The recent U.S. Supreme Court opinion upholding the constitutionality of federal health care reform bolstered a state’s right to go in a different direction in providing and funding health care. We don’t know yet how state participation in the various parts of health care reform will play out (e.g., exchanges, Medicaid expansion, and rate review). We do know that companies that sell health plans will find it ever more impossible to satisfy the many “masters” of insurance regulation. Of course, it’s nearly hopeless already.

It’s been over 50 years since the U.S. Supreme Court ruled that the federal government could regulate insurance. Congress reacted by adopting the McCarran-Ferguson Act to preserve state regulation of insurance.

15 USC §6701. Operation of State law

(a) State regulation of the business of insurance

The Act entitled “An Act to express the intent of Congress with reference to the regulation of the business of insurance” and approved March 9, 1945 (15 U.S.C. 1011 et seq.) (commonly referred to as the “McCarran-Ferguson Act”) remains the law of the United States.

We have since devolved into 51 insurance regulatory jurisdictions that all but prevent national insurance markets. We have preserved localism at the expense of economic efficiency and consumer choice. While states can boast about the good fortune of its citizens residing in a state that [insert preferred phrase – “restrains” or ”frees”] insurer behavior, the fact remains that an insurer selling coverage throughout the United States must design 50 different plans while satisfying new federal health care reform standards and old federal employee benefit laws. Occasionally, federal law preempts state laws to create a uniform national standard.

This happens if the federal statute expressly preempts the state law, if the federal law “crowds out” state law by leaving no room for state law (“field preemption”), or if the state law conflicts with the federal law. For example, the federal Employee Retirement Income Security Act (ERISA), governing employer health and welfare benefit plans, expressly preempts state law.

However, that same ERISA law saves from preemption those state laws regulating the “business of insurance.” Luckily, even if a state law governs insurance, the law cannot effectively prevent employers from obeying ERISA. For example, a state law requiring insurers to set different rates for each employee based upon the employee’s health would be preempted by ERISA. This state preservation limbo has resulted in endless litigation over state vs. federal jurisdiction that puts insurers directly in the middle.

Health Care Reform

Federal health care reform also contains state law preemption provisions. The federal Affordable Care Act (ACA) directly regulates employer group health plans and contains several preemption clauses. Here are some of the preemption provisions of the ACA:

§ 2715 (e) Preemption

The standards developed under subsection (a) shall preempt any related State standards that require a summary of benefits and coverage that provides less information to consumers than that required to be provided under this section, as determined by the Secretary. [42 U.S.C. § 300gg 15]

§ 2724. (a) Continued applicability of state law with respect to health insurance issuers

(1) In general Subject to paragraph (2) and except as provided in subsection (b), this part and part C insofar as it relates to this part shall not be construed to supersede any provision of State law which establishes, implements, or continues in effect any standard or requirement solely relating to health insurance issuers in connection with individual or group health insurance coverage except to the extent that such standard  or requirement prevents the application of a requirement of this part.

Other specific implementation regulations demonstrate conflict and “field preemption” issues. A good example of this can be found in federal medical loss ratio (MLR) standards for health plans and for the attribution of losses among plans providing benefits in more than one state.

45 CFR § 158.120 Aggregate Reporting

… (b) Group Health Insurance Coverage in Multiple States.

Group coverage issued by a single issuer that covers employees in multiple States must be attributed to the applicable State based on the situs of the contract. Group coverage issued by multiple affiliated issuers that covers employees in multiple States must be attributed by each issuer to each State based on the situs of the contract.

(2) For employer business issued through a group trust or multiple employer welfare association, the experience of the issuer must be included in the State report for the State where the employer or the association has its principal place of business.

Insurance companies cannot establish a group plan premium satisfactory to one state if another state may object. Companies cannot design a group plan meeting different states’ demands for benefits and still meet federal standards that similarly situated employees receive the same benefits for the same premium. The conflict arises when a state overreaches in an attempt to exercise extra-territorial jurisdiction.

In adopting the federal MLR regulations, Health and Human Services (HHS) explained that it followed NAIC recommendations. The state having jurisdiction over the group plan is that state where the policy was “issued” and in which the employer is located. The agency rejected multi-state jurisdiction that results in different standards for the same group health plan.

The regulation requires issuers to report experience based on the State-of-issue for each policy that it writes. This requirement is intended to result in a report that describes experience under policies whose benefits and premiums either are regulated, or could be regulated, by a State, since it is at the State level that insurance regulation occurs. The regulation generally defines the State-of-issue based on the ‘‘situs’’ of the insurance contract between the issuer and the policyholder. HHS defines ‘‘situs’’ as the State in which the contract is issued or delivered as stated in the contract. Consistent with NAIC guidance, HHS interprets this as the State that has primary jurisdiction over, or governs, the policy. [Fed. Reg. Vol. 75, NO. 230 at 74870 (12/1/2010)]

Note above that HHS uses “state” in the singular and accepts the NAIC view with respect to “primary jurisdiction” of the situs of the contract to avoid conflicting jurisdiction.

[W]here an issuer insures employees of a business located in multiple States, the NAIC recommended and HHS agrees that MLR reporting should be based on the ‘‘situs of the contract.’’ Under this approach, incorporated in this regulation, the premiums and claims experience attributable to employees in multiple States are combined and reported by the issuer in the MLR report for the State identified in the insurance policy or certificate as having primary jurisdiction over the policyoften the headquarters of the company. [Id. at 74870, emphasis added]

Underscoring this fundamental view of primary jurisdiction with respect to multi-state plans, the federal Center for Consumer Information and Insurance Oversight (CCIIO) issued a bulletin addressing these jurisdictional conflicts among state laws.

In its Frequently Asked Questions on Essential Health Benefits Bulletin (February 12, 2012), CCIIO declared that the employer’s primary place of business is the governing state.

“In the case of a non-grandfathered insured small group market plan that offers coverage to employees residing in more than one State, which State-selected EHB benchmark plan would apply?”

“A: Generally, the current practice in the group health insurance market is for the health insurance policy to be issued where the employer’s primary place of business is located. As such, the employer’s health insurance policy must conform to the benefits required in the employer’s State, given that the employer is the policyholder. Nothing in the Bulletin or our proposed approach seeks to change this current practice. Therefore, the applicable EHB benchmark for the State in which the insurance policy is issued would determine the EHB for all participants, regardless of the employee’s State of residence. Health insurance coverage not required to offer EHB, including grandfathered health plans and large group market coverage, would comply with the applicable annual and lifetime limits rule, as described in the answer to the previous question.” [Emphasis added]

In 2009, facing pressure for national insurance regulation, the NAIC established a sub-committee to address conflicting rules. The committee surveyed states (Washington did not respond) before releasing a White Paper recommending an approach to harmonizing the fractured regulation of multi-state plans. The NAIC noted the deviation of some states asserting extra-territorial jurisdiction contrary to the common approach of state regulation.

All states consider where the insurance policy is delivered or issued for delivery in making a determination about whether to assert regulatory jurisdiction over an insurer or a product.  Some states only consider where the policy is delivered or issued for delivery when determining their regulatory jurisdiction.  Insurers and managed care companies in the group market represent that they almost uniformly understand that the primary jurisdiction whose laws, rules, and regulations govern its rights and responsibilities under a contract are those of the jurisdiction in which the contract is sitused.  This is understood to be the jurisdiction in which the contract is delivered or issued for delivery, and in which the employer is located to take that delivery.  On the other hand, differences in the ways that states interpret the phrase “delivered or issued for delivery” exist. [White Paper at 5 (2009)]

The NAIC describes as one of several examples, the following conflict among states’ laws governing providers and provider contracting.

Application of varying provider access rules creates confusion for both members attempting to access care and for the providers attempting to provide it.  There are instances where the provider access laws of one jurisdiction will conflict with the required provider contracting laws of another, leaving the insurer with no choice but to violate one or the other.   For example, state laws can simultaneously require different levels of co-pays or deductibles, or even require certain co-pays or deductibles while a neighboring state requires direct access and prohibits providers from being required or even permitted to collect co-pays or deductibles. [White Paper at 10, emphasis added]

Washington State Courts

Washington’s method of resolving conflicts of law between various jurisdictions was summarized by the Washington Supreme Court last year in Schnall v AT&T Wireless Services:

Washington courts have also adopted the “significant relationship” test in section 145 of the Restatement, which gives great weight to the place where the parties’ relationship was centered. [Citations omitted and emphasis added, Schnall v. AT&T Wireless Services, Inc., 171 Wn.2d 260 (April 14, 2011)]

Washington applies the analysis from the Restatement that requires consideration of the following factors in determining which state’s law takes precedence.

(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.

(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance,

(d) the location of the subject matter of the contract, and

(e) the domicil, residence, nationality, place of incorporation and place of business of the parties.

These contacts are to be evaluated according to their relative importance with respect to the particular issue [Citations omitted]. Additionally, the expectations of the parties to the contract may significantly tip the scales in favor of one jurisdiction’s laws being applied over another’s [Citations omitted].  [Mulcahy v. Farmers Ins. Co., 152 Wn.2d 92 at 101 (2004)]

In a case directly addressing the jurisdiction of a state over a group policy, a Washington court found for the state of policy issuance:

Rights against the insurer under a group policy are generally governed by the law of the state where the master policy was delivered…Restatement (Second) of Conflict of Laws 192, comment H. The rationale behind this rule is that each individual insured should enjoy the same privileges and protection. By applying the law of the state where the master policy was delivered, “everywhere it shall have the same meaning and give the same protection and that inequalities and confusion liable to result from applications of diverse state laws” would be avoided [Citations omitted]. [Erickson v. Sentry Life Ins., 43 Wn. App. 651, 719 P.2d 160 (May 13, 1986)]


O.K., so now we now we know how to work out who is in charge of health insurance regulation, right? Wrong. Let’s not forget that Congress loves to write preemption provisions that start out with: “unless a state law provides greater protection/ standards/ rights…”

You typically find out who is in charge when you get fined and must defend yourself. You make as many arguments as you can and hope for the best. There are consequences. When you pull out your calculator (iPhone) to determine the price of health insurance, add a nice round number for regulatory compliance costs, then double it for the cost of satisfying all the different supervisors.

The situation reminds me of my childhood mowing lawns when I had to decide whether to listen to the husband who told me to mow down the low bushes or the wife who told me to mow around them. I had to decide which of the two would cost me the most. More often than not, I just listened to the wife since she cared the most and wrote the check. Afterwards, I just tried to avoid the husband unless I couldn’t and got fired.