Health Benefits Case May Spark Reform : Self-Insured Employer’s Denial of Coverage for AIDS Seen as Catalyst to Change in Law

Insurance specialists and company officials predict that the case of an AIDS patient who lost his company-paid health benefits will likely spur reform of the nation’s 18-year-old benefits and retirement law.

Reacting to a U.S. Supreme Court decision to not hear a case in which a Houston music company slashed the health coverage of John McGann, benefits experts agreed that the federal Employee Retirement Income Security Act, known as ERISA, will most likely be overhauled in the near future.

“The political pressure will be such that Congress will amend it,” said James Ozark, a partner for Hewitt & Associates, a human resources consulting firm in Newport Beach.

The Supreme Court on Monday decided to let stand a lower court ruling that H&H; Music Co. had the right to deny health benefits to employees and that ERISA protections did not apply in his case.

The company, which was self-insured, slashed McGann’s health benefits from $1 million to $5,000 after learning that he had contracted the deadly disease. He died last year.

Companies that use health maintenance organizations or contract with insurance companies to provide indemnity employee health benefits are regulated by state law and therefore are tightly controlled, experts said.

But companies such as H&H; Music, which pay employees’ medical bills with their own resources rather than pay set fees to an insurance company or health maintenance organization, are regulated only by ERISA and therefore have more latitude in deciding what benefits they are willing to cover.

The McGann case has wide-ranging implications, health benefits experts said, because employees experiencing premature childbirth or suffering from cancer or other chronic diseases face similar cuts in benefits.

And because an increasing number of companies are opting for self-insurance, considered cheaper than conventional health insurance programs, many agreed that stiffer regulations should be enacted to cover self-insured companies.

The problem with self-insurance, they said, is when the company starts up its own plan but neglects to purchase stop-loss coverage, also called reinsurance. With reinsurance protection, small companies that are self-insured don’t have to worry about depleting their pool of funds in the event of a single catastrophic illness.

One amendment to ERISA might be a clause requiring self-insured companies to purchase stop-loss protection.

Health-care experts familiar with the McGann case note that his employer did not purchase reinsurance when it dropped health benefits provided by General American Life Insurance Co. and undertook its own indemnity plan. Coverage of McGann’s illness would have depleted H&H; Music’s pool of funds available to pay other employees’ medical bills, said Roy Young, president of self-insurance consultant US Benefits Inc. in Costa Mesa.

“This is bad news for self-insurance,” Young said. “Opponents to self-funding will say how terrible this is.”

Self-insurance is gaining popularity as a cheaper alternative to conventional employee health benefits packages. Self-insured companies can save tens of thousands of dollars a year because they don’t have to pay administrative fees and commissions to insurance companies.

Analyst Drew Cree at the Costa Mesa branch of Foster Higgins & Co., an international benefits company based in Princeton, N.J., said a recent survey shows that, while only 19% of companies providing health benefits are self-insured, the number is growing by at least 10% a year by some estimates.

The vast majority of those companies, however, are large corporations with 10,000 or more employees. Pooled funds from those companies would rarely, if ever, be threatened by a single catastrophic illness.

Still, Cree said, H&H; Music’s action was surprising. “I have never seen an employer arbitrarily cut benefits like that.”

The Supreme Court action--or inaction--may be moot.

Experts say that the 1990 Americans with Disabilities Act should adequately protect employees who fall ill or incur huge medical bills because of accidents.

The act, which prevents employers from discriminating against disabled employees, could be interpreted to cover those with acute or chronic illnesses such as AIDS, experts say. Simply put, cutting off benefits would be a form of discrimination.

While agreeing that the Supreme Court was right in not hearing the case, health benefits experts and company officials with self-insurance plans expressed little support for H&H; Music’s treatment of McGann.

“They made a hard decision and they blew it,” said Jonathan Bromberg, health benefits administrator at Aerotest, a Costa Mesa company that tests airplanes. Bromberg is also a consultant on self-insurance.

William Roper, chairman of packaging manufacturer Ropak Corp., said that when he decided to self-insure employees four years ago he designed a plan that included reinsurance.

“I would never, never consider self-insurance with out stop-loss protection,” said Roper, whose Fullerton company is about the same size as H&H; Music. “That is just too much of a risk.”

Larry Watts, a spokesman at McGaw Inc. in Irvine, agreed. McGaw, a self-insured company that makes medical products, has never made the decision to cut employees’ benefits for any reason.

“Since we are in health care, it would be impossible to imagine us doing anything like that,” Watts said.

H&H; Music’s action set a bad precedent, Watts said, giving self-insured companies more excuses to cut benefits for medical problems such as premature childbirth, one of the most expensive procedures.

“What are they going to do then, cut that benefit?” Watts asked. “You can’t decide which catastrophic illness to cover or not. It’s an ethical as well as a practical issue. I’m sure that people with chronic diseases are not going to sleep well tonight.”

Conventional Coverage Vs. Self-Insurance

A recent survey indicates that companies with fewer than 500 employees are more likely to pay a health insurer or HMO a set fee to provide health care for their employees. Larger corporations overwhelmingly prefer to cover employee health care out of their own pools of funds.

Types of Insurance

Conventional Health Insurance: Company pays a set fee per employee to an insurance company or health maintenance organization. The insurance company or HMO then handles and pays all employee medical bills.

Indemnity Plan: Insurance company contracts with a group of physicians or a medical center to provide health care for clients.

Benefit: The subscriber has the flexibility of seeing the physician of his or her choice.

Drawback: The patient generally pays a deductible of 10% to 20% of the medical bill--more if the physician chosen is outside the group.

Health maintenance organization: Subscriber sees doctors within HMO’s network of physicians and dentists.

Benefits: No deductibles, only small co-payments for each visit and a ceiling on charges for pharmaceutical products.

Drawback: Little flexibility in picking a doctor.

Self-insurance: A company takes care of all medical bills incurred by its employees out of its own pool of funds, part of which is typically paid by employees through payroll deductions.

Benefit: Cost savings because no fees are paid to insurance companies.

Reinsurance: Self-insured companies buy policies that allow them to draw from funds created by a pool of insurance companies. Also called stop-loss insurance.

Benefit: Such policies help businesses ensure that a single catastrophic illness will not wipe out a company’s medical payment fund. Conventional: 59% Self-insurance: 41% Number of Employees: Fewer than 500

Conventional: 39% Self-insurance: 61% Number of Employees: 500 to 999

Conventional: 26% Self-insurance: 74% Number of Employees: 1,000 to 2,499

Conventional: 24% Self-insurance: 76% Number of Employees: 2,500 to 4,999

Conventional: 16% Self-insurance: 84% Number of Employees: 5,000 to 9,999

Conventional: 24% Self-insurance: 76% Number of Employees: 10,000 to 19,999

Conventional: 13% Self-insurance: 87% Number of Employees: 20,000 to 39,999

Conventional: 19% Self-insurance: 81% Number of Employees: 40,000 or more

Sources: Foster Higgins Health Care Benefit Survey, 1991; Barron’s Dictionary of Finance and Investment Terms