Labor Department Pick Signals New Concern for Self-Insurance Industry

The announcement today that President Obama has nominated Tom Perez as the next Secretary of Labor arguably sets the stage for a strong federal push to restrict the ability of thousands of employers nationwide from sponsoring self-insured group health plans.

This provocative conclusion requires the connection of several dots, so we’ll lay them out for your consideration.

As this blog has reported previously, federal regulators have been asking lots of questions about self-insured group plans since the passage of the ACA.  More specifically, they are trying to determine whether smaller self-insured employers that purchase stop-loss insurance with “low” attachment points constitute a “loophole” to the health care law and that these employers are somehow “gaming” the system.

We’ve methodically discredited these assertions multiple times, but it’s important to set the stage as new developments are reported and additional context is provided.

Since insurance is largely regulated at the state level, the obvious question arises regarding how the feds can regulate stop-loss insurance should they wish to do so?  This can clearly be done through federal legislation or potentially through regulation. 

The regulatory route is more complicated as the ACA does not provide any explicit statutory authority for such action.  But regulators can be a creative bunch, especially under the current Administration.

The creative theory is that federal agencies with jurisdiction over the Public Health Services Act (PHSA) and the Employee Retirement Income Security Act (ERISA) may rely on the their general rule-making authority given to them under their respective laws to argue that the federal government may indeed need to regulate stop-loss insurance and re-characterize stop-loss policies with “low” attachment points as “health insurance” through regulations separate and apart from the new law. 

While this action would be controversial and subject to challenge by Congress and private citizens, it is possible that a rule-making process could be initiated to achieve this policy objective.

Based on discussion with key regulators as recently as last week, such a rule-making process is unlikely to occur this year.  This blog speculates that the primary consideration for inaction at this point is that regulators are simply overwhelmed with finalizing all of the rules and related guidance required for full ACA implementation at the end of this year.

Once these deadlines pass, however, the regulators will have more bandwidth to circle back on ancillary areas of interest.  Here’s where we connect the dot with Mr. Perez’ name on it.

While the career professional staffers within DOL (non-political appointees) are competent and at least reasonably objective in most cases, the new agency head is anything but.

Mr. Perez comes with baggage from his tenure within the Justin Department where evidence strongly suggests that at least some of his civil rights enforcement decisions were influenced by political considerations.   In short, he a “social justice” guy who fits nicely into the Administration’s template for policy-making.

His resume also includes a stint with HHS under the Clinton Administration and a senior staff position with the late Senator Ted Kennedy.  Rounding out his big government pedigree, he is a graduate of Harvard Law School and the George Washington Public School of Health.

All of this background suggests that Mr. Perez will be inclined to position DOL as a more activist agency with regard to health care reform issues, including stop-loss insurance regulation.   This motivation will likely be particularly acute if the SHOP exchanges run into early problems with lack of enrollment as many experts predict.

For the sake of discussion, let’s assume this analysis is correct.  In this case, then Secretary Perez could push for a rule-making process as described earlier, or perhaps lead an effort to close the self-insurance “loophole” through federal legislation.  Let’s connect another dot.

As a technical matter this would a “cleaner” approach and not subject to legal challenge.   Congress could simply enact legislation amending the definition of “health insurance” under the PHSA, ERISA and the Code to include, for example stop-loss policies with a “low” attachment point.

Given that Republicans control the House right now and are generally supportive of self-insurance, the politics do not support this potential strategy.   But if you believe recent public commentaries that the Administration’s grand political plan is focused on the objective of Democrats winning back control of the House in 2014, the legislative pathway becomes clearer. 

Und this scenario, it’s hard to imagine that a Secretary Perez would not push for a legislative “fix.”  After all, it’s not fair that some citizens are saved from the exchanges in favor of receiving quality health benefits from their employers, right?   Social justice, indeed. 

And the last dot is connected.