Judge Heard What Healh Care Law Did Not Say

It’s ironic that the ultimate fate of the nearly 3,000 page Patient Protection and Affordable Act (PPACA) may hinge on what was not included in the legislation.

Today’s ruling by a federal appellate court judge in Florida that the law’s individual mandate provision is unconstitutional is certainly important, but even more significant is that the judge also ruled that entire law must be struck down on the basis on non-severability. In other words, if a single provision does not pass constitutional muster, then it all gets thrown out.

This is particularly interesting because shortly after the passage of PPACA, it came to light that the law did not include a severability provision, which is a pretty standard clause for most comprehensive legislation. To this day no one really knows for sure the reason for this important omission, although the most likely theory is that it was drafting error made in the rush to pass the legislation.

Then-Speaker Nancy Pelosi famously said that we needed to pass the bill to know what’s in it. Apparently we also needed to pass the bill to know what was not in it.

I have written and commented about this small but important legislative detail frequently over the past year. On more than one occasion someone has challenged me that it is not realistic to think that the entre law could be thrown out even if specific provision were voided by the courts. Conventional wisdom misses the mark once again.

So it’s off to the Supreme Court we go and we’ll see if at least five justices hear what the health care law did not say.

Self-Insurance Faces a Triple Regulatory Threat

SIIA has reported recently on a series of the meetings with DOL and HHS officials to discuss PPACA-mandated studies on self-insurance. Our assumption is that at a minimum there is ignorance among regulators, but more likely a negative bias pervades.

We are working to head off a DOL report that concludes smaller employers should not self-insure due to solvency concerns and a separate HHS report suggesting that self-insured health plans will negatively impact health insurance exchanges due to adverse selection concerns.

While the policy battle rages on these two fronts, self-insurance is now being targeted by a third team of regulators. The Treasury Department has recently developed a keen interest in stop-loss insurance of all things.

The hook for the IRS folks is that the new health care law limits the tax deduction companies that sell fully-insured health insurance products may take for the compensation they pay to their employees. In other words, if a company sells “health insurance,” the company is subject to this tax deduction limitation. And guess what, it looks like the IRS and Treasury officials are confusing stop-loss insurance with health insurance.

Consider the following excerpt from an IRS publication regarding this tax deduction limitation, requesting comments from the public on:

"the application of the deduction limitation for services performed for insurers who are captive or who provide reinsurance or stop loss insurance, and specifically with respect to stop loss insurance arrangements that effectively constitute a direct health insurance arrangement because the attachment point is so low." (See IRS Notice 2011-2).

So, not only are the Treasury officials asking insurance practitioners how they should treat, for example, stop-loss policies, Treasury is explicitly asking for comments on how they should treat these policies, especially policies with a low attachment point.

Interestingly, this was reported to be a hot subject of discussion at an American Bar Association meeting for tax practitioners last week in Florida. Can you picture a bunch of tax lawyers with no background in self-insurance trying to figure out stop-loss insurance? Yep, that’s a scary thought.

But back to the IRS. Should it conclude that stop-loss insurance can be defined as health insurance for even its limited tax treatment purposes, a troublesome precedent will be established. For more than two decades, SIIA has been largely successful in pushing back on state efforts to regulate stop-loss insurance like health insurance.

A contrary interpretation by the feds will likely embolden those who seek to impose new regulations on self-insured plans via their stop-loss insurers. That’s the last thing the industry needs.

So, with stop-loss insurance under a Treasury Department microscope, self-insurance now faces a true regulatory triple threat. Watch for additional updates on this important developing story.

A Tale of Two Domiciles

This month brought interesting news from two neighboring captive domiciles that portend two different paths in the years ahead.

In Tennessee, Governor Bill Haslam appointed Julie McPeak as the new commerce and insurance commissioner. This is big news for the self-insurance world because not only does McPeak understand alternative risk transfer, she has been an advocate for self-insureds and captives in her capacity as an attorney over the past few years.

Before that, she was the chief insurance regulator for the state of Kentucky and directly contributed to the captive insurance industry taking hold in that state.

Several months ago, then candidate Haslam approached Ms. McPeak to solicit her opinion on how the insurance industry could contribute to economic development in that state. She talked-up captives among other initiatives and apparently her input made a positive impression on the soon-to-be governor.

Tennessee can best be described today as a “dormant” captive domicile because it has a captive insurance statute, but no energy or resources have been committed by either the private or public sector to encourage captive formations in that state.

Ms. McPeak’s appointment has the real potential to change this. Work is already underway to update the state’s captive law to make it one of the most progressive and competitive in the country,

With a favorable law (assuming it can be passed through the Legislature) combined with a regulator who is willing to champion alternative risk transfer solutions, the key ingredients are in place to transform this domicile from dormancy to vibrancy.

Now let’s compare and contrast Tennessee with the nearby domicile South Carolina.

As most industry observers know, South Carolina has seen a reversal of fortune over the last several years as a captive insurance domicile. Its rapid growth and success in the early years has been stalled for some time, largely due to the state’s insurance department, which has increasingly been at odds with the captive insurance industry.

Industry leaders pleaded with newly-elected Governor Nikki Haley to appoint a new insurance commissioner who could restore the state’s status as one of the world’s premiere captive domiciles.

Interestingly, Ms. McPeak’s name had been floated last year as a possible candidate who could rescue captives in South Carolina, but it was obviously not to be.

Instead, Government Haley last week named David Black, CEO of Liberty Life Insurance Company to the post.

Now, Mr. Black does have solid business credentials but he is clearly not an altenative market guy, which means there will be a learning curve about captives at a minimum and no guarantee that he will be an advocate.

This latter point is important because it’s not good enough to be just luke warm about captives. The reason for this is that in order for any captive insurance domicile to grow the bureaucracy must be constantly tamed and that takes top-down leadership imposing a vision of true public-private partnership and demanding results.

The bureaucracy inside the South Carolina Department of Insurance is particularly challenging with regard to the captive application and review process, so the leadership demands are particularly acute.

We will soon see if Mr. Black is up to his challenge. Ms. McPeak is certainly up to hers.

This tale of these two domiciles will continue.