The Regulatory Review

More and more employers are self-financing health insurance, bypassing government regulation and potentially rising costs.

Who is your health insurance company? If you live in the United States, the answer may not be the company on your health insurance card. However, the true identity of your insurer can affect the coverage and healthcare costs of your plan.

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

Self-funded plans have become increasingly common over the past 15 years. 64 percent of workers in the United States have a self-funded health plan.

However, these plans lack state legal protection. 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 policies between states or between states and the federal government.” Although states have traditionally played the predominant role in insurance regulation, ERISA changed the state’s position in regulating many health insurance plans—particularly self-funded plans.

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

But this ban on government regulation only increases healthcare costs, according to scientists. In addition, ERISA preemption may also impact worker health benefits and protection from certain billing practices.

For example, to control unexpected medical bills, many states have enacted consumer protection laws. But for people with self-funded insurance, state laws that address surprise medical bills through insurance reform offer no protection because of ERISA. It wasn’t until the federal No Surprises Act, which introduced a statewide solution to surprise medical bills, that went into effect this year that workers with self-funded insurance gained protection.

The ERISA advance may also reduce the amount of benefits individuals receive. For example, ten states and the District of Columbia have expanded contraceptive coverage beyond federal regulations. In 2016, the Maryland legislature passed legislation allowing a person to receive six months of birth control at a time, which is more generous than the coverage required by law. Unfortunately, people with self-funded plans in Maryland do not benefit from the law unless their employers choose to provide them.

Despite the potential for higher costs and lower employee benefits, employers continue to self-insure themselves because complying with the regulations of different states can be cumbersome, especially for large employers operating in multiple states. Self-funding insurance also allows employers to avoid government health insurance premium taxes. But even with tax savings and fewer benefits, costs can increase because employers don’t have the tools to oversee how outside administrators make billing decisions.

With self-insurance, employers pay external administrators to set up provider networks and process claims. The third-party administrator, the company on a person’s insurance card, negotiates rates with providers and ensures that claim billing codes are correct, tells the employer how much they owe, and collects an administration fee.

Employers sometimes struggle to hold these outside administrators accountable. Even experienced large employers can overlook false accusations. A federal appeals court recently ruled that Aetna, a third-party administrator, improperly enriched itself by charging Mars, a self-insured company, a bogus billing code to disguise the fact that Aetna was subcontracting with another company for completed the administration of chiropractic services.

According to a lawyer who often handles cases against third-party administrators, employers report that the system is too complicated to challenge allegations made by third-party administrators. And those with these plans are subject to a different regulatory regime than those not covered by self-funded insurance plans, making it harder to challenge a third-party administrator’s decisions.

In the absence of broader federal regulations, and because current federal laws and regulations encourage employers to self-insure, the majority of workers in the United States who have self-funded plans face potentially higher costs, lower benefits, and a more difficult claim process situation.

But a recent decision by the US Supreme Court ruled that ERISA forestalls government regulations on the rates that healthcare providers and other entities charge for drugs or other items and services. Because this case did not explicitly address the issue of self-funded insurance, scholars still advocate that states directly regulate self-funded insurance plans.

Meanwhile, employers will continue to struggle to understand third-party billing practices, and workers will not benefit from government regulations that protect consumers covered by other health insurance plans.