Rethinking the Rules.

This year, Congress will consider several pieces of legislation that would change how the insurance industry does business.

It is a time of change in Washington, with a new presidential administration and new members of Congress settling in. Changes could be in store for the insurance industry, too--particularly health insurers--based on several pieces of legislation pending in Congress. The 107th Congress will consider legislation regarding estate taxes, retirement benefits, class-action lawsuits and other issues affecting the industry.

"There are so many significant issues before Congress and the states affecting health care in 2001 that insurers and plans will be at the center of the action and active in helping to develop solutions," said Dean Rosen, senior vice president and general counsel with the Health Insurance Association of America.

These issues were debated in Congress and legislative committees last year, but no laws were enacted. The insurance industry is waiting to see which of these bills will become law in 2001 and what impact the new legislation will have.

Pension Reform

ChamberBiz (www.charnberbiz.com), an online small-business resource, estimates that nearly half of U.S. workers and more than 80% of those who work for businesses with 25 or fewer employees are not covered by pension plans. To encourage access to pension coverage, Rep. Rob Portman (R-Ohio) and Rep. Ben Cardin (D-Md.) introduced a bill in 1998 that calls for aggressive tax exemptions for workers who save more for their retirement and increased financial benefits for employers that offer retirement plans for their employees. Although the act has been in the works during the last two congressional sessions, it smiled in the Senate last year during the final days of the lame-duck session. But supporters now anticipate it to be a candidate for early action by the 107th Congress.

The Portman-Cardin Pension Reform Act includes readjusting the SIMPLE (Savings Incentive Match Plans for Employees) program, which is geared for small businesses that want to start a pension plan. In addition, the legislation would offer significant tax incentives to small businesses that set up regular pension programs. It also would improve other retirement programs, such as 401(k), 403(b) and 457 plans. A key part of the bill would increase contribution limits on various types of savings plans. In a 401(k), the amount that could be contributed tax-free would increase from $10,000 to $15,000 a year.

The legislation was passed in the House of Representatives in October as part of a broader tax package known as the Taxpayer Relief Act.

Both the American Council of Life Insurers and the National Association of Insurance and Financial Advisors are optimistic that Congress will enact pension reform early in the legislative session. Portman and Cardin plan to reintroduce their bill in the House during the early part of the current session.

The ACLI expects the act, if passed, to have a big impact on the life insurance industry, which manages nearly one-fourth of the private pension funds in the United States and has about 1.8 trillion under management, said Angela Arnett, senior counsel for ACLI.

"Life insurers are one of the biggest marketers to small business and employers for pension plans," Arnett said. "I think this is going to create the opportunity for insurers to go out and gain additional business and assets under management."

Herb Perone, an ACLI spokesman, said baby boomers over the next 30 years are going to double the retirement population from 35 million to 70 million people. At the same time he said, traditional pensions have been on the decline in the United States and more people have coverage through 401(k) plans and individual retirement accounts than through traditional pensions. "This means that each individual has to take full responsibility for accumulating retirement assets and have full responsibility for managing those assets to last a lifetime," Perone said.

One of the act's key components--"catch-up" contributions--is expected to benefit women in particular, because women make up 56% of the U.S. population with no retirement or pension coverage. The legislation would allow working people over the age of 50 to make additional "catch-up" contributions to their retirement savings plans and would allow workers to increase contributions to their plans.

"The clock keeps ticking. With each day, the need to do this becomes pronounced and a little more urgent. We think the climate in Congress, with its much bipartisan support, is very good for passage of this legislation," Perone said.

Class-Action Reform

Another reform issue introduced in 2000 would allow state class-action lawsuits to be tried in the federal court system. The proposed legislation, which never made it out of the Senate last session, is anticipated by its supporters to garner renewed legislative action sometime during the current congressional session.

Ken Schloman, a spokesman for the Alliance of American Insurers, said the reform aims to get class-action lawsuits that are national in scope tried in federal court rather than a state court. Schloman gave the example of an Illinois court's 1999 ruling against State Farm Group in a class-action lawsuit over the insurer's use of aftermarket automobile parts. "Massachusetts required the use of competitive crash parts. This ruling had the effect of negating Massachusetts law," he said.

Current laws require that each member of a class-action lawsuit have at least $75,000 worth of damages before the class action can be moved to federal court, said Melissa Shelk, vice president of federal affairs for the American Insurance Association. "This is a very high burden. In many class actions, the actual damages by each plaintiff may not reach the $75,000 threshold, therefore making it impossible to move to the federal court," Shelk said. Passage of this legislation would change the threshold requirements, pegging them to the aggregate amount of damages and the number of plaintiffs. "The major focus of this is to change the federal diversity rule so that there would have to be at least $2 million aggregated damages for all plaintiffs and there would have to be over 100 plaintiffs," she said.

The 106th Congress saw the reform proposal pass the House and clear the Senate Judiciary Committee, Shelk said, "There will be legislation reintroduced in the near future, but it hasn't been finalized," she said.

The AIA believes that former President Clinton would have vetoed the bill. But Shelk expects a "friendlier" reaction from President Bush's administration, adding that U.S. Attorney General John Ashcroft, a former member of the Senate Judiciary Committee, was a strong supporter of the legislation.

"This is not a panacea for class actions, but we believe it will be a better forum for hearing class actions than in state courts. There is currently a proliferation of class actions at the state level, and it is not uncommon to find forum shopping, which makes it much harder to have a fair hearing," Sheik said. "As a result, some insurers have been faced with big settlements. The federal courts provide a forum with better rules, which should help eliminate some of the forum shopping we see today."

Robert Hurns, counsel for the National Association of Independent Insurers, said the reform will largely impact insurers. "They won't have to spend a lot of money on frivolous claims," Hurns said. "Pending diminished-value lawsuits are going on all over now, but what most people don't know is that a majority of these cases have been dismissed. Insurance companies have to retain outside counsel in various jurisdictions and spend a lot of time preparing motions. The only people that benefit is the trial bar. What reform would do is to restore class actions to their original intent, where there is a group of people who actually were wronged and whose claims could be adjudicated swiftly"

Privacy Regulation

While class-action and pension reform legislation didn't make it through the last Congress, major legislative action related to individuals' medical privacy was passed at the end of 2000. Insurers are just beginning to feel the effects of a newly released regulation. On Dec. 20, Clinton released a final regulation establishing the first-ever federal privacy protections for the personal health information of all Americans. Clinton called upon the new Congress to begin strengthening the regulation through penalties and the ability of individuals to hold health plans and providers accountable for improper information disclosure.

The final regulation, which is anticipated to be fully implemented within two years, is being issued under the authority of the bipartisan 1996 Health Insurance Portability and Accountability Act. The regulation underscores the Clinton administration's commitment to safeguarding the security of personal health information.

The medical privacy rule, which applies to health insurers, health-care providers and clearinghouses, will give consumers more control over and more access to their health information. The final regulation extends the proposed rule by strengthening several key protections, including extending protections to personal medical records in all forms (including paper records and oral communications) and ensuring that health-care providers have all the information necessary to appropriately treat their patients.

"Even though everyone has privacy policies in place, I think the lack of pre-emption and uniformity is going to be a difficult compliance challenge with this kind of overlay of federal regulation," HIAA's Rosen said. "There are requirements in the law that say we must oversee our contractors who are not covered by law. Going out and recontracting with them potentially and putting in place some type of oversight mechanism to make sure they are in compliance--because we are the ones who are ultimately going to be penalized--is going to be very difficult."

Rosen said this is another area that the system will have to digest in terms of cost. "I think that people would have found some of the requirements a lot more livable if it was a single standard, as opposed to just a new standard and one of many. There are questions about how some of the language may affect what is happening now in terms of quality promotion," he said.

The HIAA is expected to take an even closer look at the medical privacy issue in the near future. "I think there is initially some concern that some of the language and requirements could have a chilling effect on some quality activities that insurers are now undertaking," Rosen said.

Patients' Bill of Rights

Legislation that would give patients the right to sue their health insurers for unlimited amounts has a long lineage, with early roots in the American Medical Association's decade-long push of various versions of so-called patient protection legislation.

Supporters had hoped to receive passage of this legislation by the 106th Congress when it returned in December 2000 for a post-election lame-duck session. But the proposal never made it out of the session, and it is now being anticipated by many supporters to be a major issue on the current congressional docket.

With a new congressional membership under way, at least four opponents of the bipartisan Norwood-Dingell bill--the proposal that calls for unlimited liability for employers' health plans covered under the Employee Retirement Income Security Act--lost their seats in the Senate and were replaced by supporters of strong patient protection. This could potentially strengthen the push for the bill, bringing victory to patients' rights activists in the process. Bush also has indicated that he will call for some form of patients' bill of rights, said Joe Luchok, a spokesman for HIAA.

Liability is a major concern with a patients' rights bill, Luchok said. The degree of liability on the part of employer health plans will depend on which proposal becomes final. Three such proposals that have been introduced in Congress include the Norwood-Dingell proposal, one that places a cap on liability and a proposal designed to keep the current system in place.

"We've been concerned about a number of aspects of the bills. If providers have more flexibility to do things and prescribe courses of treatment that may financially benefit them, it may not be the best quality for the patient. If you add layers of regulation at the federal level, particularly on top of state legislature, you are bound to increase costs," Rosen said.

Rosen also believes the right-to-sue issue is "a wild card, but open-ended liability as envisioned in the House bill" that could have serious effects. "Depending on what version gets passed, it could have a devastating impact in terms of cost. I think people have to look at it now and remember that we are now entering a period where the last three years have seen health costs ticking tip again. As people want more choices, the cost of drugs are increasing dramatically, and technology is increasing as society is aging. We are starting to loosen our grip on the tail of this cost tiger a little bit," Rosen said.

Estate-Tax Repeal

Another federal issue expected to receive a push by agent groups again in 2001 centers on the issue of estate taxes. The 106th Congress' attempts to repeal all estate and gift taxes were defeated when Clinton vetoed the Death Tax Elimination Act of 2000. Clinton viewed the proposal as poorly constructed and believed it didn't fit within a full set of tax changes he wanted, said Doug Bates, assistant vice president of tax at the American Council of Life Insurers.

"While moderate congressional Democrats proposed a compromise on the estate-tax issue, which would have reformed rather than repealed the estate and gift tax, Republicans rebuffed this proposal," said David Winston, NAIFA vice president of government affairs.

According to NAIFA, several Republicans, particularly in the House, indicated that the issue would reappear during the early part of the 107th congressional session. "Repeal proponents stand firm in their conviction to work toward complete estate-tax repeal. But it is far from certain whether Bush intends to make it a priority," Winston said. In terms of tax relief, Bush has focused on changes to income-tax brackets as a means to provide immediate economic stimulation, Winston said, "While the Bush tax plan still contains estate-tax elimination, this aspect is being overshadowed by rate reductions. The current political environment suggests estate-tax relief is much more likely," he said. NAIFA supports this relief.

Repeal of the so-called "death tax" could potentially provide a windfall for some of the country's wealthiest families. In addition, repealing the tax could prove quite costly. According to the Joint Committee of Taxation, the bill passed by Congress would cost $105 billion over the first 10 years, as it phases in slowly. If the estate tax is repealed and is fully in effect, the proposal would cost about $50 billion a year. During the second 10 years--from 2011 to 2020--the cost of the proposal would skyrocket by nearly six times the cost for 2001 to 2010.

The Independent Insurance Agents of America, major supporters of the proposal, believes that a repeal, rather than a reduction, of the estate tax "is the cleanest, most effective way to simplify the tax code as it pertains to estate transfer." Under the current IRS tax code, estates worth $675,000 or more are subject to the tax, while family farms and businesses worth $1.3 million or more must pay the estate tax. The estate-tax exemption is rising to $1 million by 2006.

Eric Berg, a life insurance analyst at Lehman Bros. Inc., said the repeal would be a negative for many life insurers--particularly Hartford Life, Lincoln Financial and Axa Financial, all of which have developed the high-net-worth market and sell lots of second-to-die policies. While it may be too early to quantify the impact, Berg said, "the companies would likely move to beef up their business elsewhere, so we're holding off changing earnings."

On the other hand, Jeff Myers, IIAA vice president of public affairs, believes its effects on carriers will be minimal.

"[Insurers] are not closely held, family-run businesses. For independent agencies, most of which are family-business enterprises, it is going to mean significant change, however," Myers said. "They are no longer going to face potential taxes that could siphon significant amounts of dollars out of the bush ness. It means businesses will be able to change hands without so-called death taxes, which take 50% or more of net worth of business. Many times, heirs of small businesses and independent agencies have found that the easiest way to pay estate taxes is to just sell off the business, because they can't afford it otherwise. Repeal will aid in the perpetuation of family-held businesses from one generation to the next."