888-599-5553

888-599-5553

Is Stop-Loss the Same as Health Insurance?

The answer to this question depends upon the context in which it is asked.  In Texas, in the context of liability for premium taxes, the answer delivered by the Texas Supreme Court on June 17, 2022, is yes.

The Name of the Case

The name of the case is Glenn Hegar, Comptroller of Public Accounts of the State of Texas and Ken Paxton, Attorney General of the State of Texas v. Health Care Service Corporation.  The State of Texas is listed first in the name of the case because it was the petitioner in the Texas Supreme Court.  That means that it lost in the lower courts.  Health Care Service Corporation was the respondent because it won in the lower courts.  You might recognize the respondent, Health Care Service Corporation, by its more familiar name, Blue Cross Blue Shield of Texas.

The Premium Tax Statute

The subject matter of the case was section 222.002 of Chapter 222 of the Texas Insurance Code, which imposes a tax on the premiums received by insurers in the State of Texas for the sale of insurance policies.  Like many statutes, its language is not a picture of clarity.  The relevant subparagraph provides as follows:

(b) Except as otherwise provided by this section, in determining an insurer’s taxable gross premiums or a health maintenance organization’s taxable gross revenues, the insurer or health maintenance organization shall include the total gross amounts of premiums, membership fees, assessments, dues, revenues, and other considerations received by the insurer or health maintenance organization in a calendar year from any kind of health maintenance organization certificate or contract or insurance policy or contract covering risks on individuals or groups located in this state and arising from the business of a health maintenance organization or the business of life insurance, accident insurance, health insurance, life and accident insurance, life and health insurance, health and accident insurance, life, health, and accident insurance, including variable life insurance, credit life insurance, and credit accident and health insurance for profit or otherwise or for mutual benefit or protection.

The outcome of the case depended upon the meaning of the words “covering risks on individuals or groups” located at the mid-point of this paragraph.

Blue Cross Blue Shield and Stop-Loss Insurance

Blue Cross Blue Shield of Texas is licensed by the Department of Insurance to sell several types of insurance, among which are health insurance and stop-loss insurance.  The difference is that health insurance covers the cost of medical care provided to insureds by paying the providers directly.  Stop-loss insurance does not pay the providers directly.  Instead, stop-loss insurance reimburses an employer that sponsors a self-funded health plan for costs that are paid by the employer.

In a self-funded health plan, an employer agrees to pay the medical expenses incurred by its employees and their dependents out of general assets.  Contrast this to a fully-insured health plan, where the employer pays premiums to an insurance company and the insurance company agrees to pay the medical expenses of the plan participants.  In both plans, the purpose is to pay the providers.  In a self-funded health plan, the employer pays the providers.  In a fully-insured health plan, the insurer pays the providers.

An employer that buys health insurance knows that its total cost for employee medical care will be limited to the premiums that it pays to the insurance company.  An employer that uses a self-funded health plan has no such assurance.  Medical costs can fluctuate widely depending upon the health of its employees and their dependents.  To hedge against unexpected or catastrophic claims, employers often buy stop-loss insurance.  Stop-loss insurance protects the employer from claims in excess of certain thresholds.

There is no question that Blue Cross Blue Shield of Texas is an insurance company subject to Chapter 222 of the Texas Insurance Code.  There is also no question that Blue Cross Blue Shield of Texas is required to pay a tax on the premiums that it receives for certain insurance policies.  The question is whether premiums received for stop-loss insurance, rather than health insurance, are subject to the premium tax statute.

The Battle is Joined

In 2012, Blue Cross Blue Shield of Texas received over $7 billion in insurance premiums.  Of that amount, $171.6 million represented stop-loss insurance premiums.  It paid $3,005,270.13 in premium taxes on the stop-loss premiums.  It then sought a refund of the premium taxes paid on the stop-loss premiums.  When its refund claim was denied, it filed this lawsuit.

In both the trial court and the Court of Appeals, Blue Cross Blue Shield won.  Both courts held that stop-loss insurance does not “cover risks on individuals or groups” and is not health insurance in the normal sense of that term.  The State of Texas appealed the decision of the trial court to the Court of Appeals and the decision of the Court of Appeals to the Texas Supreme Court.  It fared much better in the Texas Supreme Court than it had in the trial court and the Court of Appeals.  The Texas Supreme Court reversed on a 5-4 vote and entered judgment in favor of the State.

The case implicated two distinct legal concepts.  The first is that a taxpayer has the burden of proving that it is entitled to a refund.  The second is that a court should interpret a statute to give effect to the intent of the legislature.  By giving greater weight to the second legal theory, the Texas Supreme Court ruled that Blue Cross Blue Shield had not met its burden of proving its entitlement to a refund.

In both lower courts, Blue Cross Blue Shield had focused on the language “covering risks on individuals or groups”.  Blue Cross Blue Shield argued that the term “individuals” means natural persons and that the term “groups” means multiple natural persons.  An employer that sponsors a self-funded health plan is neither.  Instead, it is a “juridical entity”, which means it is a creature of state law.  Since stop-loss insurance protects the employer, rather than any individual employee or group of employees, it does not provide insurance coverage to “individuals or groups”.  Both lower courts bought this argument.

The Texas Supreme Court, however, wasn’t buying.  In the majority opinion, it says that the Court’s job is to give effect to the legislature’s intent.  And, it is clear from the language of the statute that the legislature’s intent was for the premium tax statute to be expansive.  It based its position on the words “any kind”, which precede the phrase “covering risks on individuals or groups”.  It determined that the legislature intended the premium tax to apply to any and all insurance sold in the State of Texas without regard to the identity of the insured.

Next, the Court focused on the preposition “on” and contrasted that with the preposition “to”.  It said that the preposition “on” essentially means that the statute covers expenses incurred in connection with individuals or groups.  And, before stop-loss insurance can reimburse an employer, there must be medical expenses paid in connection with care provided to the plan participants.  The statute is not limited to risks faced by the plan participants.  So, the statute covers stop-loss insurance premiums even though there is no risk of costs borne by the plan participants.

The dissent disagreed.  It said that a different legal concept should apply.  That where a taxing statute is ambiguous, the stature should be construed in favor of the taxpayer.  The dissent found section 222.02(b) of Chapter 222 to be ambiguous.  It said that the Comptroller’s interpretation was reasonable but no more reasonable than the interpretation advanced by Blue Cross Blue Shield.  In such circumstances, the Court should favor the taxpayer and direct the legislature to amend the statute if the Court’s judgment is contrary to the legislature’s intent.

We have consistently applied an ancient pro-taxpayer presumption: The reach of an ambiguous tax statute must be construed strictly against the taxing authority and liberally for the taxpayer. In other words, a tax must apply unequivocally.” TracFone Wireless, Inc. v. Comm’n on State Emergency Commc’ns, 397 S.W.3d 173, 182 (Tex. 2013) (cleaned up) (quoting Morris v. Hous. Indep. Sch. Dist., 388 S.W.3d 310, 313 (Tex. 2012)).

This well-established default rule demands clarity from the Legislature before taxes may be imposed . . . Courts must strive to understand the Legislature’s meaning, even when its choice of words makes that task difficult. But in the face of a tax statute that cannot be applied with confidence one way or another, the default rule acknowledges that it is better for courts to admit that the statute is unclear and require the Legislature to clarify itself than to side with the government and thereby risk judicially imposing a tax the Legislature never authorized. By invoking the default rule in favor of taxpayers when indeterminate statutes yield indeterminate results, courts ensure that the Legislature, not the Comptroller or the judiciary, imposes the taxes collected by the State.

To answer that question, the Court must decide whether these insurance policies “cover risks on individuals or groups.” Id. The Court and the Comptroller have a reasonable reading of the Code under which Blue Cross must pay the premium tax on these policies. But the court of appeals and Blue Cross likewise have a reasonable reading. Because the Code’s text provides no unambiguous answer, we should rule for the taxpayer. If this causes an unanticipated or undesirable gap in the tax’s application, the Legislature should amend the statute to express its wishes more clearly.

Conclusion

This case, which will have a significant impact far beyond the litigants, turned on the ability of one side to convince five out of nine judges to adopt its interpretation of the words “any kind” and “on”.  Three lousy words were worth over $3 million to the winning party.  If that seems weird, it’s because it is.

However, it is important to note that the holding in this case is limited to its context.  There are other contexts in which stop-loss insurance is not treated as health insurance.  For example, even though a self-funded health plan is an employee benefit plan subject to the Employee Retirement Income Security Act of 1974 (ERISA), stop-loss insurance will not be considered a plan asset, as long as stop-loss insurance premiums are not paid with employee contributions.

The reason is that ERISA acknowledges that stop-loss insurance does not provide benefits to the plan participants.  The employer remains solely responsible for the payment of medical costs with or without stop-loss insurance in place.  Stop-loss insurance protects the employer.  It provides no benefit to the plan participants.  Importantly, this means that an employer could obtain stop-loss insurance from its captive insurance company without running afoul of ERISA’s prohibited transaction rules.