Once again this year, Maryland lawmakers are debating how to rein in the excesses of managed care.

It's become an annual exercise as HMOs have grown through the '90s -- and complaints from patients and doctors have grown with them.

The lawmakers have directed insurers to pay for specific services, such as in-vitro fertilization. They have crafted an appeals procedure for patients who think their health plan has failed to cover medically necessary care. They have limited retroactive denials of claims from hospitals and doctors.

Yet whatever rules the lawmakers come up with, hundreds of thousands of insured Marylanders are outside the reach of the legislation.

A broad federal law governing pensions, health and other benefits, the Employee Retirement Income Security Act (ERISA), prevents the states from regulating health plans in which an employer is self-insured.

The law also prevents the health plans from being sued for punitive damages.

Most employers pay premiums to HMOs or other health plans, and the health plan is at risk for the cost of care. But many companies, particularly large ones, assume the risk themselves and pay a management fee to a health plan or administrator. The states cannot regulate such self-insured plans. Some, particularly insurers and business groups, view this exemption from state rules as important for employers, particularly large companies with workers in many states.

"It can be so onerous to come up with a separate plan in each state," said Brian Bark, a benefits consultant in the Baltimore office of Buck Consultants, a national firm that advises clients on whether self-insurance or conventional insurance is better for them.

Others, including health care providers and consumer groups, say it's a problem.

The argument of the multistate employers "needs to be balanced against the need to provide some core benefits and core protections," said Steven B. Larsen, Maryland's insurance commissioner. Larsen has become something of a crusader on the issue, doggedly attempting to generate interest in the arcana of "ERISA pre-emption."

Both supporters and opponents of limits on state authority agree there is little likelihood of change on the horizon.

"There will be some form of federal legislation this year that will erode some part of the ERISA pre-emption," predicted Richard Service, editor of the trade magazine Business & Health.

However, Service said, what is likely to result from competing "patients bills of rights" is more federal regulation of the self-insured plans, not an expansion of state reach.

When ERISA was enacted 25 years ago, it was intended to safeguard pensions and encourage companies to offer health insurance by protecting them from interference from the states. HMOs were not widespread.

But, as states and the federal government have responded to managed care backlash by legislating patient rights and mandating coverage, ERISA has turned into a shield for self-insured companies that critics call a giant, if unintended, loophole.

Nationally and in Maryland, about one person in five is covered by an employer self-insured plan, according to estimates by the Employee Benefits Research Institute and the state Health Care Access and Cost Commission (HCACC). That's about 48 million people nationally and about 872,000 in Maryland.

One of those people is Robert Freaner, a forklift operator from Beltsville. After cancer surgery left him with a hole in his throat, his doctor referred him to a prosthetic dentist for a repair that would allow him to eat and drink.

CIGNA, his health insurer, initially said the prosthetic dentist was not one of its providers and offered to send Freaner to an oral surgeon. Dissatisfied, he filed a complaint with the Maryland Insurance Administration, which has the authority, under a new appeal procedure, to order a health plan to provide care. An investigator for the insurance administration began collecting information about the case.

"Then, she called me and said she couldn't do anything any more," Freaner recalled. "I said, 'What do I do now' and she said, 'Don't give up.' " His doctors persisted, and eventually CIGNA honored the referral.

It's not just patients who turn to state regulators, only to find out they are dealing with a self-insured plan.

The Maryland Hospital Association last year filed a complaint with the insurance administration covering 106 disputed claims -- either disagreements over whether care had been medically necessary or whether proper information (such as codes for the care given) had been provided.

But when the insurance administration reviewed the claims, the agency found it lacked jurisdiction over 15 because the patients were covered by self-insured plans.

Similarly, doctors turned to the state insurance administration with their complaint that Mid Atlantic Medical Services Inc., a Rockville managed-care insurer, had improperly been denying claims more than six months after they were initially approved.

Of 380 patient claims, about 180 were tossed out because they stemmed from self-insured plans, according to Pam Kasemeyer, an attorney for the doctors.

"The states, and Maryland in particular, have been the leader in trying to provide remedies" for the problems of managed care, said T. Michael Preston, executive director of the Medical and Chirurgical Faculty of Maryland, the state medical society. "ERISA interferes with the remedies we have put in place."

Interfering with remedies isn't the point of self-insurance, said Paul Dennett, vice president for health policy of the Association of Private Pension and Welfare Plans, a Washington group that represents large employers and benefits consultants.

"Employers try to develop benefits that are directly responsive to workers," Dennett said. State requirements, he complained, restrict that flexibility and often represent "the desires of organized health care providers," such as medical specialty groups who lobby to have their services covered.

Besides flexibility, Dennett said, employers turn to self-insurance to save money. While regular insurance requires premium payments up front, he said, self-insurance allows employers to hold on to their funds until claims come due. Also, he said, large employers can sometimes save by performing some functions normally done by an insurer, such as keeping a record of employee dependants.

As states added required coverage, some argued that it would push more employers into self-insurance. Definitive statistics are hard to come by, but there's no sign of a rush to self-insurance.

Nationally, said Craig Copeland, senior research associate at the Employee Benefits Research Institute, enrollment in self-insurance plans actually declined somewhat in mid-90s.

"A lot of the reason we saw a curtailing was that as soon as managed care took over, employers were able to get insurance for a lower price. They weren't worried about avoiding mandates," he said. Now, however, "It looks like it's ticking back up."

Francis X. Kelly III, president of Kelly & Associates Insurance Group Inc. in Hunt Valley, has been worried about small employers seeking to avoid mandates by choosing self-insurance.

If small companies with young, healthy employees choose self-insurance -- which might save the firms some money in the short run -- that would pull the healthier people out of the standard state risk pool, increasing rates for small employers that remain in the pool.

And under Maryland's "small group" system, the self-insured employers could come back into the regular insurance pool if their employees started running higher medical costs.

But, said Kelly, it doesn't seem to be happening much. In Maryland, said Kelly, "Certain [self-insurance] products carriers have emerged, and then retreated." Besides running his company, Kelly is also president of the Maryland Association of Health Underwriters, an organization which represents agents, brokers and others in the insurance business.

Bark, the benefits consultant, said his clients decide whether to self-insure based on a cost analysis: "Mandates don't really force anyone into self-insurance."

That claim is supported by a state survey of large self-insured employers in Maryland that found that most state-required benefits were included in the self-insured plans.

"Self-insured firms readily cover services designed to prevent or diagnose illness (e.g. well child care, mammograms, prostate cancer screening) and services that are less expensive substitutes for some other service (e.g. home health care, hospice care)," concluded the report by HCACC, the state health cost agency.

However, the report said, only a minority of self-insured employers cover in vitro fertilization, an expensive service mandated for fully insured plans in Maryland, and mental health coverage tends to be less extensive than in plans governed by state law.

There is no push in Congress to extend the reach of state authority to cover self-insured plans. "Politically speaking and realistically speaking, the opponents are powerful," said Larsen, who testified earlier this year at a congressional hearing on ERISA health issues.

Rather, there is a proposed "bill of rights" backed by key Republicans which would establish federal protections for the self-insured, and a competing bill with Democratic backing which would set federal standards for both self-insured and fully insured plans. (States could add additional rules for fully insured plans, but the self-insured plans would still be subject only to federal regulation.)

Larsen says the federal Labor Department, which administers ERISA, is not the best place for consumers to get action on complaints. "One alternative would be to empower the states to adjudicate and enforce the federal standards," he says. "This is similar to what they do on the environmental side."

Given the lack of support for extending state authority, he said, such a plan could be "the best mix of realism and consumer protection."

Pub Date: 4/04/99