Judge says Md. rule is illegal Self-insurance limits for smaller companies barred by ERISA act

February 27, 1996|By M. William Salganik | M. William Salganik,SUN STAFF

In a decision that could affect the health plans of thousands of Marylanders employed by small firms, a federal judge has ruled that Maryland overstepped its authority in issuing new regulations that attempted to set limits on companies that self-insure health benefits for their employees.

The Maryland regulations, which set a minimum level of risk a company had to assume to be self-insured, conflict with the federal Employee Retirement Income Security Act (ERISA), which prevents states from regulating self-insured plans, Senior U.S. District Judge Alexander Harvey II said in a ruling issued Friday and received by the parties yesterday.

Maryland Insurance Commissioner Dwight K. Bartlett III said it was "highly likely" that the state would appeal the decision, although he said he had not yet had time to review it with his staff. Dennis W. Carroll, legal counsel to Mr. Bartlett, said the state could seek to delay the effect of the decision pending appeal.

The tussle is important because an increasing number of firms, rather than purchasing traditional health insurance, are choosing to pay their employees' health costs themselves, usually using an administrative firm to process claims. By being insuring themselves, companies are exempted from Maryland rules that require specific insurance coverage for different areas, such as mental health.

Almost always, self-insured employers purchase "stop-loss" insurance to cover large claims by an individual employee or a high total of claims.

In December, the insurance agency issued rules specifying that a stop-loss policy could not cover claims of less than $10,000 for an individual employee.

"Our concern was that, in order to avoid state mandates, employers will adopt what they say is a self-insured plan, and then turn around and obtain a stop-loss policy that shifts most of the risk to the insurer," Mr. Bartlett said yesterday. If the insurer was assuming most of the risk, he argued, the employer was not truly self-insured, and should offer the coverage required by the state.

The regulations were challenged in court by American Medical Security, a claims administrator; United Wisconsin Life Insurance Company, which writes stop-loss policies; and three small Maryland employers.

Judge Harvey's ruling "means the regulation is out the window," said Edward J. Birrane Jr., a former state insurance commissioner who represented the plaintiffs. "The judge will prohibit the Maryland Insurance Administration from enforcing the regulation in any way."

The issue primary involves small employers because those with more than 50 to 100 employees typically have stop-loss policies larger than the minimum Mr. Bartlett was seeking to impose.

Other states have also been wrestling with how to define self-insurance; Maryland's regulations were based on recommendations by the National Association of Insurance Commissioners. Mr. Carroll said Maryland's is the first regulation to be tested in federal court, although a court in Missouri blocked a similar regulation.

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