Do You Know Who Funds Your Health Insurance?

            A friend of mine called me last week with a question about health insurance coverage. As some of you know, if you are insured under an “Obamacare” plan, you need to select your coverage for next year this month.

            The thought of a big premium bill arriving just as the Christmas bills hit the mailbox is certainly something that will dampen the Christmas cheer.

            In any event, all of us need to have some kind of insurance to protect us at least against catastrophic illness or injury.

            For most folks, health insurance is either provided by an employer plan or by the government in the form of Medicare or Medicaid benefits. For those who do not have either of these options, they either get their insurance through the Affordable Care Act marketplace – in Connecticut it is called AccessHealthCT.com – or they take the risk of being uninsured.

            Most folks who receive their health insurance through an employer plan, pay a certain percentage of the premium each pay period – typically anywhere between 20 and 50 percent – and the employer pays the remainder so that the employee and eligible dependents are secure.

            In Connecticut, there are two types of plan or funding mechanisms that employers can use. The most common is the fully funded plan where the employer contracts with an insurance company to cover all the medical costs incurred by covered employees and their dependents during a contract period.

            The other which is also fairly common is known as a “self-funded” plan. Lots of municipal and state employee plans are self-funded. But private employers also use self-funded plans. In these schemes, the employer contracts with an insurance company to administer the benefits, but the employer itself pays the medical bills that are claimed for all eligible beneficiaries.

            In order to reduce risk associated with catastrophic claims that may go into the six figures, the employer will often purchase “stop-loss” coverage so that an excessive claim will get paid by an insurance company rather than the employer.

            But what happens if an employee covered by a self-insured plan receives treatment say for a hernia that requires surgery and an overnight stay in the hospital. The bills for that could run into the low to middle five figures. The employee submits the claim through his self-funded health plan, but the employer fails to pay the bill.

            Who becomes responsible for the bill at that point? This is where it gets hairy for the employee. Under the law, both state and federal, the employer is obligated to pay the bills and it faces fines, penalties, and potential criminal prosecution if it fails to do so. But suppose the employer goes bankrupt and has no assets to cover the bills. Then what.

            There was a case in Connecticut back in 1993 that dealt with this issue, and it did not turn out well for the employee. The federal appeals court noted that there were potential remedies under federal law, but none applied to this fact pattern. The court concluded, “distasteful as it is to conclude that people who prudently secured insurance may be left nevertheless exposed to the risk this suit does not open an avenue to recovery.”

            It is important for you to know if your employer self-funds its health insurance plan and if so, what will happen if the employer fails to pay your claims.