune) from ERISA fiduciary duty relating to the plan, because, technically, the employer-owned Stop-Loss policy is like the employer's fire insurance or any other corporate insurance.

The biggest source of errors is where premium payment for employer-owned Stop-Loss policies is coming from plan assets (the trust). For speed or convenience, sometimes the TPA pays the premium for the employer-owned Stop-Loss policy with a check from the plan assets. (NOTE: I will be using the word "sacred" as shorthand to describe the strict oversight & protections ERISA and DOL give to plan assets. "Sacred" is my term for ease. It is not an official or legal term.)

At this point, loud sirens should go off in your mind, because fraud has just been committed. Why? Think about it. The premium was paid by money that is considered sacred because it is money from employees' Before deciding that the solution is simply to have the employer-owned policy payable to the plan, be sure that everyone considers and does the proper accounting trail. Otherwise, how would the employer get credit for the contribution to the plan if the money technically came from the Stop-Loss? This can also throw off the 80/20% or whatever formula to determine employee contribution levels based on amount of contribution from the employer's account. co-pays, COBRA premiums, and money for which the employer has taken a tax deduction as a contribution to the plan. However, who would collect the pay-off from the Stop-Loss of an employer-owned policy? The check would be made out to the XYZ Corporation. Thus, the corporation has (technically) defrauded and stolen from the employees' plan assets, since the money that generated the pay-off to the employer came from the sacred plan assets.

Sure, the employer presumably had to pay out extra money to cover the larger-than-expected claims that triggered the Stop-Loss (though as the percent of co-pay rises and in some other situations, most of the claims money actually may have come from employees, not the company). The intentions are presumably honorable and logical. However, the fact remains that the sacred plan asset money was used for a purpose (Stop-Loss) that ended up going to the corporation. Technically, the employer could take that Stop-Loss check money and invest in something totally different than the plan or even run off with it. If the payment check says XYZ Corporation, then the money goes to the corporation for whatever they want. Our members have experienced some shameful stunts by cash-strapped employers misusing Stop-Loss reimbursements that should have been used for the plan. In such cases, the TPA is in a very awkward position if the TPA arranged the Stop-Loss agreement.

Before deciding that the solution is simply to have the employer-owned policy payable to the plan, be sure that everyone considers and does the proper accounting trail. Otherwise, how would the employer get credit for the contribution to the plan if the money technically came from the Stop-Loss? This can also throw off the 80/20% or whatever formula to determine employee contribution levels based on amount of contribution from the employer's account.

How does this problem occur?? Haste is the main culprit. The placement of Stop-Loss is often a hurried event, and often verbal and shifting during negotiations. The main concern is what the risk & coverage & price will be. The issue of exactly who is the owner of the policy and the source of the premium payment check is often glossed-over or ignored. It is not unusual for the TPA to assume and blithely type in that one entity is the owner/payor/beneficiaryƒwhile someone at the Stop-Loss office makes the assumption and blithely types in the other entity as the owner/payor/beneficiary. No one probably ever verifies that the final version(s) agree + are what was intended + is consistent with reality (where the checks are coming & going). For employer-owned Stop-Loss, TPAs sometimes have an additional culpability, which adds to the problem. It is easier to write a check from the plan asset account than to go to the employer/sponsor to request that a separate check be written on a corporate account. This concern may seem like silly busy-work, but it can have huge legal implications. So, everyone go check your policies right now.

Storm Warning for Stop-Loss Players

I feel like one of those storm forecasters who broadcasts that a storm is on the way, we aren't sure where it will hit, how strong the winds will be or how much damage will be caused...but the storm is on the way for the Stop-Loss community. The storm clouds for the Stop-Loss transactions will evolve from some of the final regs issued in recent weeks, especially HIPAA Nondiscrimination rules, Privacy rules, and EDI. Like the weather forecaster, we don't know how the interpretations will evolve and thus what final net impacts they will have. However, SPBA Stop-Loss Partners, do not sit back and expect same old same old, or think that these are "only TPA problems". Read the SPBA materials!!!!

Let me give just one shocking example, which will be discussed not only among the audience, but also with the IRS regulator at the SPBA Spring Meeting: It appears that the new HIPAA nondiscrimination rules will prohibit (starting this Sept.) an employer (and TPA??) from knowing about a quote from an insurance company charging different rates on an individual-by-individual basis, based on any health factor, even if the employer does not pass the different rates to the individuals. So, this may end up having the net effect of outlawing Stop-Loss underwriting and lasering, or certainly any mention thereof to the client. See the HIPAA Nondiscrimination regs enclosure with the 1/26/01 UPDATE, top of pg. 7, for slightly more info. We don't know anymore insights yet. The SPBA Meeting will be the next big step. The purpose of this alert is just to be sure both Stop-Loss and TPAs are alert to coming changes.