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Abraham, Kenneth S.; Chiappori, Pierre-André --- "Classification risk and its regulation" [2015] ELECD 931; in Schwarcz, Daniel; Siegelman, Peter (eds), "Research Handbook on the Economics of Insurance Law" (Edward Elgar Publishing, 2015) 290

Book Title: Research Handbook on the Economics of Insurance Law

Editor(s): Schwarcz, Daniel; Siegelman, Peter

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781782547136

Section: Chapter 9

Section Title: Classification risk and its regulation

Author(s): Abraham, Kenneth S.; Chiappori, Pierre-André

Number of pages: 31

Abstract/Description:

In McGann v. H & H Music Company (McGann), a man with group health insurance provided through his employer contracted AIDS. At the expiration of the policy period, his employer changed the terms of coverage, which previously had provided lifetime coverage of $1 million, by limiting lifetime coverage of AIDS-related claims to a maximum of $5,000. McGann sued for ‘discrimination’ under the Employment Retirement Income Security Act of 1974 (ERISA, § 510). The court held that there had been no discrimination in the sense prohibited under ERISA, because the new lifetime maximum applied to all employees, not just to McGann himself. ERISA, said the court, does not regulate the actual terms of employee benefits, only the manner in which those terms are administered and applied. It seems likely that, whatever personal attitudes the employer had toward AIDS, it had understandable economic reasons for making the change. The employer probably was providing health insurance to a comparatively small group of employees. After one of them incurred the need for expensive treatment, the employer’s premiums would likely have increased steeply when the policy period (and therefore the insurance contract) expired, if the employer continued to provide the same coverage. So new, more limited coverage was negotiated in order to keep overall premiums manageable.