RRG defeated by state economic power

Despite victories in court, AD-RRG was defeated by California's deeper pockets

By Michael Moody, ARM, MBA

While U.S. businesses struggle with many aspects of their operations today, one aspect that continues to plague them is the rising cost of employee health care. Escalating cost of employee health coverage has been in the double-digit range for most of the past 20 years, and while the current lower inflationary rates have moved the rate of increase into single digits, they are still two to three times the overall CPI numbers. As a result, these increasing costs have become a competitive disadvantage in the international economy for employers, while souring U.S. employees who continue to see increasing premiums, co-payments and deductibles.

It’s little wonder that employers have been receptive to innovative ways to better manage these costs. For that reason, many employers have investigated the advantages of self-funding their employee benefit costs. After review, most have decided to move forward with self-funding. Typically, self-funding can provide some meaningful reductions over a fully insured program; however, prudent employers don’t stop there—they continue to look for additional cost savings.

Innovative approach

Over the past year or so, several organizations have begun to find additional approaches for savings in their employee health coverages. One of the more unusual approaches has been the utilization of a risk retention group (RRG) to provide contractual liability for stop loss insurance to the RRG’s owners who maintain self-funded health plans. Over this period of time, several of these innovative programs have been started.

One of the first such programs that was finalized was an auto dealer’s risk retention group that was going to do business in California. The program was known as AD COMP MED risk retention group (AD-RRG). The group of California auto dealers already participated in a workers compensation self-insured group. AD-RRG was a licensed Montana domiciled risk retention group, formed under the federal Liability Risk Retention Act (LRRA). It should be pointed out that the AD-RRG had nothing to do with the management or operation of their owners’ health plan or the provisions of benefits under such plans. Rather, the RRG was designed to provide liability insurance to the employers for their potential contractual liability arising from the plans.

The AD-RRG, which was formed in April 2007 in compliance with LRRA, notified the California Insurance Department of its intention to operate within the state of California. However, the Department of Insurance advised the RRG in late September 2007 that it was going to deny its registration, and the Department of Insurance did, in fact, issue a cease and desist order on December 5, 2007. The California Department of Insurance took the position that despite what Montana, the “lead regulatory state,” had determined about the RRG, California would not approve it for operation. California stated the RRG would be providing first party health insurance coverage rather than third-party liability insurance. And since the company was not authorized to sell health insurance, the insurance department stated they would have to cease operations.

Pushing their weight around

Robert “Skip” Myers, attorney at Morris, Manning and Martin, LLP, notes, “Despite being a clear violation of the federal preemption provided by the LRRA, some states have consistently questioned the authority of the RRGs. Congressional intent was abundantly clear and well documented,” he says. Liability insurance companies chartered in one state, “should be free to operate on a multistate basis after providing a ‘notice filing’ in any such non-domiciliary state.” As would be expected, Myers points out this “preemption of regulatory authority from the state has never been well-received by the individual state insurance departments.”

In fact, over the years, some states have established organized discrimination against RRGs. These practices have taken a number of forms, but basically fall into two groups: assessment of fees, and taxes—both of which are clearly a violation of the federal legislation. The attack on the AD-RRG, however, expanded the scope of discrimination. Subsequent to the original cease-and-desist order, the RRG has had a number of legal battles with the California Department of Insurance, and for the most part, has won the majority of these battles. Ultimately, they even obtained a temporary restraining order against California.

While the opinion of the court was quite favorable to AD-RRG, Myers notes, “It was just the start of their troubles.” The overall outcome called for a lengthy discovery process, which would stretch over a year. And as Myers points out, “Being a start-up insurer, the RRG just could not afford the expense of this lengthy process.” As a result, the RRG has given up its fight and entered into agreements with California to cease operations. He goes on to note, “California quite simply used its economic power to grind down the RRG, even though a federal court had twice issued favorable rulings. The fact that AD-RRG has a better legal case may not matter in this instance.”

Conclusion

Currently Congress is reviewing the LRRA legislation. Legislation has been introduced in the House (H.R. 5792) that would impose certain new corporate governance requirements on RRGs. But it would also allow qualified RRGs to offer commercial property insurance to its owners. “It would also order the GAO to investigate abuses of state authority in the regulation of RRGs,” Myers says, adding that although this is a good start, “it does not go far enough.”

The auto dealer RRG has subsequently withdrawn its lawsuit against the state of California, citing the costs of protracted litigation as the primary cause. Subsequent to the settlement agreement, the auto dealers group has had to move to a fronted insurance program for its stop-loss coverage. Myers points out that “Congress needs to be aware that the state abuses include more than just fees and taxes.” He says that “the expense of litigation against a state government in federal court is just too great for any new insurance entity, particularly RRGs.” And he adds, “A better method of dispute resolution needs to be found.”