16 October 2014 | The Self-Insurer © Self-Insurers’ Publishing Corp. All rights reserved.

Bench BenchFrom the

by Thomas A. Croft, Esq.

On August 4, 2014 the U.S. Court of Appeals affirmedtheU.S.DistrictCourt’s decision of

September 7, 2012, throwing out

SIIA’s ERISA pre-emption challenge to

the Michigan Health Insurance Claims

Assessment Act, MCL 550.1731, et

seq. (“the Michigan Act”) on the face

of SIIA’s Complaint. The trial and now

appellate, federal courts determined

that SIIA’s position on the pre-

emption issue “failed to state a claim

upon which relief could be granted”

under Fed.R.Civ.P. 12(b)(6). In other

words, these courts concluded that

SIIAwasjustplainwrongasamatter

of law, even if everything it alleged in

its Complaint about the nature and

effect of the Michigan Act was true.

In general terms, The Michigan

Act imposes a tax (or assessment)

(currently 0.75%) on “paid claims”

by “carriers” and TPAs up to a

maximumof$10,000perinsured

individual annually. “Carriers” include

health insurers generally and ERISA

Plan Sponsors in particular. The

assessment only applies to services

rendered within the state of Michigan

to persons who “reside” in Michigan.

The regulations promulgated under

the Michigan Act state that the home

address of an individual as maintained

in the ordinary business records of a

carrier or TPA establishes a “rebuttable

presumption” that that address is the

domicile (residence) of the individual

for purposes of the tax.

I am no ERISA pre-emption

expert, although I will admit to

more than a passing familiarity with

thejurisprudenceconcerningit

and its development over the past

twenty years. In any event, I make

nojudgmentsaboutthepropriety

of either the District Court’s or

the Court of Appeal’s pre-emption

analysis, though I question whether

this wasn’t a much closer case than

either court appreciated under

applicable pre-emption law. SIIA’s brief

in the Court of Appeals is available

here1 and deserves careful study

6th Circuit’s Decision in SIIA v. Snyder Has Signifi cant Implications for Self-Insured Plans and Their TPAs,and Also Poses Perplexing Questions for Stop Loss Carriers

© Self-Insurers’ Publishing Corp. All rights reserved. The Self-Insurer | October 2014 17

with the Court of Appeals opinion itself, here.2 Regardless of the merits of these Courts’ decisions on the pre-emption issues, I question the procedural propriety of their disposition of this case on the face of the pleadings, without any inquiry into the real world facts alleged by SIIA in its Complaint and any evidence about the effect of the Act on the administration of ERISA Plans, both within and without the State of Michigan.

Closer to home, for me, however, are the specifics of the Michigan Act as they purport to apply to stop loss carriers, which are contradictory and frankly baffling in several respects. The tax is expressly imposed on “carriers” and TPAs for “paid claims” as defined in the Act. Before delving into what exactly is a “paid claim” under the Act, we need to examine Section 3(3) of the Act in detail:

“(3) All of the following apply to a group health plan that uses the services of a third party administrator or excess loss or stop loss insurer :

a. A group health plan sponsor is not responsible for an assessment under this section for a paid claim if the assessment on that claim has been paid by a third party administrator or excess loss or stop loss insurer, except as otherwise provided in section 3a(2).

b. Except as otherwise provided in subdivision (d), the third party administrator is responsible for all assessments on paid claims paid by the third party administrator.

c. Except as otherwise provided in subdivision (d), the excess loss or stop loss insurer is responsible for all assessments on paid claims paid by the excess loss or stop loss insurer.

d. If there is both a third party administrator and an excess loss or stop loss insurer servicing the group health plan, the third party administrator is responsible for all assessments for paid claims that are not reimbursed by the excess loss or stop loss insurer and the excess loss or stop loss insurer is responsible for all assessments for paid claims that are reimbursable to the excess loss or stop loss insurer.”

What in the name of all that is rational (much less holy), do these provisions mean?

•Subdivision 3(a) tells us that a Plan Sponsor doesn’t owe the assessment if the TPA or stop loss carrier has paid it... This much makes sense – if someone else has paid a tax for you, it seems only logical that you no longer owe the tax. But then we have the phrase “except as otherwise provided in section 3(a)(2).” The problem here is that section 3a2 does not “otherwise provide.” It simply declares that Plan Sponsors and TPAs shall develop a methodology for collecting the assessment from groups with uninsured or self-funded coverage as a percentage of “actual paid claims.” See Section 3(a)(2)(d). The interplay between these provisions is simply unclear.

•Subdivisions 3(b) and 3(c) tell us that the TPA owes the assessment on all its “paid claims,” “except as provided subdivision d,” and that the stop loss carrier owes the assessment on all its “paid claims,” except as provided in subdivision d. So subdivision d seems quite important.

• Instead of clarifying, subdivision d obfuscates and confuses things further. It says that, where there are both a TPA and a stop loss carrier (quite a typical scenario), the TPA is responsible for the assessment on “paid claims” not

reimbursed by the stop loss carrier and the stop loss carrier is responsible for the assessment on “paid claims” that are... [wait for it... ] “reimbursable to” the stop loss carrier.

Subdivision d might make more sense if the word “by” had been used in lieu of the word “to,” thus purporting to impose the tax on the TPA up to the specific deductible and on the stop loss carrier to the extent of the reimbursable excess. But that’s NOT what the statute says. One has to strain to imagine where a “paid claim” would be “reimbursable to” a stop loss carrier. Truth is, I can’t think of one. A refund to the stop loss carrier by the group/TPA on an overpaid claim would be something “reimbursable to” the stop loss carrier, but why should the stop loss carrier betaxedonsuchanadjustment?

Maybe the key to understanding the above-quoted provisions is the phrase “uses the services of a third party administrator or excess loss or stop loss insurer” in Section 3(3) quoted above. Does being insured by a stop loss carrier constitute “using the services of ” the stop loss carrier? Perhaps subsection 3 contemplates a situation where the lines between providing excess loss insurance become blurred with the processing of underlying claims by stop loss carriers acting in a dual capacity as a TPA processing claims under the Plan and also as a stop loss carrier. I have criticized such arrangements elsewhere on conflict of interest grounds, but it is possible that the Michigan legislature recognized this blending of functions exists with some carriers and wrote the Act with that aspect in mind. Insuring groups with stop loss insurance alone cannot fairly be characterized as “providing a service” in my view and thus the

18 October 2014 | The Self-Insurer © Self-Insurers’ Publishing Corp. All rights reserved.

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entirety of section 3(3) may be inapplicable in most cases to stop loss carriers.

Additionally, insofar as potential stop loss carrier liability is concerned, we must look closely at the Act’s definition of a “paid claim.” In pertinent part, it states:

“’Paid claims’” means actual payments, net of recoveries, made to a health and medical services provider or reimbursed to an individual by a carrier, third party administrator, or excess loss or stop loss carrier... ” Real world fact: STOP LOSS CARRIERS DO NOT PAY PROVIDERS OR INDIVIDUALS. [Please excuse me for raising my voice]. Ergo, stop loss carriers never “pay claims” within the meaning of the Act and are therefore notsubjecttotheassessmentunlessthey do something completely outside the norm of industry custom, practice and common sense, like cutting a

check to a provider directly or, God forbid, paying a stop loss claim directly to a Plan beneficiary.

SIIA raised such arguments in its briefs, but neither court’s opinion addressed them. Indeed, neither the District Court nor the Court of Appeals’ opinions ever even mention the words “stop loss” or “excess loss.”

In my opinion, the Act simply does not and cannot apply to stop loss carriers, the references in the Act to such carriers quoted above notwithstanding. But that is only my opinion based on my reading of the statute itself in its current form and cannot and should not be taken as formal legal advice without further study. Perhaps the addition of language to policy forms might address any uncertainty in this regard and clearly provide for indemnification from stop loss insureds for any suchassessmentsleviednowbyMichiganorbyotherjurisdictionsinthefuture.

So, where does this leave us? It leaves TPAs to pay the tax and to recoup itfromtheirclients,includingself-insuredclientssubjecttoERISA.Itimposesonerous reporting requirements on them, for which they will likely charge. This is a problem for TPAs both inside and outside Michigan, insofar as Michigan residents receiving treatment within the state will be covered by self-insured Plans sponsored by employers everywhere and hence Plan Sponsors/TPAs will technicallybesubjecttotheassessmentandreportingrequirementsasfarasMichigan is concerned.

Perhaps the most ominous aspect of the Courts’ validation of the Act is expressed in footnote 2 of the Court of Appeals’ opinion:

“We recognize that each of the fifty states might enact similar taxes and multiple states could potentially claim and individual, perhaps a student, as a

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resident. This scenario could be burdensome to ERISA-covered entities. This state of affairs, however, is hypothetical and not before us at this point. We prefer to rule based on concrete facts rather than a blind appraisal of future events... ”

Indeed. The validation of this Act will invite similar legislation elsewhere. One can only hope that another federal circuit will come to the opposite conclusion, one that is informed by the development of a factual record on the implications of such legislation on the self-funded community. n

Tom Croft is a magna cum laude graduate of Duke University (1976) and an honors graduate of Duke University School of Law (1979), where he earned membership in the Order of the Coif, reserved for graduates in the top 10% of their class. He returned to Duke Law in 1980 as Lecturer and Assistant Dean (1980-1982) and as Senior Lecturer and Associate Dean for Administration (1982-1984). He also taught at the University of Arkansas-Little Rock law school, where he was an Associate Professor of Law (1990-91), earning teacher of the year honors.

Until 2004, when he specialized in medical stop loss litigation and consulting, Tom practiced general commercial litigation. He was a partner in the litigation section of a major Houston fi rm in the late 1980s and moved to the Atlanta area in 1991. He has been honored as a Georgia “Super-Lawyer” by Atlanta Magazine for the last eight years running and holds an AV® Preeminent rating from Martindale-Hubble®.

Tom currently consults extensively on medical stop loss claims and related issues, as well as with respect to HMO Excess Reinsurance, Medical Excess of Loss Reinsurance

and Provider Excess Loss Insurance. He maintains an extensive website analyzing more than one hundred cases and containing more than fi fty articles published in the Self-Insurer Magazine over many years. See www.stoplosslaw.com. He regularly represents and negotiates on behalf of stop loss carriers, MGUs, Brokers, TPAs and Employer Groups informally, as well as in litigated and arbitrated proceedings and has mediated as an advocate in many stop-loss related mediations. Tom can be reached at tac@xsloss.com.

References1http://stoplosslaw.com/wp-content/uploads/2014/08/SIIA-6th-Circuit-Brief.pdf

2http://stoplosslaw.com/wp-content/uploads/2014/08/SIIA-Michigan-Decision-August4-2014.pdf