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Court: Employers Can Cut Benefits to AIDS Patients

November 27, 1991

NEW ORLEANS (AP) _ Employers who run their own insurance plans can change their policies at any time and ax benefits for workers who develop catastrophic illnesses such as AIDS, a federal appeals court ruled.

The court, in a case from Texas involving an AIDS patient whose coverage was dropped from $1 million to $5,000, upheld lower court rulings that self- insured businesses have an ″absolute right″ under a 1974 law to alter the terms of medical coverage.

The Nov. 4 decision by the U.S. 5th Circuit Court of Appeals is binding in Texas, Louisiana and Mississippi and is certain to guide courts elsewhere.

″If this ruling stands, it’s a question of any illness that an employer decides to exclude from their health plan, not just AIDS,″ Thomas B. Stoddard, executive director of the gay-rights Lambda Legal Defense and Education Fund in New York City, said Tuesday. ″A self-insured employer could decide leukemia is too expensive, or for that matter any type of cancer or any other illness.″

Stoddard represented John McGann in the lawsuit against the Houston music store that employed him when he was diagnosed with AIDS in 1987. McGann died in June.

In 1987, H&H Music Co. had an outside group insurance policy providing for $1 million in medical benefits for each of its several hundred employees.

Months after McGann began filing AIDS-related claims, H&H switched to a self-insured plan. The plan eliminated coverage for drug and alcohol abuse and put a $5,000 cap on AIDS-related claims, but kept the $1 million limit for other diseases.

H&H said it cut costly AIDS benefits so it could afford other coverage for the rest of its workers.

But McGann argued that the change amounted to discrimination and retaliation against him because he was the only employee with AIDS. He sued under the 1974 federal Employment Retirement Income Security Act, which governs self-insurance plans.

The appeals court noted that the music store’s plan stated that benefits could be withdrawn at any time. The court said discrimination is illegal under the 1974 law only if it is ″motivated by desire to retaliate against or to deprive employee of an existing right to which he may become entitled.″

The court affirmed that the music’s store motive ″was to ensure the future existence of the plan and not specifically to retaliate against McGann.″

It also said the law does not prohibit discrimination ″between or among categories of diseases.″ Therefore, it said, H&H is free to cut benefits for one catastrophic illness while continuing them for others.

H&H lawyer Mark Huvard hailed the ruling, saying employers would never offer health benefits if they were locked into them forever.

Stoddard said he had not decided whether to appeal to the U.S. Supreme Court.

A similar case is before the 11th U.S. Circuit Court of Appeals in Atlanta, which covers Alabama, Georgia and Florida.

Marie Healy, a health plan lawyer in New Orleans, said the ruling will prompt more employers to limit benefits. ″It’s a question of you’ve got so much money in the pot and how are you going to spend it,″ she said.

More and more American companies are trying self-insurance, assuming the financial risk of paying claims in exchange for less regulation and the chance to cut costs.

More than half of all American workers are employed by companies that are partially or completely self-insured, said the Health Insurance Association of America.

Commercial insurers face hundreds of regulations. Self-insurance plans, on the other hand, face virtually no state regulation, and self-insured companies keep the dividends and other returns from money invested to pay claims.

They are also exempt from state taxes on insurance premiums and can be more flexible in designing benefits to fit the needs of employees.

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