Who Regulates What?
State Rate Regulation
Federal Rate Regulation
Background Information:
Fully Funded Coverage, Self-Funded Coverage, and MEWAs
A Word about MEWAS and Discretionary Associations
State Rate Regulation
States have the authority to regulate the following types of insurance:
- individually purchased insurance, known as insurance purchased in the “individual market,”
- employer-based plans that are fully funded, and
- MEWAs that are either fully-funded or self-funded.
Generally, states do not have the authority to regulate other private, employer-based plans that are self-funded.
States take steps to ensure that health plans will be able to pay their enrollees’ claims for all of the types of health insurance that they regulate. But states do more to regulate the premiums charged to small employers and to individuals than those charged to large businesses. This is because, policymakers reason, large employers with more than 50 workers have enough clout to negotiate insurance premiums on their own. Any group of 50 or more is likely to include a range of people who are healthy and less healthy, so the costs for one large group may not be significantly different from another.
In contrast, employers with fewer than 50 workers, and individuals, have less bargaining clout. Insurers may not want to sell policies to small groups and individuals with high health care expenses and, without regulation, they may price policies at unaffordable rates. As a result, most states restrict premium variation in the small group market through rate regulation using the mechanisms described in this paper. Some states also regulate premium rates in the individual market.
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Federal Rate Regulation
As mentioned above, states cannot regulate self-funded health plans (with the exception of MEWAs). Self-funded health plans sponsored by private employers are regulated by the federal government under the provisions of the Employee Retirement Income Security Act, ERISA. But this law does not regulate premiums. In fact, no federal laws or regulations restrict the amount that a private employer can be charged for a health plan. However, as described below, there is another federal law (HIPAA) that prohibits employers and employee-based health plans from discriminating against individual employees due to health status. What’s more, ERISA also requires employers to administer benefits in a responsible manner, and this law applies to both fully funded and self-funded plans.
- The Health Insurance Portability and Accountability Act (HIPAA) prohibits discrimination in premiums charged to employees and their dependents based on health status. In other words, within an employer’s plan, premiums must be the same for groups of “similarly situated” employees. (Groups of employees may be considered “similarly situated,” for example, if they are all full-time workers, or if they have the same job classification, or if they have all worked at the same business for at least a certain amount of time.) Employees in one group may be charged a different premium than employees in another group. However, an individual employee cannot be singled out based on his or her health status and charged a higher premium than someone else in the same group. And an employer or insurance carrier cannot classify employees based on their health status and charge them higher premiums—an employee in poor health cannot be charged more than an employee in good health.¹
Under ERISA, employers have a fiduciary responsibility to administer employee benefit plans (including health plans) solely in the interest of participants and beneficiaries. Their exclusive purpose should be to provide benefits and to pay plan expenses.
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Background Information
Fully Funded Coverage, Self-Funded Coverage, and MEWAs
An employer that “fully funds” health insurance enters into a contract with a health insurance company to handle health benefits for its workers. The employer pays premiums to an insurer, and, in exchange, the insurer pays health care claims and bears the risk for claims.
In contrast, an employer who “self-funds” health insurance directly pays the health care claims for its employees. Employers who self-fund may also pay a third party administrator to administer health benefits and/or pay a stop-loss insurer to cover a portion of claims that exceed a certain dollar threshold.
Multiple Employee Welfare Arrangements—MEWAs—are programs designed to provide welfare benefits (such as health coverage) to the employees of two or more employers. They may be either fully funded or self-funded. |
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Under the federal Employee Retirement Income Security Act (ERISA), states cannot regulate employers’ self-funded health benefit programs. However, Multiple Employee Welfare Arrangements (MEWAs) are an exception to this rule. Under a 1983 amendment to ERISA, states are allowed to regulate both self-funded and fully funded MEWAs. To assist in this effort, states may enter into cooperative agreements with the federal Department of Labor to enforce requirements that MEWAs be adequately funded. What’s more, some states prohibit the sale of self-funded MEWAs entirely. (For details about federal and state powers over MEWAs, see the Department of Labor Web site.)
Other groups, such as associations that are not established by employers, may also sell health insurance. This type of insurance is known as “discretionary association health insurance.” States do have the power to regulate discretionary association health insurance. However, state laws that protect consumers from rating and marketing problems in these plans vary greatly—some states take a proactive role, and other states require insurers to follow only minimal requirements. For example, some states require discretionary association health insurers to follow only the rules of the state where the association is domiciled (usually, where it is headquartered), while other states require such insurers to also follow the rules of states where members live or work. For more information about discretionary association health insurers, see our report titled The Illusion of Group Health Insurance: Discretionary Associations. |
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¹26 CFR § 54.9802-1T
