Ill Feelings Over Self-Insurance : Workplace: Some firms believe that it’s cheaper to pay employee medical claims themselves. But such plans can leave workers with far less protection.

Darryl Spellman never thought much about his company health plan until medical bills stamped “Unpaid” began arriving in the mailbox and collection agents started calling on the phone.

“I’m getting stuck with all their bills,” said Spellman, a 26-year-old Simi Valley resident, of the $2,500 worth of medical claims that have gone unpaid by his former employer, Calmark Development, a Los Angeles-based real estate development firm.

While Spellman and fellow employees continued to pay for insurance through payroll deductions, the company has never fully explained why it won’t pay the bills. Some employees say the firm ran into trouble after being hit with higher-than-expected medical claims.

“I tell them the bills are going to collection, and (Calmark says) ‘We don’t know what to tell you,’ ” said Spellman.

State insurance regulators and lawyers don’t know what to tell him, either.

Of big employers that provide health insurance to their workers, Calmark is among the majority of large firms--those with more than 100 workers--which, over the past few years, have sought relief from spiraling health-care costs by canceling insurance policies and paying employee medical claims themselves.

While the strategy is designed to save cash, it also insulates employers from state insurance regulations and penalties as well as law suits under state regulations, which permit much higher damage awards than federal statutes. Employees in self-insured companies are left protected only by federal laws that critics say are weak and by agencies that are understaffed.

The potential for problems has grown as self-insurance has spread from large corporations--where problems have been relatively few--to smaller firms that may lack the deep pockets to cover medical claims, state officials say.

The practice has allowed some companies to deny coverage to groups of individuals with diseases that may require costly care, including employes stricken with cancer or AIDS.

Self-insured firms “are outside of our reach,” said Walter Zelman, special deputy for health insurance at the California Department of Insurance. “Employees are much more (dependent upon) the employer. They have very little recourse.”

However, both critics and supporters of self-insurance agree that most such plans are well managed--and, indeed, often offer coverage that exceeds state requirements.

The critics, moreover, often have a vested interest in seeing the plans fall under state control, said James A. Kinder, executive vice president of the Self Insurance Institute of America, a Santa Ana-based trade group of employers and insurance administrators.

“Attorneys don’t like this because they don’t have the ability to take on cases on a contingency basis,” Kinder said.

Despite the debate over the merits of self-insurance, it has grown rapidly during the past 20 years. At least 11 million workers at medium- and large-size companies were covered by self-insured plans, according to a 1988 survey by the Bureau of Labor Statistics. That was up from about 5 million workers in 1982.

With self-insurance, businesses assume that they will save money by paying employee medical claims directly instead of paying an insurance company to shoulder the risk. Industry officials claim that companies can reduce their health-care costs as much as 20% annually by self-insuring.

Such savings appear all the more attractive in light of what the Labor Department says are 20% annual increases in employee health-care costs.

“By being self-insured, you can invest your money in the bank and earn interest” instead of paying premiums, said Art Young, benefits manager at Hewlett Packard, the Palo Alto-based high-technology firm that adopted the method in 1976.

But many in the insurance field acknowledge that self-insurance has proved more effective in managing cash flow than limiting health-care costs, which continue to rise.

“Employers looked at self-insurance and said, ‘This is a way we can really control our costs,’ ” said Kevin Swanson of Buck Consultants, an employee benefits advisory firm. “But it isn’t. It really is a financial vehicle.”

Another major attraction for companies--and a prime concern of critics--is that self-insurance is insulated from state laws that regulate insurance companies. Those rules require insurers to offer types of coverage--ranging from alcoholism rehabilitation to hair transplants--that business groups blame for inflating health-care costs.

Self-insured firms instead must abide by the Employee Retirement Income Security Act of 1974. Intended to protect employee pensions, ERISA--which is administered by the Labor Department--has been extended to cover self-insurance as well.

Advocates say federal regulation gives employers some of the flexibility they need in a time of skyrocketing health costs.

“The real meat of it is that the employer has the ability to design the program the way he wants,” said Bob Turell, chairman of Los Angeles-based Insurance Design Associates, which helps companies set up self-insured plans.

But the critics say Washington has proved ill-equipped to regulate health benefits.

“The Department of Labor does not really do anything to help people with their claims,” said Robert Hunter, president of the National Insurance Consumer Organization. “These self-funded health plans have gone through these cracks. You are talking big corporations going through the cracks.”

Many companies that make the switch eliminate state-mandated coverage for drug and alcohol rehabilitation and treatment for mental disorders, Turell said. “Those are benefits that can be very costly, and we have a number of clients who have cut those benefits.”

Self-funded firms also are shielded from state and local laws that prohibit the exclusion of specific diseases from coverage. In a nationwide petition drive for health-insurance reform launched this month, the National Coalition for Cancer Survivorship is calling for self-insured plans to abide by those state laws.

“People don’t realize that this is a huge problem for people dealing with cancer and chronic diseases,” said Selma R. Schimmel, executive director of Vital Options, a Studio City-based support group for young adults stricken with cancer. Self-insurance “is going to leave the AIDS patient, the cancer patient or a person with chronic illness feeling very insecure when they check into a hospital.”

Three years ago, the Circle K convenience store chain raised the ire of gay rights groups when the company, which is self-insured, eliminated benefits for illnesses related to “personal lifestyle decisions.” Those included AIDS and drug- and alcohol-related problems.

While Circle K later restored those benefits, many self-insured firms continue to limit or exclude coverage for AIDS, gay rights advocates say.

“We don’t even have the minimum protections against this abuse in self-insurance,” said Evan Wolfson, staff attorney at Lambda Legal Defense and Education Fund in New York. “There is a regulatory collapse. That’s why we needed aggressive enforcement by the states.”

Most states allow insurance firms to be sued in state courts for bad faith or negligence--cases that can result in large monetary damages.

But under ERISA, an employee at a self-insured firm may only file suit in federal court, and even there cannot seek the large compensatory awards that attorneys say help keep insurance firms in line--and, not coincidentally, make the cases profitable for lawyers. An employee can only seek payment of medical claims and attorney’s fees.

The result is that few lawyers will take on suits challenging self-insured plans.

“Who is going to go through all the hoops and all the expense of federal court for this kind of thing?” asked William Shernoff, a Claremont attorney who is a leading critic of ERISA.

Officials say that employees with complaints against a self-insured plan can turn to the Labor Department for help. But with only 600 employees to police 5.5 million pension, health insurance and other employee welfare plans, officials concede that they often run behind. In 1989, the department investigated less than 3% of the 67,000 requests for help submitted by employees in ERISA-regulated health and pension plans.

“We do have a small technical assistance staff,” said department spokeswoman Gloria Della. “They have been good (in responding to complaints), but they can only handle so many cases.”

Last year, Minnesota insurance department officials called for greater federal scrutiny of self-insured firms after three such companies in the state went bankrupt, leaving more than 6,000 workers without health coverage. Many with medical problems found it difficult to find health insurance afterward; insurers did not want to assume responsibility for their pre-existing conditions.

There was no safety net for the Minnesota workers. Unlike insurance companies, self-insured firms are not required to set aside money to pay claims, even though employees typically contribute toward their coverage through payroll deductions, as with other kinds of health insurance. Furthermore, employees are ineligible to receive assistance from the state-sponsored guarantee funds that cover claims against bankrupt insurance firms.

The fears of bankrupt and poorly managed self-insured plans have grown as smaller employers, with as few as 25 workers, have followed the lead of big corporations. What worries some insurance officials is that smaller firms often lack both a large corporation’s financial resources to pay claims and its sophistication to predict and prepare for potential losses.

“What is of increasing concern, from a consumer perspective, is that we see more and more smaller companies going to self insurance,” said Herb Clark, chief of staff at the Florida Department of Insurance. “There is no money set aside to pay for the bills. Increasingly, we are going to find problems.”

Small firms can protect themselves against major medical claims with a form of casualty insurance. But that can still leave an employer facing up to $100,000 a year in claims as well as monthly payments to administrators to handle the plans.

“There are still some wide swings in costs,” said Swanson, of Buck Consultants. “You can have one or two claims that can ruin the whole program. They might have to be going to the bank to be paying their health-care claims.”

As its employees painfully discovered, Calmark was one firm apparently ill-suited for self-insurance.

Company insiders said the developer expected to save money when it dropped its insurance carrier and turned to a self-funded plan in 1988. Within two years, however, the firm was hit with more than $1 million in medical claims and was paying up to $10,000 a month to a health plan administrator, according to company sources.

After ignoring claims or delaying payments for months, Calmark stopped payments altogether last August or September, according to one Calmark employee familiar with the firm’s health insurance practices--an employee who also faces a pile of unpaid medical bills.

Soon afterward, Calmark switched to a health insurance firm for coverage. However, the bills of approximately 160 workers run up during Calmark’s stint with self-insurance remain unpaid, according to employees.

Why Calmark refused to cover the medical claims is still a mystery. Calls to Calmark officials were not returned. Employees who remained with the firm despite problems with their medical bills said the company has never failed to meet its payroll; they are not aware of any serious financial problems.

“I think they could pay, but I don’t think they want to part with their money,” said Robert H. Kiefer, a former Calmark employee. Kiefer is stuck with $15,000 in medical bills for knee surgery and therapy--medical care that was pre-approved by Calmark’s administrator. While the company kept paying his salary and later consulting fees, Kiefer said Calmark began skipping payment of his medical bills in April, 1990.

“I started hearing from the doctors’ offices and the physical therapists’ offices: ‘Calmark had not paid the bills,’ ” said Kiefer, a 46-year-old San Clemente resident who held top positions at the company’s California and Nevada home construction divisions.

Kiefer, like other employees, soon discovered that state authorities could not help. Calmark employees who contacted the Labor Department were advised to bring suit in federal court.

“They are telling us we have to hire a lawyer and put out more money, which we can’t afford to do,” said Robert Schlotter, a former Calmark construction supervisor in Nevada. Schlotter says the firm reneged on nearly $10,000 in bills stemming from kidney surgery for his 15-year-old daughter.

“I wouldn’t pay for benefits from a self-insured company again, because you have no protection,” Schlotter said.

Companies That Self-Insure

Self-insured health plans are more common at large firms. 99 or fewer workers: 26.7% 100-999 workers: 29.3% 1,000 or more workers: 70%