2011 Professional Risk Symposium: EPL, E&O and

Fiduciary

LATEST DEVELOPMENTS IN ERISA PREEMPTION

Chicago, IL ~ March 24 & 25, 2011

LATEST DEVELOPMENTS IN ERISA PREEMPTION

Moderator:Joelle Sharman, Esq., Partner, Lewis Brisbois Bisgaard & Smith LLP

Panelists:Andy R. Anderson, JD, Partner, Morgan, Lewis & Bockius LLP

Laura F. Coppola, AFSB, RPLU, CPCU, Vice President, Strategic Products Group and Fiduciary Liability Product Manager,

Executive Assurance Department, Arch Insurance Group

Katherine "Kate" A. Crouch, Employee Benefits Broker/Consultant,

Health and Welfare Benefit Services

Brian D. Smith, Esq., Senior Claims Counsel, Private and Non Profit Programs, Travelers Bond and Financial Products

Laura W. Tholen, Senior Legal Counsel, FMR LLC (Fidelity Investments, LLC)

ERISA’s Preemption Provisions

ERISA’s preemption clause preempts all state laws that relate to an employee benefit plan.

ERISA contains an exception to this preemption rule (the “savings clause”) that allows state laws to regulate the business of insurance.

ERISA (through the “deemer clause”) prevents states from characterizing a self-insured plan as

the business of insurance.

ERISA’s Remedial Scheme

• Plan participants may bring a civil action under ERISA against a plan administrator who fails to comply with a request for information about the plan, to recover claimed benefits, to enforce rights under terms of the plan, or to clarify rights for future benefits.

• ERISA imposes a fiduciary duty on those who make discretionary decisions on behalf of the employee benefit plan.

LITIGATION TRENDS

• Challenges to state regulation of health plans and insurers

• Challenges to state tort lawsuits for delay or denial of health care.

Both relevant to healthcare reform initiatives

Challenges to State Regulation of Health Plans

and Insurers

• Maryland (Wal-Mart) Law – State Pay or Play

Covered employers required to spend at least 8% of their payroll on “health insurance costs.” If the employer fails to do so, employer must pay the difference between what the employer spent on health insurance costs and the 8% requirement into the Maryland Fair Share Health Care Fund.

Challenges to State Regulation of Health Plans

and Insurers

• State Pay-or-Play Laws

The Fourth Circuit held that Maryland’s Wal-Mart Law

was preempted by ERISA because it affected only

one company in the state and effectively forced Wal-

Mart to restructure its health benefit plan to increase

coverage.

Challenges to State Regulation of Health Plans

and Insurers

• City of San Francisco Ordinance-Pay or PlayCovered employers required to make minimum “health care expenditures” per employee. An employer has several options for meeting its “health care expenditure” requirement. The employer also has the option of paying its required expenditure to the city. Amounts paid to the city will fund program designed for the uninsured population of San Francisco.

Challenges to State Regulation of Health Plans

and Insurers (cont’d)

• State Pay-or-Play Laws

The Ninth Circuit held that San Francisco ordinance

was not preempted by ERISA because it applied to

multiple types of employers, and because employers

had a choice to either pay into county funds or offer

health benefits, unlike the Maryland law.

Challenges to State Regulation of Health Plans

and Insurers (cont’d)

Individual Mandates• Individual mandates have not yet been

litigated under ERISA

• Unclear whether they will bind administrators and dictate plan choices.

• Should be saved from preemption

POTENTIAL SOLUTIONS:

Congressional Action • ERISA waivers to permit state health reform; amend

ERISA to allow state-based tort litigation against HMOs, etc.

Executive Action• Before PPACA, the DOL decided to promulgate

amendments to ERISA to clarify when state and local healthcare program constitute an ERISA welfare plan; after PPACA and the petition for certiorari in the San Francisco case, however, DOL changed its mind.

PPACA and Preemption

• Beginning on the effective date for each provision of PPACA, any state law that does not meet the federal minimum standards will be preempted

• PPACA contains a number of provisions that specifically preempt different types of state law

What did PPACA do?

• Added additional provisions to ERISA, including:

– prohibition on lifetime and annual limits on group health plans.

– prohibition on recessions of coverage, and

– requirement to include preventive health services.

• Included parallel provisions in the Internal Revenue Code, entitled “Group Health Plan Requirements.”

PPACA- American Health Benefit Exchanges

• To facilitate the purchase of qualified health plans, PPACA provides for a system of health insurance exchanges to be established and operated by the states starting in 2014

• HHS has the authority to establish and operate an exchange for any State that does not elect to establish an exchange

• Beginning in 2017, states may elect to allow insurers to offer qualified health plans to large employers through the exchanges.

PPACA’s Requirements on Fiduciaries

• Insurers and plan sponsors must modify coverage to comply with mandates relating to individual and group and health insurance market reforms.

Penalties for Noncompliance

• ERISA fiduciary standards require trustees to comply with ERISA and PPACA

• Participants and beneficiaries may sue to enforce PPACA provisions against GHPs and insurers

• Trustees could be held personally liable if GHP not amended properly or administered in compliance with PPACA

• IRS may assess excise taxes upon GHPs that don’t comply. Penalty to be paid by the fiduciary or the liability carrier

• HHS enforce reforms against insurers and nonfederal government plans (states and municipalities).

 

ERISA Fiduciary Standards

• Many executives don’t know ERISA from other acronyms

• Many don’t know they are even fiduciaries

• Need a primer on fiduciary liability under ERISA

Preventing Liability for Penalties

• Ultimate responsibility for PPACA compliance rests with plan administrator (board of trustees)

• Work closely with insurers, TPAs, consultant and legal counsel to make sure plan terms are amended to comply with PPACA and plan is administered accordingly

• Trustees should document steps they are taking to analyze PPACA’s impact on their plans

Preventing Liability for Penalties

• Establish a formal process for reviewing their consultants’ recommendations as to benefit changes and required plan amendments

• Consult with fiduciary liability carriers to determine the extent to which PPACA penalties may be covered under their policies

Fiduciary Coverage—Before and After PPACA

• ERISA bonds are not sufficient

• Understanding the need for fiduciary liability insurance

• Typical causes of claims

• How coverage works

• What coverages to look for in the policy

QUESTIONS REMAINING:

• To what extent does ERISA limit states' power to require employer participation in local health reform?

• What impact, if any, will the PPACA have on the scope of this power?

• Will employers continue to offer group health plans?

• Will courts continue to recognize ERISA preemption principles?

• How will PPACA’s appeals rights change judicial oversight of ERISA benefit cases?

QUESTIONS?

LATEST DEVELOPMENTS IN ERISA PREEMPTION

Moderator:Joelle Sharman, Esq., Partner, Lewis Brisbois Bisgaard & Smith LLP

Panelists:Andy R. Anderson, JD, Partner, Morgan, Lewis & Bockius LLP

Laura F. Coppola, AFSB, RPLU, CPCU, Vice President, Strategic Products Group and Fiduciary Liability Product Manager,

Executive Assurance Department, Arch Insurance Group

Katherine "Kate" A. Crouch, Employee Benefits Broker/Consultant,

Health and Welfare Benefit Services

Brian D. Smith, Esq., Senior Claims Counsel, Private and Non Profit Programs, Travelers Bond and Financial Products

Laura W. Tholen, Senior Legal Counsel, FMR LLC (Fidelity Investments, LLC)