Marketing Health Insurance through "Trusteed Groups": A Perversion of the
Group Insurance Concept
March 2006
Group and individual health insurance are
governed by different laws, underwriting standards, and marketing methods. Most
likely, however, consumers make no distinctions among small group insurance,
employer-based versus non-employer-based group health insurance, and large group
insurance. To average consumers, group is group, and it is perceived as a better
deal than individual policies.
by Tim Ryles,
Ph.D.
Tim Ryles Consulting
Since perception is often reality, marketers of health insurance often sell
"group" insurance without disclosing the differences and a common marketing
practice is to sell health insurance as group insurance through trusts set up
and controlled by insurers. Health insurance sold in this manner is commonly
characterized as "trusteed products" in the industry.
Health insurance marketed through these trusts often blurs distinctions between
group and individual insurance and between small and large group policies. Trusteed
group marketing, then, may pervert group insurance principles, especially with
regard to two important factors: (1) which groups are eligible for holding a
master group policy and (2) the role of the master policyholder in group insurance.
Eligible Groups
The groups to which a group policy can be issued are well known in regulatory
and industry circles. Typically, group statutes permit the issuance of group
policies to:
-
Single employers
-
Multiple employers
-
Labor unions
-
Debtor-creditor groups
-
Associations
-
Credit unions
State rules may also permit issuance of a group master policy "to cover any
other substantially similar group which
in the discretion of the Commissioner (of Insurance) may be subject to the issuance
of a group … policy or contract." (See for example, Georgia Insurance Code 33-30-1(5)
and Alabama Insurance Code 27-20-1(5).) From this language arises the notion
of a "discretionary group." Accordingly, when policy forms are filed, regulators
may be advised that the master policy is issued to a discretionary group in
a foreign jurisdiction.
Three things are notable about the legislative language:
- It is the discretion of the Commissioner, not that of the company or
the trust, to confer recognition on the group.
- Acceptance or approval of policy forms and rates is not approval of
the group.
- The statute sets a standard upon which the Commissioner is to rely in
determining whether to recognize the group, the standard being that the
discretionary group must be substantially similar to the other eligible
groups.
The NAIC Group Health Definition and Group Health Insurance Standard Provisions
Model Act adds additional criteria for the approval of discretionary groups.
Section 2 of the 1983 Model Act found in some insurance codes states:
- No such group health insurance policy shall be delivered in this state
unless the commissioner finds that:
- The issuance of the group policy is not contrary to the best interest
of the public;
- The issuance of the group policy would result in economies of acquisition
or administration; and
- The benefits are reasonable in relation to the premiums charged.
- No such group health insurance coverage may be offered in this state
by an insurer under a policy issued in another state unless this state or
the state in which the group policy is issued, having requirements substantially
similar to those contained in Subsections (A)(1), (2) and (3), has made
a determination that the requirements have been met.
This provision is to be read in the conjunctive, not the disjunctive.
The Substantially Similar Test
What characteristics should the discretionary group possess to be substantially
similar to other eligible groups? I address this question by first describing
what traits one finds among the eligible groups, including:
- They were not formed for the purpose of buying insurance; rather, insurance
is incidental to their existence.
- Related to (1) is the fact of duration: the groups have been around
for some time and have some stability.
- Eligible groups have a governing structure. Employers have a corporate
structure and a chain of command; unions have strict governing structures
regulated by federal labor law; legitimate associations and credit unions
have elected governing structures; debtor-creditor groups have a business
relationship, but the group insurance available is usually limited to credit
life, disability, or other policies with limited benefits.
- Rank-and-file members of the eligible groups have a set of common interests.
When the statutes have received judicial construction, this element of common
interests receives special notice. For example, the Texas Supreme Court stated
that one of the legislative purposes in limiting the types of entities eligible
to procure insurance for a group of persons may well and reasonably have been
to make certain that the agency purchasing the insurance bore such a close relationship
and kinship of interests with the individual insureds that the agency could
and would know the insurance needs of the individuals in the group and would
use his money (if he contributed) to see that those needs were served. SeeBoard of Ins.
Commissioners v. Great Southern Life Ins. Co., 239 S.W.2d 803 at 811
(Tex. 1951).
In upholding a state statute restricting entities to which a group life contract
could be issued, the Texas Supreme Court further construed the meaning of "group."
According to the court, the state legislature has the:
- right to limit the writing of group insurance to situations where there
[is] a close relationship and an affinity of interests between those making
up the insured group and the person or agency contracting with the insurer
for the insurance. See State of Texas v. State Mutual Life Assurance Company of America,
353 S.W.2d 412 at 418-419 (Tex. 1962).
Discretionary groups do not even come close to satisfying these criteria.
Here is why. A master policy is issued to the trust, but the insurer maintains
control over the policy administration. As in group insurance, enrollees get
a certificate of coverage, not a policy form, thereby reinforcing the appearance
of group insurance. Joining the trust is usually done at the time insurance
is purchased, but the new trust members have no knowledge of what the trust
is or how it is governed, nor do they gain any special benefit beyond the opportunity
to buy insurance.
In fact, it is not at all uncommon for the trust agreement or some other
document to stipulate that insureds have no say whatsoever over the trust or
the conduct of the trustee. The trustee group has no governing structure, no
by-laws or constitution, no meetings, no assets. Further, certificate holders
have no affinity of interests; indeed, if one certificate holder knows the identity
of another, it is most likely a mere chance occurrence. Aside from being human
beings, trustee group certificate holders have two things in common: (1) they
hold certificates of insurance and (2) they breathe air. It is this latter trait
that leads marketers of such plans to characterize the insureds as an "air breather
group." In trust law, it is an illusory trust.
The Role of the Master Policyholder
In an individual policy, the insured is the policy owner; in group insurance,
the entity to which the policy is issued is called the master policyholder.
In delineating the different roles played by the insurer and the master policyholder,
certain duties and functions are expected of the master policyholder, including
negotiating terms and conditions of coverage, reviewing the performance of the
plan of insurance, and determining whether to continue the group contract or
to seek another insurer if relationships go awry. In this regard, the master
policyholder's interests coincide with the interests of the certificate holders
and, generally, the master policyholder is said to act as agent of insureds
in fulfilling these duties.
A direct consequence of the trusteed group arrangement is that the master
policyholder's role is emasculated through the insurer's retention of control
over the contract. Without the intermediary role of the master policyholder,
the insured-insurer relationship is the same as would be the case in a regular
individual policy: all relationships are directly between the insurer and insured
for applications, claims, premium payments, and other matters. There is no master
policyholder to evaluate the insurer's market conduct and methods of premium
determination even when premiums raise serious questions about benefits being
reasonable in relation to premiums charged—no master policyholder intervenes
to take the business elsewhere as might occur in a genuine group policy relationship
when problems arise.
The Maryland Court of Appeals confronted just such an arrangement in 1982
in Guardian Life Ins. Co. of Am. v. Insurance Commissioner
of the State of Maryland, (293 Md. 629), concluding:
- The trust … is essentially one in name only, an artifice which serves
no legitimate purpose…. In actuality, because Guardian itself is in total
control of the trust fund, the trustee is, at best, an entity without substance
and cannot therefore function as the "policyholder"….
The Maryland court saw a form-over-substance arrangement, recognizing that
the master policyholder position was a fiction.
Having eliminated the master policyholder's function in trusteed groups,
insurers are able to operate in a virtual laissez
faire manner. Since the group is essentially a fiction, an insurer may
engage in individual underwriting, post-claims underwriting of individuals (as
opposed to experience rating of the group), durational rating (increasing premiums
based upon how long one has been insured), and tier rating (separating insureds
into tiers based on claims experience after the policy is issued). In fact,
rating classifications that initially appear to be based on objective factors
(age, geography, gender, occupation, etc.) may be modified and replaced by claims
experience on policy renewal and insureds may be moved from one classification
to another as their claims costs increase or as the prospect of more costly
claims in the future are ascertained by the insurer. Such practices, unlawful
in many jurisdictions, would not be tolerated in a genuine group policy by the
master policyholder.
Thus, the discretionary group form of insurance is hazardous to policyholders—it
negates the crucial function of the master policyholder; and it does not conform
to the basic characteristics of group insurance. It is also questionable as
to whether discretionary groups serve a lawful purpose.
Trusts must be established for lawful purposes, so are there indications
that air breather groups are designed to achieve unlawful purposes? Both caselaw
and regulator market conduct examinations suggest that air breather marketing
methods are designed to evade state regulation. In Guardian cited above, the insurer argued that since its master policy was issued to a
trust located in Rhode Island, Maryland law could not apply to certificates
issued in Maryland. The court, penetrating the form to find no substance to
Guardian's argument, held otherwise.
That the issue of extra-territorial jurisdiction was a subject of concern
in the 1980s when trusteed groups began to flourish is further evidenced by
the Georgia Commissioner's 1987 directive to insurers reminding them that Georgia
rejected such spurious arguments. More recently, a Colorado market conduct examination
reviewed an insurer that is well known for using trusteed groups. Colorado regulators
concluded that the company was marketing an individual policy as a group policy.
Under most state insurance codes, this is a deceptive trade practice. Additionally,
both Alabama and Georgia commissioners have issued directives affirming obligations
of air breather "one-life groups" to comply with deceptive trade practice statutes
prohibiting unfair discrimination in rating (Alabama) and small group regulations
(Georgia).
Thus, the unlawful purposes served by trusteed group marketing seem to be
that companies use it to sell individual insurance as group insurance, it is
used to engage in unfairly discriminatory rating practices, and it is a means
of circumventing small group reform laws. Consumers are best advised to avoid
the purchase of such products.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.