SPECIAL COMMUNICATION

DATE: June 30, 2010

TO: All SIIA Members

FROM: Mike Ferguson, SIIA Chief Operating Officer

RE: Threats to Self-Insurance – Act II

With the recent passage of federal health care reform legislation after an extended time period of intense lobbying by SIIA and other organizations, we understand many of our members may believe that our industry can take a break for a while on being concerned about legislative/regulatory/legal developments. In fact, nothing could be further from the truth.

Passage of the Patient Protection and Affordable Care Act (PPACA) has created new lobbying challenges for our industry, which will unfold in the coming months and years ahead. These challenges are combined with ongoing threats coming from multiple directions.

To help our members see the “big picture,” we have detailed these threats and challenges and encourage you to read this communication in detail. This information will take some time to digest, but we believe it is critical to re-engage our members now in preparation for the many battles that are sure to come.

SIIA will further intensify our lobbying efforts and communication strategies in order to protect your interests. To be successful, we will need your help.

It has been very interesting to hear feedback from members over the past year expressing skepticism (and then disbelief) that comprehensive health care legislation would pass despite repeated warnings coming from SIIA. Perhaps that is understandable given the history of previous reform efforts, but the fact is that things can happen in Washington, DC very quickly under the right political circumstances…and that’s exactly what occurred.

Please consider this fact when you hear new “calls to action” from SIIA, which are certain to come. In a busy life, people often “click past” some e-mail messages, especially about discomforting issues. But please be assured that all SIIA messages on these subjects are designed to serve your direct business interests.

And, most important, our communications provide you the information you need to actively participate in the political process that is so important to preserving the right of employers to utilize alternative risk transfer programs.

The complete report follows. Please read it and pass it on to anyone else in the industry who you think should be supporting SIIA’s government relations and legal defense efforts. We hope that once you read this you will be re-engaged and be motivated to help SIIA protect the industry.

ADDITIONAL FEDERAL LEGISLATION/OVERSIGHT

In the last half-year of this session and certainly after this fall’s contentious mid-term election, Congress can be expected to keep healthcare reform on the front burner. We anticipate oversight hearings to receive testimony on how PPACA is working and what “technical” legislative changes may be needed as well as any amendments to the law.

In preparing Congressional hearing testimony, SIIA will be soliciting feedback from our members with regard to PPACA compliance issues. It is vital that we hear about issues and problems encountered by self-insured health plans as a result of PPACA. Your first hand experiences provide SIIA the ammunition we need to engage our contacts on Capitol Hill to make sure that critical issues are addressed in any future remedial legislation. Congress needs to hear about how reform may weaken healthcare plans for millions of Americans who belong to self-insured plans.

We also anticipate introduction of new legislation, unrelated to PPACA, focused on health care cost control given that costs are expected to continue to rise, likely at an even faster rate as a result of the passage of PPACA.

Yes, believe it or not, Congress is certain to focus on health care reform again once it becomes clear that the cost curve has not been “bent” as promised. SIIA will be calling you to action when the new legislative proposals start to emerge.

And by the way, in case you think a possible Republican takeover of Congress will create a more favorable political government, think again. The reality is that many Republicans do not like the employment-based health care system and would likely push for more individualized coverage approaches.

FEDERAL REGULATION

The PPACA’s 2500-plus pages of statutory provisions, which become effective as early as September 23, 2010, call for more than 100 sets of regulations to be issued by federal agencies including the Department of Health and Human Services (HHS), Department of Labor (DOL) and Treasury Department.

SIIA members face a vastly more complex and costly administrative burden to comply with PPACA. While this is undoubtedly one of the most controversial and far-reaching laws ever passed by Congress, its actual implementation will be determined by interpretations by the regulatory agencies.

Federal agency regulations often expand on the statutory language and go beyond the legislative intent of Congress. In addition to the Obama Administration agencies cited above, the Internal Revenue Service (IRS) will determine tax rules for healthcare plans.

In a letter to Congress on May 25, 2010, HHS Secretary Kathleen Sibelius outlined the key insurance reform questions her agency currently addresses which included:

What benefits are included in a minimum “essential benefit package?” How will the small business tax credit operate? What are the new implementation rules for “pre-existing condition” exclusions? And, how will the employer “pay or play” mandate be administered? The clear implication is that the Obama Administration’s HHS will largely dictate how health reform will or will not work.

Key details now being hashed out by regulators include:

Definitions of grandfathered plans – HHS has already started to spell out what benefit and other plan design changes (deductibles, coinsurance, etc.) will affect grandfather status for plans in existence as of March 23, 2010.

Adult child coverage – HHS has already issued proposed rules extending coverage for young adults allowing them to stay on their parents’ health plans until age 26. On April 27, the IRS issued guidance concerning the tax treatment of this coverage.

Pre-existing conditions – Effective for plan years that begin on or after September 23, rules to be issued by HHS will address the ban on exclusion of children up to age 19 from policies and plans because of pre-existing conditions. Coverage requirements for adults with pre-existing conditions will begin starting in 2014.

Early retiree reinsurance program – In connection with a June 21 start date, HHS will issue rules implementing a $5 billion early retiree reinsurance program under which participating employer plans will be eligible to receive reimbursement for a portion of their costs for providing certain medical claims to early retirees age 55 through 64.

SIIA will continue to educate HHS and DOL regulators about self-insurance, including ongoing consultation with DOL to influence fair treatment of self-insurance in its report on self-insured plans that is due March 23, 2011.

Our objective is to broaden DOL’s data input beyond the current Annual Return/Report of Employee Benefit Plan – Form 5500, which we feel does not provide a complete view of self-insurance. While recommending ways DOL can take a broader look at self-insurance, we are also positioning SIIA as a resource through the development of the report.

SIIA will also be representing the industry in the development of a mandated-HHS report analyzing the large group market and compare fully-insured and self-insured plans. In a similar way to our effort with DOL, we want to make sure that HHS has the full story when it considers self-insurance.

Make no mistake, there are interest groups working aggressively to influence the conclusion of these reports so that self-insurance looks bad.

STATE REGULATOR AND HEATH INSURANCE INDUSTRY ATTACKS

While continuing developments in Congress and federal regulatory agencies pose significant challenges, the self-insurance industry also faces the threat of being undercut by state regulators who feel threatened by federal entry into insurance regulation and by the commercial health insurance industry. Both the National Association of Insurance Commissioners (NAIC) and the Association of Health Insurance Plans (AHIP) are actively attacking self-insurance!

The NAIC wrote earlier this year to congressional leaders expressing concerns that reform provisions might encourage more businesses to self-insure to avoid costlier coverage as a result of the new law. They moaned that an increase in the self-insurance marketplace would be "devastating" for businesses, employees and healthcare providers.

For its part, AHIP continues to claim that as a significant number of Americans are covered through self-insured plans, these plans and their employer sponsors should contribute to the funding from which self-insurance is exempted under the PPACA (SIIA succeeded in keeping self-insured plans from having to pay these fees.) Another AHIP spokesman has stated publicly that under reform healthier lives will move to self-insurance thus undermining the solvency of plans within state exchanges.

SIIA rejects AHIP’s unfounded and unsupportable propaganda as another example of the traditional industry’s ongoing attacks against the alternative market. On the basis of fair competition in a free market, we do agree with AHIP’s statement that incentives for employers to self-fund are stronger under reform! If that’s a bad thing for them, it’s good for thousands of employers across the country who need a more cost effective way to fund health benefits risks.

While these are not new threats, they have intensified and should not be taken lightly by our industry. These efforts once again show that we must continue to educate our elected officials about self-insurance and defend against these baseless claims.

SIIA will also take a more aggressive stance in responding to attacks from AHIP, NAIC or other interest groups who would like nothing better than for the self-insurance industry to be dismantled.

LITIGATION

Major litigation of national significance involving ERISA preemption and self- insurance could be heading to the U.S. Supreme Court. Illustrative of how litigation impacts self-insurance, this important case seeks to determine whether employers who sponsor ERISA plans are required to spend specific amounts on health care for their employees. (See SIIA Special Report on Golden Gate Restaurant Association v.City and County of San Francisco).

In this case the Golden Gate Restaurant Association, a group comprised of self- insured health plan sponsors, is challenging a local ordinance that requires San Francisco employers to spend specific amounts on employee health benefits or pay a fee ("pay or play"). Although ERISA clearly provides that federal law preempts such local ordinances, the Ninth Circuit Court of Appeals stayed a District Court ruling holding that the ordinance is not in violation of the spirit of ERISA preemption.

The case is ripe for U.S. Supreme Court review because the Ninth Circuit decision creates a split with the Fourth Circuit in a somewhat similar case where the court struck down a Maryland statute as impermissibly seeking to mandate the structure of ERISA plans.

The final outcome of this important case will establish an important precedent with enormous national implications for self-insured employers. If cities and states are allowed to enact and enforce so-called "fair share" laws like the San Francisco ordinance, multi-state employers would face dozens of different and often conflicting requirements that would make it impossible to offer a uniform benefits package and would significantly increase plan administrative costs – two results ERISA preemption was specifically designed to prevent.

Not surprisingly, the Obama administration has requested the U.S. Supreme Court to let the Ninth Circuit Court’s decision stand.

Because of the overarching significance of the Golden Gate Restaurant Association case, SIIA will file an Amicus brief on this case with the U.S. Supreme Court should the case be accepted.

STATE LEGISLATIVE DEVELOPMENTS

Self-insurance continues to be attacked in a variety of state legislatures seeking to impose various forms of taxation – all violations of federal law under ERISA. SIIA will continue to monitor state legislative and regulatory developments and will vigorously oppose unjustified state regulation. Following are just three current and recent examples:

Connecticut – An example of a state’s attempt to regulate self-insurance indirectly through direct TPA regulation is found in Connecticut HB 5090. A comprehensive bill regulating TPAs, this measure would have prohibited TPAs from earning compensation contingent on cost savings achieved by the TPA in the claims processing of self-insured plans. The bill also would have provided preferential treatment for ASOs over traditional TPAs.

Faced with vigorous opposition from SIIA members in Connecticut, the bill did not come to a vote in the Senate as the legislature adjourned for the year.

Oklahoma – Further illustrating the threat to self-insurance posed by state legislatures, Oklahoma lawmakers passed a bill that will impose "access payments" on all claims paid by a" health insurance carrier." In particular, the bill would redefine "health insurance carriers" to include noncarriers such as self-insured "employer welfare arrangements" and "third party administrators."

Such state "access payments" (or taxes) to fund Medicaid targeted on specific groups such as self-insured health plans and TPAs would redefine the common meaning of the term "insurance carrier." The state law would impose significant new rate increases on employers and individuals who contribute to health plans and pay premiums, adding to already skyrocketing healthcare costs. This type of state law creates yet another legislative disincentive for employers to continue offering self-insured health benefits to employees and their dependents.

Clearly self-insured plans are not carriers. State legislation that seeks to impose assessments on self-insured employer welfare arrangements is preempted by ERISA. "Employee welfare benefit plans" is a defined term under ERISA providing that "any and all state laws…that may...relate to any employee benefit plan shall be superceded [by federal law]. This provision has been upheld by numerous decisions of the U.S. Supreme Court.

SIIA opposed the Oklahoma legislation and Chief Operating Officer Mike Ferguson wrote to Governor Brad Henry to urge him to veto the bill. The bill was an “eleventh hour” measure introduced during the final week of the session, and passed largely without due consideration and without the opportunity for opponents to effectively register objections.

The bill was eventually signed into the law by the governor but it is expected to be challenged in Court. SIIA will monitor the anticipated legal developments and get involved as appropriate.

Oregon – The state of Oregon operates the Oregon Medical Insurance Pool (OMIP) to provide insurance to high-risk individuals who have been denied coverage in the individual market. Due to the existence of the OMIP pool the individual health insurance market declines one in every four applications and pushes the individual into OMIP where the pool losses are subsidized by insurance companies writing individual health insurance, group health insurance and stop-loss coverage.

OMIP is designed to provide affordable coverage to those with high cost or ongoing medical conditions at a cost that is within 125% of the average industry rate. Therefore the plan is designed to have claims exceed premium income. These losses are passed on to the health insurance and stop-loss market in the form of an assessment that is based on a per covered life basis. This results in significant disparity for stop-loss carriers licensed in Oregon since the stop-loss premiums are a fraction of the premium amounts collected by the traditional insurance market.

SIIA has long opposed Oregon’s view of treating stop-loss insurance as health insurance. Many federal and state courts have agreed with our position, but not this state. The level of assessments in Oregon for the OMIP program has damaged the availability of stop-loss insurance in the state. Further, a bill that would also assess TPAs is expected to be revived in the next session after being defeated earlier.

CONCLUSION

This report obviously represents a point in time. There will be new legislative, regulatory and legal threats to come – some anticipated and others not.

What we can say with certainty is that SIIA will continue its leadership role in working to protect the employment-based health care system and the interests of our members. Please watch for updates on the issues discussed in this report and instructions on how you can support our government relations and legal defense efforts. We trust we can count on your involvement and support as we enter yet another critical time period for our industry.