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Sunday, Oct. 5, 2008 | 2 a.m.
In the final days of the 2007 legislative session, an amendment was slipped into an insurance bill that greatly benefited a company that provides payroll services and administers health benefits for a variety of employers.
Without a committee hearing or public testimony, two Republican senators added the late-hour amendment. The new language allowed the company, Payroll Solutions, and certain other companies to avoid the kind of state oversight, regulation and taxes that apply to health insurers throughout Nevada.
Because of the change, Payroll Solutions avoided a $1 million fine and back taxes for operating as a health insurance provider without a license, a matter still being contested in the courts.
It’s not clear why the Legislature acted as it did, but Payroll Solutions did have a strong ally there. State Sen. Bob Beers, R-Las Vegas, had been the company’s vice president for sales until the legislative session began in early 2007.
Beers, who’s locked in a tight reelection battle that could determine which party controls the upper chamber, told the Las Vegas Sun last week he resigned from Payroll Solutions before the start of the 2007 Legislature because he knew the company had a legislative agenda, and he didn’t want to compromise his role as senator.
But Beers said he did introduce company Chief Executive Howard Winters to state Sen. Randolph Townsend, the powerful Republican chairman of the Commerce and Labor Committee. Also, Sen. Warren Hardy, another influential player, said Beers asked him to talk to Winters. Hardy and Townsend added the amendment.
Beers told the Sun last week the amendment sought to clarify what had always been true: Federal regulators, not the state, should govern insurance offerings of Payroll Solutions and companies like it.
Hardy told the Sun on Thursday that Payroll Solutions asked for the amendment merely to “close a loophole.”
In fact, it did much more, according to an internal memorandum two deputy attorneys general sent to their boss, Attorney General Catherine Cortez Masto. In addition to aiding Payroll Solutions, the new language opened the door to insurance scams across the state, the memo says.
Alice Molasky-Arman, who recently retired as commissioner of the state Insurance Division, sent a letter to Cortez Masto warning that ramifications of the amendment were “potentially disastrous.”
Payroll Solutions is what’s known as an “employee leasing organization.” That means that companies hire Payroll Solutions to take care of their payroll, taxes, benefits administration and the like.
Payroll Solutions also began offering a self-funded health plan in 2001 to the companies for which it performed the other services.
The federal government decided in the early 1980s that it wanted help from the states in regulating this type of arrangement, which is known as a Multiple Employer Welfare Arrangement, or MEWA. The government wanted help because MEWAs are prone to fraud and insolvency.
A Nevada company called Employers Mutual, for instance, went bust this decade. An executive had been skimming money and was later sentenced to prison.
Payroll Solutions, however, has long argued that it’s not a MEWA and thus not subject to state oversight.
The state disagrees. In 2006, it held an administrative hearing that concluded with a $1 million fine against the company and a demand for back taxes.
The company appealed to the courts, setting off a flurry of suits between the parties in state and federal courts.
Payroll Solutions asserts in court filings that it is running a “single-employer plan,” even though it runs the health plan for multiple employers. In other words, the company argues that for the purposes of employee benefits law, all the people who work for all those companies are really employees of Payroll Solutions.
“We feel Nevada revised statutes make it clear we are a single employer, and that we would not be subject to Division of Insurance jurisdiction,” Winters, the company chief executive, said in an interview last week.
The distinction between single- and multiple-employer plans is important because the federal government, not the state of Nevada, regulates self-funded single-employer health insurance plans. Single-employer plans are perceived to be less risky and so require less oversight.
The Bush administration Labor Department, in an advisory opinion, has agreed with Nevada that Payroll Solutions is a multiple-employer plan, subject to state regulation.
In addition to appealing the state’s decision, Payroll Solutions filed a lawsuit rebuking then-Insurance Commissioner Molasky-Arman, naming the division and her personally, accusing her of defamation, abuse of authority and violation of civil rights.
Molasky-Arman, the suit alleged, had used federal law to determine Payroll Solutions’ status, which constituted abuse of authority.
Timothy Menifield, the company’s chief financial officer, said he thought it was possible competitors had lobbied the Insurance Division to move against Payroll Solutions, but said he didn’t want to speculate. He noted the company had been offering its coverage since 2001, but the Insurance Division didn’t act until 2006.
As the case made its way in court, Payroll Solutions decided it wasn’t going to take any chances.
It turned to the Legislature.
Townsend, who apparently met Winters through Beers, has worked closely with Molasky-Arman for a long time, he said in an interview last week.
The amendment he inserted was added, oddly, to a section of law that deals mostly with workers’ compensation, not health insurance. Though Townsend held extensive hearings on the overall legislation, he never took testimony on the amendment.
The principals say they don’t remember much about how the amendment became law, which is understandable given the flurry of activity surrounding the end of the biannual 120-day session.
Hardy said Beers asked him to talk to Winters because Beers told him he wasn’t comfortable moving legislation for his former employer. Hardy said he was under the impression the amendment was “cleanup,” shorthand for laws passed that clarify old laws. He said Winters told him the amendment fixed “a loophole” that prevented him from operating.
Hardy said he doesn’t recall any objections from the Insurance Division.
“That would have raised some red flags,” he said, before adding that he can foresee the issue being revisited during the 2009 session. “If we inadvertently opened a loophole, let’s close it.”
(Hardy is president of the Associated Builders and Contractors, which uses Payroll Solutions for its services, but he said his staff ultimately made the decision about which company to use. As a vendor, Payroll Solutions was required to become a member of Associated Builders and Contractors, like its other vendors. Neither Payroll Solutions nor its executives have given campaign donations to Beers, Hardy or Townsend.)
Townsend said the amendment was a way to help the division during a time of limited resources by reducing the number of insurance companies it has to regulate.
Beers said the law eliminated duplication: “The practice in question refers to whether or not there’s going to be a duplicate set of regulations on the health plan under the law. Under (the federal law) it’s regulated under the feds. The state decided it wanted to regulate it, too.”
The federal government disagrees. The Labor Department said in a second advisory opinion that the amendment was an illegal attempt to preempt federal law, while again stating Payroll Solutions is a MEWA subject to state regulation.
Still, Beers accused the division of regulatory overreach: “The division of insurance is in great flux. Payroll Solutions is not the first time the division had stepped into areas of regulation that it didn’t have authority to regulate,” citing recent settlements agreed to by the division.
State officials tell another story, however, according to the documents obtained by the Sun from a third party.
The amendment was added “surreptitiously” and “most probably passed without full knowledge of the facts or implications ...,” said the internal memorandum from deputy attorneys general Shane Chesney and Joanna Grigoriev to Attorney General Cortez Masto.
(The Attorney General’s office declined to comment, citing attorney-client privilege. Chesney, Grigoriev and Molasky-Arman all declined to comment for this story.)
State officials are concerned the new law will have fly-by-night companies seeking the new classification and avoiding regulation by the state insurance commissioner. They’re also concerned that conventional insurance companies, which have to pay premium taxes and comply with state regulations, would be at a competitive disadvantage and would also seek the new classification.
Indeed, conventional health insurance companies have begun asking regulators how they can achieve this status outside the purview of state regulators, according to the documents.
If that happens, the Nevada insurance market would be transformed, the lawyers argue.
The memo from Chesney and Grigoriev to Cortez Masto warns that the new law could allow companies to operate unmoored from state insurance rules that, for instance, mandate coverage of cancer screenings and require companies to contribute to a fund that would pay claims if they go broke.
Moreover, Nevada collects roughly $250 million in insurance premium taxes every year, which would be slashed if insurance companies escape Nevada’s purview.
The Chesney-Grigoriev memo describes the history of the law, which, they argue, was “precisely the opposite” of the Payroll Solutions argument. The new legislation “accomplished a change in the law which essentially strengthened and codified this legal argument in the pending” litigation, they wrote.
If Payroll Solutions’ legal argument holds up in court, the implications could be profound, Molasky-Arman wrote in her to letter Cortez Masto. Nevada will become a haven for shady operators, while drawing conventional insurance companies that will register as employee leasing companies like Payroll Solutions and thus avoid state oversight, she wrote.
The amendment “will devastate the health insurance market” and “destroy Nevada’s reputation as a strong, fair regulatory environment,” the letter said.
Winters said this is a gross exaggeration, asserting that entering the employee leasing business is not easy or without its own compliance issues.
An insurance industry insider, granted anonymity to speak freely about the case, said insurers are eagerly awaiting the results of the litigation to see whether they too can also become largely unregulated insurance providers.
Sun researcher Rebecca Clifford contributed to this report.