Goofy views on Benefits, ERISA, Fiduciary, TPAs & ASO
Re: Wall Street Journal Weekend Investor Jan 7th, 2012 - “When Insurance Fails” – by Leslie Scism
By: Frederick D. Hunt – Active Past President
Society of Professional Benefit Administrators (SPBA) The national association of Third Party Administrators (TPAs)
What is the most comprehensive, intensive and proven consumer protection law in the nation? What law imposes such intense fiduciary duty that customs most businesses are free to use to increase their profits can land a fiduciary in jail?
Readers of a recent WSJ article “When Insurance Fails” by Leslie Scism are not only ignorant of the answer, but have been mislead with grossly incorrect information and misuse of even the proper vocabulary involved. The faulty premise of the article is that individuals might do better buying their own insurance rather than participating in an employer sponsored employee “insurance” benefit plan.
“Insurance” was the first vocabulary goof. The vast majority of employee benefit plans for the whole gamut of types of employment fall under very strict regulation of the Employee Retirement Income Security Act (ERISA). I was there when it was being crafted (a much more bi-partisan & professional process than seen in the recent health reform legislative process). The unquestioned goal of ERISA was to be the ultimate consumer protection law. The two overwhelming goals are to assure adequate funding to pay for the promises plans make to plan participants…plus to be sure that the plan assets are used prudently. So, what gets paid and how much is treated as a sacred duty; not a whim. To assure that enforcement is the toughest, the law gives the US Department of Labor the power to investigate any issue as either a civil or criminal (jail) federal offense. Various other federal agencies, also have enforcement powers over ERISA plans, plan sponsors and the various types of professionals who administer the plan.
How tough is regulation & enforcement? An example is that most businesses and insurance companies are allowed to automatically or force the sale of a tie-in product in order for the consumer to buy the main product. For instance, a carmaker may force a buyer to have the battery or other product from a company they own or influence, and thus get an additional profit center. Under ERISA, that kind of tie-in is a whole category of “prohibited transaction” known as “self-dealing”, and can land you in jail. It is all for the protection of plan participants and to be sure that plan assets are used in the most prudent way in every transaction. So, ERISA regulation is anything but cavalier or a legal fluke as the article misleadingly indicated.
ERISA’s protection of prudent use of plan assets for stability of the plan and to be sure the plan participant (worker & enrolled dependents), extends not just to oversight on plan sponsors (employers & unions)….but is also a watchdog against patients & doctors who try to game the system. Abuse can be multiple medical visits to get prescriptions to re-sell on the street, working with a doctor to slip in some cosmetic surgery (removed as a tax-exempt benefit by Congress years ago), inflated medical charges, etc. etc.. Unfortunately, the amounts and types of patient & medical provider abuse have been growing exponentially.
IMPORTANT: In these examples, it is the correct beneficiary, but not a use or amount promised in the plan. So, the media will worry about the patient “not getting his medical bills paid”……not whether it was a legitimate charge and amount. Therefore, if the plan did pay such non-legitimate use of plan assets, the plan sponsors & administrative officials will be held responsible by the federal officials for imprudent or unauthorized use of the plan assets. Unlike an insurance company policy, it is not money the employer is trying to keep for itself. An ERISA plan is a finite amount of money to serve all employees. So, being sympathetic and paying for something that does not quite meet all the requirements of the plan is the criminal offense of defrauding all the other workers. Most lawyers don’t realize this, and resent that ERISA plan officials won’t play the old legal game of coming up with some money to make the lawsuit disappear. It is not an option in the strict ultimate consumer protection law ERISA in a self-funded plan.
Ms. Scism and her sources proved their ignorance of their subject by blithely using the wrong vocabulary constantly. If I commented on the cardiac protocols of a podiatrist, you’d know I was ignorant. Well, Ms. Scism and her resources constantly refer to “insurance companies”. Insurance is when there is a company that is paid money to provide protection for potential losses. The premium belongs to the insurance company and the insurance company may retain any money left over. The business of INSURANCE is regulated by states.
HOWEVER, most such insurance policies have an exemption from many requirements of the federal ERISA law. (When I was at the birth of ERISA, the insurance companies fought hard to be exempted. They did not want what they considered onerous fiduciary requirements and intense enforcement.)
The vast majority of employee benefit plans use self-funding (less often called self-insurance). It is a very different system. Employers, and sometimes unions & employers jointly, sponsor employee benefit plans, write a plan contract of what is covered. Labor & management often formally negotiate what is included. In other cases, I have found that employers want to custom-design the coverage offerings to the specific needs & wants of that workforce. The plan is then funded up-front or as needed. This is why all the fiduciary and intense transparency & reporting requirements, described above, kick in. Most self-funded plans hire professional Third Party Administrator (TPA) firms who are under close government scrutiny to be sure that fiduciary duty is consistent.
Ms. Scism may have been confused because many insurance companies now also offer Administrative Services Only (ASO….the same legal responsibilities as a TPA, but usually done by personnel in the insurance company) to ERISA self-funded plans. However, her confusion on this point does highlight a problem. Many insurance companies who do ASO, and their customers, get forgetful that their ERISA work has the much more intense and very different laws & rules than their insurance work. I worry that when legal or operational questions arise, insurance company employees trained in insurance law and working within an insurance company follow insurance law instead of the more intense federal ERISA laws and regulations. That may lead to the kind of confusion Ms Scism and her sources had in the article. Are “insurance companies” she mentions in their insurance mindset when doing ASO instead of being in the correct mindset that ASO requires of acting as a TPA in administering ERISA?
The 2010 health reform law made a clear distinction between insurance and self-funded. Health Reform is full of restraints, mandates, and penalties imposed on the business of insurance……precisely because insurance company insurance (not ASO) policies do not have the fiduciary and self-interest restraints that self-funded plans have. In any case, the grossly misleading article was as out of line as condemning podiatrists or cardiac practices.
Has ERISA self-funding been successful over the decades? Yes, on many fronts. First, because there is no profit or leftover money for an insurance company, that money is saved. Second, employers can give workers the “most bang for the buck” by custom-designing what is covered to the unique needs & wants of that workforce. (I remember an employer who had 100 workers. 98 were women of childbearing age plus the old man owner and his grandson. The employer realized that what 98% of his workforce wanted was the most comprehensive pregnancy, child-related, and women’s health coverage possible. So, that’s how the plan was custom-designed (not one-size-fits-all set by politicians in the state capitol). It didn’t offer much for the elderly man or his grandson….but the 98% of the employees had fantastically useful coverage which they loved and appreciated).
We are seeing the most dramatic proof of the wisdom & success of ERISA right now. When ERISA was being written, there was a twin bill called PERISA which would apply ERISA-like fiduciary responsibility to the funding & promises of government employee benefit plans. The public sector decided they didn’t want such rules, so PERISA disappeared and was never passed. So, think of the number of governmental plans who have cavalierly made big promises that can never be kept. Workers will find cuts or no benefits as promised. So, instead of damning ERISA, the Wall Street Journal should be proclaiming the true news story that ERISA has been a triumph of responsibility.
I am befuddled at what seemed to be the main theme of the article, that individuals would somehow be better with their own private insurance policy than in an employee benefit plan (self-funded or insured). What were you thinking?!?! First of all, most employers provide subsidies that range between about 50% and 99% the cost of health coverage for workers and often for dependents. Many employer plans also offer various other goodies such as wellness, etc. etc. An employee benefit plan also means that the worker has informed people at the employer or plan administration firm to help seek answers or remedies to possible problems. Ms. Scism’s advice to go-it-alone ignores those kinds of huge financial advantages. As the founders of this country said, “Together we stand, divided we fall.” A group employee benefit plan is standing together.
Last but not least, Ms. Scism seems to mix up a wide assortment of different kinds of insurance & coverages, such as life insurance, supplemental-medical, disability, etc. Each is subject to different laws and, operationally very different. So, again, Ms. Scism’s article is like lumping cardiac surgeons, podiatrists, physical therapists, and osteopaths into one category. Those professionals would all scream at such inaccurate lumping together. I am screaming at the same errors in the article.
The true news story is actually good news: how successful the private employee benefit system has been and is geared to be even more useful for the future…and how successful & useful self-funding and the various players that make it work such as Third Party Administrators (TPAs) and self-funding is.