Ricardo Martinez Ortega Illustration

Major developments, events and headlines are affecting the evolution of the health insurance regulatory environment at both the federal and state level. The implementation of the Patient Protection and Affordable Care Act (ACA) seems to require an unending amount of clarification and has a huge impact on employers as primary facilitators of health insurance coverage in the U.S. There’s also a renewed interest in regulatory oversight of self-insurance, captives and private exchange models, as private employers seek alternative ways to provide employees with health insurance and other benefits. In addition, cybersecurity threats, such as that experienced by Anthem, demand some sort of regulatory response, and the federal government is getting into the business of insurance licensing.

Here, we break down a few of these regulatory trends.

The Patient Protection and Affordable Care Act

The greatest expansion of federal intrusion into the insurance industry is, as some would say, PPACA. Following its enactment, employers began searching for alternative ways to provide employee benefits within the constraints of the new regulatory environment. Ironically, this has led to further legislative and regulatory action.

For example, self-insurance products began to be marketed to smaller employers as concerns grew over the impact of modified community rating and other market reforms. Self-insured plans are generally exempt from state insurance laws under ERISA; however, state insurance departments have been finding ways to indirectly regulate self-insured plans through the stop-loss market.

For the remainder of 2015, we’ll continue to see new regulations and guidance released regarding the implementation of PPACA. Watch for:

  • Application of Code 105(h) nondiscrimination laws to fully insured plans
  • Guidance on designing a compliant wellness program
  • Proposed rules for the Cadillac tax or repeal of the tax
  • Further clarification of the employer shared responsibility and associated employer reporting

However, the most interesting event to watch will be the U.S. Supreme Court’s ruling in King v. Burwell and its aftermath. Depending on the outcome, we may see Congress scrambling to propose an alternate strategy.

King v. Burwell

At the time of this writing, the Supreme Court has heard oral arguments for King v. Burwell, but no decision has been reached. In this case, the plaintiffs challenged the offering of premium tax subsidies through federally established health insurance exchanges. Specifically, the statute authorizes premium tax credits for insurance purchased on an exchange “established by the State under section 1311” but doesn’t explicitly authorize such credits for insurance purchased on an exchange established by the federal government. The question is whether premium tax subsidies can be offered by the IRS through the federally established exchange (adopted in 34 states).

The tension is between a literal interpretation of the statutory language and an interpretation that looks to the overall intent of the statute. There are legal arguments that support both interpretations. What’s interesting, however, is what was publicly stated by one of the leading PPACA architects, MIT economist Jonathan Gruber.

In a public presentation in January 2012, Gruber stated, “I think what’s important to remember politically about this, is if you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits. But your citizens still pay the taxes that support this bill. So you’re essentially saying to your citizens, ‘you’re going to pay all the taxes to help all the other states in the country.’ I hope that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges, and that they’ll do it.”

If Gruber correctly voiced congressional intent to place pressure on states to establish their own exchanges, the plain reading of the statute is the right outcome. But Gruber’s comments, while informative, will not be determinative of the outcome.

Overall, the Supreme Court will decide the fate of premium subsidies in the 34 states with federal health insurance marketplaces. The ruling may result in political backlash for both parties in Congress. Democrats’ desire to expand access may push them to find another source for the premium tax credits, while the Republicans may seek a market-driven resolution. One can only hope for a bipartisan solution.

It seems rational to propose legislation that would enable premium subsidies to be offered through alternative sources, such as private exchanges or employer-sponsored coverage. This would enable both parties to claim victory — but I wouldn’t hold my breath. Whatever the outcome, the King v. Burwell decision has the potential to greatly alter the health insurance landscape.

Stop-Loss Insurance

Perhaps reacting to the many restrictions associated with PPACA, employers are increasingly looking at self-insuring their health benefit offerings. Companies that self-insure often purchase stop-loss insurance to protect against large claims in the aggregate or on a per claimant basis. Since stop-loss insurance is generally regulated by states, its purchase enables the state insurance regulators to get a foot in the door for oversight.

States remain concerned that self-insured plans are not well-funded and are seeking regulation of stop-loss insurance sold to small employers to provide financial protection to insureds. There’s also been concern that the exodus of customers away from the fully insured market and SHOP exchanges could cause adverse selection, disrupting that market by leaving only customers with poor claim histories. New state insurance laws are designed to make stop-loss insurance unattractive to the small group market. 

States found support through the Stop Loss Insurance Model Act, adopted by the National Association of Insurance Commissioners (NAIC) several years ago, which set forth guidelines for regulating stop-loss insurance as it applies to the small group market, e.g., imposing an attachment point of $20,000.

While states aren’t required to adopt NAIC model laws, many adopted them as drafted or have used the language as a benchmark for adopting their own rules. Three states – New York, Oregon and Delaware – along with the District of Columbia, have taken it further than the Model Act by prohibiting the sale of stop-loss insurance to small employers, effectively eliminating the ability of small employers to self-insure in those states.


The post-PPACA world also found companies seeking new financing and risk transfer strategies through captives. Traditionally, risks placed with captives are related to property/casualty or workers’ compensation, but there’s more interest in placing stop-loss for employee benefit programs through captives.

Captives are licensed insurance companies that aren’t as heavily regulated as traditional insurers because they’re restricted to underwriting risks of the captive’s parent company and its subsidiaries. Nonetheless, state insurance regulators are continuing to assess the risks that captives pose to the public and determine the proper regulatory framework for oversight of these vehicles.

Not all states allow captives to be formed in their states, but there seems to be more interest by states, such as Texas, to adopt legislation that would entice captive business away from Vermont, where the majority of captives in the United States are domiciled. It will be interesting to watch the regulatory trends develop in this area.

Federal Regulation of Insurance Licensing and NARAB

The hazy line between state and federal regulation of the insurance industry can also be illustrated through the development of the National Association of Registered Agents and Brokers (NARAB), which establishes a federal scheme for multistate, non-resident producer licensing. Congress enacted NARAB II in early 2015 and President Obama signed the legislation on Jan. 12, 2015. NARAB will be governed by a 13-member board subject to presidential appointment and Senate confirmation.

This is one time the insurance industry will welcome federal involvement, although it will take time for NARAB to evolve.


Lastly, recent developments blur the line between federal and state regulation of information privacy and security issues, particularly in the digital age. As cybersecurity threats continue to make news, insurance regulators are increasing their regulatory activity to garner greater oversight. The NAIC recently formed a Cybersecurity Task Force, which announced a multistate examination of Anthem’s cybersecurity practices. States are taking notice, proposing heightened security standards and an expansion of the state insurance department’s role through examinations that would include cybersecurity assessments.

States are also seeking to fill cyber gaps left by federal privacy laws, such as the Health Insurance Portability and Accountability Act (HIPAA), which some believe don’t do enough to protect sensitive information. HIPAA falls short, for example, in the requirement to encrypt sensitive information. HIPAA encourages encryption by not imposing certain breach notice requirements if encryption is utilized, yet HIPAA stops short of requiring it. Anthem confirmed that the exposed data in its case wasn’t encrypted. Had Anthem implemented stronger cybersecurity practices, they wouldn’t have the front page for the wrong reason.

States are seeking to close that gap through more stringent regulation. For example, New York requires enterprise risk management reports for insurers, which were required to be filed for the first time in 2014 and each April thereafter. The reports are required to provide an account of how cybersecurity fits into the insurer’s overall risk management strategy.

While only time will tell what regulatory trends are eventually enacted, much less here to stay, we have a good idea what the landscape will look like in the near future. Agents and brokers should keep a close eye on developments concerning PPACA; an increase in companies choosing to self-insure their health benefit offerings; federal and state involvement in the industry; and how cybersecurity threats and data breaches will shape decision makers and privacy laws.