PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

AMERICAN MEDICAL SECURITY,
INCORPORATED; CLIENT FIRST
BROKERAGE SERVICES, INCORPORATED;
MARAN, INCORPORATED; TRIO METAL
PRODUCTS COMPANY, INCORPORATED;
UNITED WISCONSIN LIFE INSURANCE
COMPANY,
Plaintiffs-Appellees,

v.
                                      No. 96-1376
DWIGHT K. BARTLETT, III, in his
capacity as Insurance Commissioner
of the State of Maryland,
Defendant-Appellant.

NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS; NATIONAL EMPLOYEE
BENEFITS INSTITUTE; SELF-INSURANCE
INSTITUTE OF AMERICA, INCORPORATED,
Amici Curiae.
AMERICAN MEDICAL SECURITY,
INCORPORATED; CLIENT FIRST
BROKERAGE SERVICES, INCORPORATED;
MARAN, INCORPORATED; TRIO METAL
PRODUCTS COMPANY, INCORPORATED;
UNITED WISCONSIN LIFE INSURANCE
COMPANY,
Plaintiffs-Appellants,

v.
                                                                   No. 96-1446
DWIGHT K. BARTLETT, III, in his
capacity as Insurance Commissioner
of the State of Maryland,
Defendant-Appellee.

NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS; NATIONAL EMPLOYEE
BENEFITS INSTITUTE; SELF-INSURANCE
INSTITUTE OF AMERICA, INCORPORATED,
Amici Curiae.

Appeals from the United States District Court
for the District of Maryland, at Baltimore.
Alexander Harvey II, Senior District Judge.
(CA-95-1463-H)

Argued: October 28, 1996

Decided: April 11, 1997

Before NIEMEYER and MOTZ, Circuit Judges, and
DOUMAR, Senior United States District Judge for the
Eastern District of Virginia, sitting by designation.

_________________________________________________________________

Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Judge Motz and Senior Judge Doumar joined.

                   2
COUNSEL

ARGUED: Dennis William Carroll, Jr., Assistant Attorney General,
MARYLAND INSURANCE ADMINISTRATION, Baltimore, Mary-
land, for Appellant. Edward J. Birrane, Jr., EDWARD J. BIRRANE,
JR., CHARTERED, Towson, Maryland, for Appellees. ON BRIEF:
J. Joseph Curran, Jr., Attorney General, Christina Gerstung Beusch,
Assistant Attorney General, MARYLAND INSURANCE ADMINIS-
TRATION, Baltimore, Maryland, for Appellant. Andrew Jay Graham,
Kathleen A. Birrane, KRAMON & GRAHAM, P.A., Baltimore,
Maryland, for Appellees. Gregory B. Stites, NATIONAL ASSOCIA-
TION OF INSURANCE COMMISSIONERS, Kansas City, Missouri,
for Amicus Curiae Association. Joseph Semo, REINHART,
BOERNER, VAN DEUREN, NORRIS & RIESELBACH, P.C.,
Washington, D.C., for Amicus Curiae Employee Benefits Institute.
John H. Eggersten, Michael J. Friedman, HONIGMAN, MILLER,
SCHWARTZ & COHN, Detroit, Michigan, for Amicus Curiae Self-
Insurance Institute.

_________________________________________________________________

OPINION

NIEMEYER, Circuit Judge:

We must decide whether the Employee Retirement Income Secur-
ity Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., preempts a
Maryland insurance regulation that fixes the minimum attachment
point for stop-loss insurance policies issued to self-funded employee
benefit plans covered by ERISA. See Code of Maryland Regulations
(hereafter "COMAR"), § 9.31.02 (Health Insurance -- Stop-Loss
Coverage). The state regulation is designed to prevent insurers and
self-funded employee benefit plans from depriving plan participants
and beneficiaries of state mandated health benefits. See 22 Md. Reg.
913 (1995).

The district court entered summary judgment declaring that ERISA
preempts the state regulation and that the regulation is, therefore,
"void to the extent that it mandates or affects attachment points for
stop-loss insurance policies purchased by self-funded or self-insured

                    3
employee benefit plans covered by ERISA." The Court also enjoined
Maryland from enforcing the regulation or taking any other step "to
regulate or affect the attachment points for stop-loss insurance poli-
cies purchased by self-funded or self-insured employee benefit plans."

Because the purpose and effect of Maryland's regulation is to force
state-mandated health benefits on self-funded ERISA plans when they
purchase certain types of stop-loss insurance, we hold that § 514(a)
of ERISA, 29 U.S.C. § 1144(a), preempts the regulation, and, there-
fore, we affirm.

I

Client First Brokerage Services, Incorporated; Maran, Incorpo-
rated; and Trio Metal Products Company, Incorporated, are Maryland
employers sponsoring self-funded employee health benefit plans sub-
ject to ERISA. Each has purchased stop-loss insurance from United
Wisconsin Life Insurance Company ("United Wisconsin Life") and
has engaged American Medical Security, Incorporated, ("AMS") as
administrator of their plans. These Maryland employers purchased
stop-loss insurance to cover their plans' benefit payments above an
annual $25,000-per-employee level, known as the"attachment point."
United Wisconsin Life was also agreeable to a lower attachment
point, insuring a greater portion of the plans' payments, if requested
to do so by the plans' sponsors. The stop-loss insurance afforded by
United Wisconsin Life protected the plans themselves and not their
participants or beneficiaries.

The employee benefit plans sponsored by these three Maryland
employers contained substantially fewer benefits than the 28 man-
dated by Maryland for health insurance policies regulated by the
Maryland Insurance Commissioner. See COMAR,§ 09.31.05.03. The
benefit plans sponsored by these Maryland employers did not, for
example, include benefits for skilled nursing facility services, out-
patient rehabilitative services, and certain organ transplants, all of
which are mandated for inclusion in Maryland health insurance poli-
cies.

In the course of its review of United Wisconsin Life stop-loss poli-
cies in the fall of 1994 -- insurance companies issuing policies to

                    4
Maryland residents are required to obtain prior approval for their poli-
cies, see Md. Code, art. 48A, §§ 242 & 375 -- the Maryland Insur-
ance Agency disapproved United Wisconsin Life's stop-loss policies
issued to the Maryland employers in this case because the attachment
point was set informally at $25,000 and could be reduced at the
employer's request. Since the policy could have an attachment point
below $25,000 (the then mandated minimum), it was considered a
policy of health insurance and, as such, was required to include man-
dated health benefits. See COMAR, §§ 9.31.02 & 9.31.05. Subse-
quently, the Maryland Insurance Commissioner dropped the
minimum attachment point for stop-loss insurance to $10,000 of ben-
efits paid to any single beneficiary annually. The Commissioner also
imposed a minimum aggregate attachment point of 115% of total ben-
efit payments expected to be paid to all plan beneficiaries. COMAR,
§ 9.31.03B.

The Maryland employers, United Wisconsin Life, and AMS filed
suit seeking a declaratory judgment that the regulations are not
enforceable and an injunction against their enforcement. They alleged
that Maryland's insurance regulations -- which (1) establish a mini-
mum attachment point for stop-loss insurance, and (2) deem stop-loss
insurance policies with lower attachment points to be health insurance
policies -- improperly sought to regulate employee benefit plans in
violation of ERISA's preemption provision. On cross motions for
summary judgment, the district court agreed with the plaintiffs and
declared that ERISA preempts Maryland's regulations. This appeal
followed.

II

This case presents the tension between Maryland's effort to guar-
antee through its regulation of insurance that employee benefit plans
offer at least 28 state-mandated health benefits, see COMAR,
§ 09.31.05, and Congress' preemption, through ERISA, of any state
regulation that "relates to" an employee benefit plan, see 29 U.S.C.
§ 1144(a).

ERISA is a comprehensive federal statute regulating private
employee benefit plans, including plans maintained for the purpose of
providing medical or other health benefits for employees. To assure

                    5
national uniformity of federal law, ERISA broadly preempts state law
and assures that federal regulation will be exclusive. Section 514(a)
provides that ERISA "shall supersede any and all State laws insofar
as they may now or hereafter relate to any employee benefit plan" as
defined by ERISA. The courts have interpreted this clause broadly to
carry out Congress' purpose of displacing any state effort to regulate
ERISA plans. See, e.g., FMC Corp. v. Holliday, 498 U.S. 52, 58
(1990) ("The pre-emption clause is conspicuous for its breadth");
Shaw v. Delta Airlines, Inc., 463 U.S. 85, 98 (1983) ("The section's
pre-emptive scope [is] as broad as its language"). Thus, any law that
"relates to" a plan is preempted by § 514(a), and the phrase "relates
to" is given its common sense meaning, as having"[1] connection
with or [2] reference to such a plan." Shaw, 463 U.S. at 96-97; see
also District of Columbia v. Greater Washington Bd. of Trade, 506
U.S. 125, 129 (1992).

Although ERISA's preemptive scope is broad, the"savings clause"
explicitly saves from ERISA's preemption those state laws that regu-
late insurance. See 29 U.S.C. § 1144(b)(2)(A). At the same time,
however, the "deemer clause" provides that state insurance laws are
not saved from preemption if they deem an employee benefit plan to
be an insurance company in order to regulate it. See 29 U.S.C.
§ 1144(b)(2)(B); see also Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41,
45 (1987). Thus, a preempted law is saved from preemption if it regu-
lates insurance and does not deem ERISA plans to be insurers for pur-
poses of the state regulation of insurance. But at bottom, state
insurance regulation may not directly or indirectly regulate self-
funded ERISA plans. See FMC, 498 U.S. at 62. Accordingly,
although plans that provide benefits in the form of insurance may be
indirectly regulated through regulation of that insurance, see id. at 62-
64, plans that are self-funded or self-insured may not themselves be
regulated as insurance companies even if the self-funded or self-
insured plan purchases stop-loss insurance to cover losses or benefits
payments beyond a specified level. See Tri-State Machine, Inc. v.
Nationwide Life Ins. Co., 33 F.3d 309, 315 (4th Cir. 1994); Thompson
v. Talquin Bldg. Prods. Co., 928 F.2d 649, 653 (4th Cir. 1991).

Stop-loss insurance provides coverage to self-funded plans above
a certain level of risk absorbed by the plan. It provides protection to
the plan, not to the plan's participants or beneficiaries, against bene-

                     6
fits payments over the specified level, called the"attachment point."
Attachment points may be "specific" or "aggregate." Specific attach-
ment points define the level of benefits paid to individual beneficia-
ries beyond which the insurance company will indemnify the plan.
Aggregate attachment points define the total amount of benefits paid
to all participants or beneficiaries beyond which the insurance com-
pany will indemnify the plan. Stop-loss insurance is thus akin to "re-
insurance" in that it provides reimbursement to a plan after the plan
makes benefit payments. See COMAR, § 09.31.02.02(5); Travelers
Ins. Co. v. Cuomo, 14 F.3d 708, 723 (2d Cir.), rev'd on other
grounds, 115 S. Ct. 1671 (1994); Thompson , 928 F.2d at 653.

The State of Maryland regulates health insurance, requiring that
health insurance policies afford at least 28 specified benefits. See
COMAR, § 09.35.05. Apparently not wishing to be subject to state-
mandated health benefits, insurance companies and their ERISA plan
clients have entered into arrangements under which plans self-fund
benefits and purchase stop-loss insurance to insure themselves against
benefits paid beyond designated attachment points. A stop-loss policy
does not itself provide coverage for benefits. Since such a policy
insures only those benefits defined and actually paid by the plan, the
ERISA plan's sponsor, not state health insurance regulations, dictates
the range of benefits provided. Thus, by absorbing a minimal amount
of initial risk and insuring the remainder through stop-loss insurance,
plans are able to provide health benefits of a kind or at a level differ-
ent from what state law requires of health insurance.

Recognizing that such arrangements bypass Maryland's regulations
for health insurance and intending to prevent such arrangements, the
Maryland Insurance Commissioner adopted regulations that require
plans to absorb the risk of at least the first $10,000 of benefits paid
to each beneficiary. As the regulations' statement of purpose notes,
the Commissioner seeks to protect Maryland residents"against acts
by persons and insurers which deprive them of mandated health bene-
fits." 22 Md. Reg. 913 (1995). Justifying the regulation and explain-
ing how low attachment points permit self-funded ERISA plans to
bypass state mandates, the Insurance Commissioner stated in his
order:

          At very low attachment points, however, a "stop loss" policy
          is merely a substitution for health insurance. It does not

                     7
          insure only against catastrophic loss. The self-funded health
          benefit plan is not regulated by the Insurance Commissioner
          and is not required to provide any of the state-mandated
          benefits. The goal is obvious: As policies become available
          with attachment points lower than many deductibles, it
          became an increasingly attractive option to "self-insure" a
          health plan, but to continue to shift the majority of the risk
          to the insurance carrier by purchasing "stop loss" coverage.

In re: Maryland Stop Loss Insurance Litigation , No. MIA-370-12195
at 4 (Dec. 8, 1995). The regulations accordingly provide that any
stop-loss insurance policy with a specific attachment point below
$10,000 is deemed to be a health insurance policy for purposes of
Maryland's health insurance regulations and must therefore contain
mandated benefits. See COMAR, § 09.31.02.03. On the other hand,
if the specific attachment point is above $10,000 and the policy pro-
vides for payment only to the plan, and not to its participants and ben-
eficiaries, it is considered to be traditional stop-loss insurance that
essentially reinsures the risks defined by the plan. See id.

In summary, on one side of the issue before us, the Maryland Insur-
ance Commissioner seeks to take advantage of his right under
ERISA's savings clause to regulate the business of insurance. And on
the other side, the insurance companies seek to take advantage of
ERISA's preemption and deemer clauses to remove self-funded plans
from the reach of state insurance regulation.

III

We begin the analysis with the question of whether Maryland's
regulations "relate to" ERISA employee benefit plans and thus
whether they fall within ERISA's preemptive scope. See 29 U.S.C.
§ 1144(a). A regulation relates to an employee benefit plan when it
has a "connection with or reference to such a plan." Shaw, 463 U.S.
at 96-97. The Maryland Insurance Commissioner wisely concedes
that the regulations at issue do "relate to" ERISA plans. By their own
terms, the stop-loss insurance regulations apply to"an employer's
health plan," i.e., an ERISA health plan. See COMAR,
§ 09.31.02.02(4). "[W]here the existence of ERISA plans is essential
to the [state] law's operation, . . . that`reference' will result in pre-

                     8
emption." California Div'n of Labor Standards Enforcement v. Dil-
lingham Constr., N.A., 117 S. Ct. 832, 838 (1997) (noting that state
law that "has a connection with" or "reference to" an employee bene-
fit plan is preempted). By virtue of the regulations' "reference to"
ERISA plans, they "relate to" ERISA plans and fall within the scope
of ERISA's preemption provision, 29 U.S.C. § 1144(a). See Greater
Washington Bd. of Trade, 506 U.S. at 129.

Even though Maryland's regulations relate to ERISA plans, they
nevertheless may be saved from preemption if they constitute a law
that "regulates insurance," see 29 U.S.C. § 1144(b)(2)(A), without
deeming an ERISA plan to be an insurance company or other insurer,
see 29 U.S.C. § 1144(b)(2)(B). In determining whether a state law is
one that "regulates insurance," it is not enough that it operate only on
insurance companies or insurance policies. The regulation must regu-
late the business of insurance in the sense that the object of its regula-
tion (1) "has the effect of transferring or spreading a policyholder's
risk"; (2) "is an integral part of the policy relationship between the
insurer and the insured"; and (3) "is limited to entities within the
insurance industry." Metropolitan Life Insurance Company v.
Massachusetts, 471 U.S. 724, 743 (1985).

In this case, the Maryland Insurance Commissioner can well argue
with respect to the first Metropolitan Life factor that the setting of
attachment points allocates risk. Higher attachment points burden
plans with more risk while lower attachment points increase insurance
company risk. The Commissioner might also be able to argue suc-
cessfully on the second Metropolitan Life factor that the regulations
address a practice integral to the insured-insurer relationship, at least
if our analysis is limited to the explicit terms of the regulations. The
regulations, by their own terms, seek to impose requirements only on
insurance companies and their stop-loss insurance policies. This fac-
tor is, however, complicated by the fact that the intended, stated, and
actual effect of the regulations is to reach the relationship between
ERISA plans and their participants who are not parties to the insur-
ance contract. The third Metropolitan Life factor is complicated in the
same way. Although the state's regulation of attachment points is lim-
ited to entities in the insurance industry, the stated purpose of the reg-
ulations is also to reach the plan-participant relationship, a
relationship which is outside the insurance industry.

                     9
While the Maryland Insurance Commissioner can thus make a
superficial case that the regulations address the business of insurance,
the complications of the second and third Metropolitan Life factors
together with the "deemer clause" provide the core difficulty with the
state's regulation of stop-loss insurance policies issued to ERISA
plans.

We recognize that the regulations are carefully drafted to focus
directly on insurance companies issuing stop-loss insurance and not
on the employee benefit plans themselves. Thus, the regulations pur-
port to define stop-loss insurance as health insurance subject to state
regulation if the stop-loss insurance meets specific criteria. Notwith-
standing the regulations' wording, however, their purpose and effect
are directed at self-funded employee benefit plans that attempt to pro-
vide fewer health benefits to Maryland residents than state law man-
dates for health insurance policies. The state asserts a need for this
regulation because, in its absence, the loophole would allow every
self-funded plan to provide coverage for fewer health benefits than
state law mandates for health insurance policies. It argues that absorb-
ing a minimal risk is simply a sham to circumvent state insurance reg-
ulation, the area carved out by ERISA in which states may act. But
in seeking to address this perceived loophole, the state in fact ends up
regulating self-funded employee benefit plans that are exclusively
subject to ERISA.

In seeking to require self-funded plans to offer coverage consistent
with state insurance law, Maryland crosses the line of preemption.
Even though the regulatory language targets stop-loss insurance poli-
cies, the Commissioner's stated purpose is to protect Maryland resi-
dents from self-funded ERISA plans and insurers"which deprive
them of mandated health benefits." 22 Md. Reg. 913 (1995). The reg-
ulations thus use stop-loss insurance policies as a vehicle to impose
the requirements of Maryland health insurance law on self-funded
ERISA plans. By aiming at the plan-participant relationship, Mary-
land law violates the ERISA provision that no ERISA plan "shall be
deemed to be an insurance company . . . for purposes of any law of
any State purporting to regulate insurance companies[or] insurance
contracts." 29 U.S.C. § 1144(b)(2)(B).

The state's fear that plans will circumvent state regulation and offer
citizens too few health benefits is understandable. But to state that

                     10
fear reveals that Maryland is really concerned, not with the business
of insurance and its coverage of risks, but with the benefits that
ERISA plans can choose to provide their participants and beneficia-
ries. No matter how understandable this concern may be, only Con-
gress may address it, not the State of Maryland through its insurance
regulations. In attempting to address this concern through the regula-
tion of stop-loss insurance, the state blurs the real distinction between
self-funded plans, with or without stop-loss insurance, and fully
insured plans.

Maryland's regulations distinguish self-funded plans from insured
plans solely based on the level of the attachment point of stop-loss
insurance. Thus, when the attachment point becomes low, Maryland
deems self-funded plans with stop-loss insurance to be insured plans.
See COMAR, § 09.35.02.02. This distinction overlooks the real risks.

Under a self-funded plan, the employer who promises the benefit
incurs the liability defined by the plan's terms. That liability remains
the employer's even if it has purchased stop-loss insurance and even
if the stop-loss insurer becomes insolvent. Conversely, if the
employer becomes insolvent, the solvency of the stop-loss insurer
may not benefit plan participants and beneficiaries. This is because
their claims against the insurer would be derivative of the plan's
claim against the insurer, which arises only after the plan actually
makes benefit payments beyond the agreed attachment point. In con-
trast, when a plan buys health insurance for participants and benefi-
ciaries, the plan participants and beneficiaries have a legal claim
directly against the insurance company, thereby securing the benefits
even in the event of the plan's insolvency. Participants and beneficia-
ries in self-funded plans may not have the security of the insurance
company's assets because stop-loss insurance insures the plan and not
the participants.

The state's regulations fail to recognize that in a self-funded plan,
with or without stop-loss insurance and regardless of the attachment
point, the provision of benefits depends on the plan's solvency,
whereas the provision of benefits in an insured plan depends entirely
on the insurer's solvency. It is this fundamental difference that pre-
cludes the Maryland Insurance Agency from regulating self-funded
plans but permits them to regulate insurance companies that provide

                     11
health benefits to plans for their participants. While ERISA's savings
clause explicitly empowers states to adjust the obligations and incen-
tives which bear on insurance companies' solvency, see 29 U.S.C.
§ 1144(b)(2)(A), the combined effect of the preemption and deemer
clauses, 29 U.S.C. § 1144(a) & (b)(2)(B), is that ERISA plan sol-
vency is the purview of federal law alone.

Maryland's stop-loss insurance regulations also directly and imper-
missibly affect ERISA plans' costs and choices in designing their own
array of benefits. If a self-funded plan insured by stop-loss insurance
having an attachment point of $5,000 provided no benefit for organ
transplants, the regulations would either raise plan costs by including
unwanted, state-mandated insurance coverage for organ transplants or
convert the self-funded plan into a fully insured plan contrary to its
preference. These effects impermissibly intrude on the relationship
between an ERISA plan and its participants and beneficiaries.

While we recognize that self-funded plans may not be providing
Maryland residents with the range of benefits mandated by state law
and that such plans' benefits may not always be as secure as those
offered by regulated insurance companies, the remedy for any such
deficiency must be requested of Congress. When ERISA preempted
state law relating to ERISA-covered employee benefit plans, it may
have created a regulatory gap, but Maryland is without authority to
fill that gap. See Greater Washington Bd. of Trade, 506 U.S. at 130-
31 (D.C. workers' compensation provision requiring the provision of
benefits in proportion to covered benefits of ERISA plan "relates to"
and is therefore preempted by ERISA); Alessi v. Raybestos-
Manhattan, Inc., 451 U.S. 504, 525 (1981) ("even indirect state action
bearing on [ERISA plans] may encroach upon the area of exclusive
federal concern"). This is not to say that Maryland may not regulate
stop-loss insurance policies. Such regulation is clearly reserved to the
states. See 15 U.S.C. § 1012(a) (The"business of insurance, and every
person engaged therein, shall be subject to the laws of the several
states"); 29 U.S.C. § 1144(b)(2) (ERISA does not preempt "any law
of any State which regulates insurance" unless it deems a plan to be
"an insurance company"). But because the Maryland regulation before
us attempts to mandate the benefits that certain self-insured plans may
offer, we affirm the judgment of the district court.

AFFIRMED

                    12
