ERISA’S Impact on the Health Insurance Industry

Employer-based health insurance is the keystone of our health care system.  Based on 2003 estimates, the Employee Retirement Security Act of 1974 (ERISA) placed the regulation of private sector employee health benefit plans under federal jurisdiction for roughly 131 million people.[i]  ERISA applies to self-insured plans, while both ERISA and state authority apply to fully insured plans.  The distinction is important since federal and state laws vary for subrogation.  Roughly 67 million people are covered by self insured plans where the employer pays employees’ benefits directly, as opposed to traditional plans where 64 million have claims paid by insurers that collect premiums from employers.[ii]

Subrogation as an Important Cost Containment Tool

Industry estimates show that over $1 billion is recovered annually through subrogation on health plans.[iii] In 2000, one subrogation firm averaged $4.80 in recoveries for every person covered.[iv] In 2003, another firm recovered $236 million on 40 million lives – almost $6 per life.[v]  Subrogation is a key savings device for plans facing massive cost increases.  It returns proceeds to the insurer creating lower premiums as insurers set plan rates on historical costs.[vi]  Rates and benefits are predicted on actuarial expectations of expenses and subrogation is factored into the claims experience.[vii]

If an insurer had 100 policyholders and experienced $20,000 in claims, it will set premiums at $200 per policyholder.  If the company experienced $20,000 in claims and recovered $5,000 in subrogation, it will set premiums at $150. Thus, subrogation is implicitly included as a factor in actuarial calculations.[viii]  Assume a plan with $4 million a year in claims is renewing their contract.  Based on a 10% cost increase, a 3% increase for population aging, and no reduction for subrogation, the next year’s claims are $4.52 million, a 13% increase.[ix]  Subrogation recoveries would reduce this rate increase.  The ability of ERISA plans to seek reimbursement of benefits from responsible third parties is vital to their continued financial security.  The savings are passed on to employers and employees in the form of lower costs, making coverage more available and affordable.[x]

The Impact of Prohibiting Health Care Subrogation

Prohibiting subrogation will have a large economic impact as the inability to subrogate will lead to rate increases and benefit decreases.[xi]  Barring subrogation will be especially harsh for small plans, where a non-reimbursable loss will lead to significantly higher rates based on the size of the loss relative to a plan’s claims experience.[xii]  If subrogation was unavailable, the cost of insuring the past risk would increase and the projected future costs would be adjusted upward through increased premiums.[xiii]  Subrogation reduces the cost in the risk calculation on which premiums are based.  It figures into the insurance experience as revenue, not a windfall, as suggested by anti-subrogation proponents.[xiv] 

Subrogation helps ensure that the number of insureds does not decrease as studies indicate that a 1% increase in costs result in the loss of coverage for over 300,000 people.[xv]  The bottom line is that subrogation limits health care cost increases and significantly aids in preventing coverage loss for insureds nationwide.  Without subrogation, the cost of employee plan benefits will rise, deterring employers from funding plans and shifting additional costs onto plan participants.[xvi]  A U.S. Census Bureau survey showed that the percentage of people receiving health care from employers decreased from 63.6% in 2000 to 59.8% in 2004.[xvii]  Cost containment mechanisms such as subrogation are critical to ensure that the number of privately insured individuals does not further decrease.

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[i] Department of Labor Deputy Assistant Secretary for Policy Bradford P. Campbell, Testimony Before the Subcommittee on    Labor, Health and Human Services, and Education Committee on Appropriations, April 2, 2004, available at http://www.dol.gov/ebsa/newsroom/ty040204.html (last visited January 14, 2009).

[ii] Hinda Ripps Chaikind, ERISA Regulation of Health Plans: Fact Sheet,  Order Code RS20315 3/6/03 Congressional

Research Service – The Library of Congress, available at       http://www.allhealth.org/BriefingMaterials/ERISARegulationofHealthPlans-114.pdf (last visited January 14, 2009).

[iii] Debbie Reichman, Supreme Court Allows Enforcement for Health Plans Seeking Reimbursement, AHIP Coverage July/Aug   2006, available at http://www.ahip.org/content/default.aspx?bc=31|130|136|17340|17344 (last visited January 15, 2009).

[iv] Trover Solutions, Inc., Form 10-K, for the Fiscal year ended Dec. 31, 2003.

[v] Id.; Brief of Respondent, Sereboff v. Mid Atl. Med. Servs., No. 05-260 (547 U.S. 356 (2006)).

[vi] Jeffrey A. Greenblatt, Insurance and Subrogation: When the Pie Isn’t Big Enough, Who Eats Last, 64 U.Chi.L. Rev. 1337   (1997).

[vii] See e.g. Incurred Health and Disability Claims, Actuarial Standard of Practice No. 5, Doc. No. 076 (December 2000).

[viii] Jeffrey A. Greenblatt, supra note 6 at 1355.

[ix] See Documentation in Health Benefit Plan Ratemaking, Actuarial Standard of Practice No. 31 3.5.4 (Actuarial Standards  Bd. 1997).

[x] Brief for the Respondent, supra note 5.

[xi] Scott M. Aronson, ERISA’s Equitable Illusion: The Unjust Justice of Section 502(a)(3), 9 Employee Rts. & Empl. Pol’Y J. 247 (2005).

[xii] Brief for the Respondent, supra note 5

[xiii] Johnny C. Parker, The Made Whole Doctrine: Unraveling the Enigma Wrapped in the Mystery of Insurance Subrogation,

70 Mo. L. Rev. 723, (Summer 2005).

[xiv] F. Joseph DuBray, A Response to the Anti-subrogation Argument: What Really Emerged from Pandora’s Box,

41 S.D.L. Rev. 264 (1996).

[xv] Debbie Reichmann, supra note 3.

[xvi] Brief for the Respondent, supra note 5.

[xvii] See David Leonhardt, Poverty in U.S. Grew in 2004, While Income Failed to Rise for 5^th Straight Year, N.Y. Times, August 31, 2005, available at http://query.nytimes.com/gst/fullpage.html?res=9F0DE7D71631F932A0575BC0A9639C8B63&sec=health&spon=&pagewanted=2 (last visited January 15, 2009).

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This entry was posted by Adam V. Russo on Wednesday, January 28th, 2009 at 12:18 pm and is filed under ERISA. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.