Some history of US health insurance

Insurance companies all used to participate in Health Insurance Association America (HIAA). HIAA has come and gone since it merged in 2004 and became America’s Health Insurance Plans (AHIP). I bring this up is because in 1978 the association was getting ready to change §105(h) of the Internal Revenue Code.

Prior to 1978, §105(h) didn’t exist and self-insurance was rare. Most programs were fully insured due to the 1974 Employee Retirement Income Security Act (ERISA) coupled with the fact that there were no reinsurance carriers.

The ability to write self-insured programs therefore was limited as they only served very large corporations that could afford to take the entire risk as there weren’t any excess loss carriers available.

It was commonplace back then for employer plans to have a $500.00 deductible, which was considered a real big deductible. The large deductible was for the rank and file, with the
employer establishing a medical expense reimbursement program as sanctioned by §105(h) of the Internal Revenue Code for the officers and managers of the corporation. If you look at §105(h) of the Internal Revenue Code, you’ll find the words Medical Expense Reimbursement Plan, (MERP).

MERP, discrimination and me

As a Mass Mutual’s representative to HIAA, I would make the trip down to Washington D.C. to attend the Senate subcommittees during which time they discussed establishing a discrimination test for MERPs. The insurance companies stepped in and said, “Whoa, whoa, wait a minute.” They were making the point that insurance companies medically underwrite – they don’t discriminate – and that only employers discriminate. So if a law should pass establishing a discrimination test, the insurers wanted to make sure it was only for self-insured medical expense reimbursement programs, because, as they claimed, fully insured medical expense reimbursement programs are medically underwritten therefore a discrimination test was unnecessary. Hmmm really?

All right. All right. Even to this very day, if you take a look at §105(h), it hasn’t really changed with Obamacare as no new regulations have yet come out; the Affordable Care Act (ACA) still follows the old statutes. The reality is §105(h) says if the MERP is self-insured you have to pass these discrimination tests, but if it’s fully insured there are no requirements for any discrimination tests. This was my first exposure to §105(h) MERPs.

The JCPenney decision

From ‘78 to ‘84, I then became aware of a case called the JCPenney decision. JCPenney had a head of household rule, which simply said that if your spouse makes an income greater than you he/she is no longer eligible for coverage on your plan. The US Equal Employment Opportunity Commission (EEOC) challenged this decision in both the Third Circuit Court and Sixth Circuit Court. JCPenney successfully argued that as a corporation it has limited dollars and limited funds to spend for its rank and file and therefore this approach was the best way for the company to expose medical coverage to the maximum number of employees that they could by initiating this rule.