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Million-Dollar Babies Should Have Been Non-Issue for AOL

Image: CEO of AOL Tim Armstrong

AOL CEO Tim Armstrong, pictured above, should not have been "flummoxed" by some million-dollar babies, experts say. Bryan Bedder / Getty Images file

Tim Armstrong has had to apologize twice now for his announcement last year saying the company was changing its 401(k) retirement plan policy in part because it had some hefty health care claims, including two babies costing a million dollars each for care.

Experts say he may also have something else to apologize for — not knowing what he was talking about. No company the size of AOL should be strapped by having to pay for the medical care of two “distressed” newborns. And while it might have once been a problem for smaller employers, they say, the issue shows how the new health care law might provide some relief going forward.

“We had two AOL-ers that had distressed babies that were born that we paid a million dollars each to make sure those babies were OK in general. And those are the things that add up into our benefits cost,” Armstrong, pictured above, said last week.

The mother of one of the babies, Deanna Fei, told NBC News that her prematurely born child was one of the costly newborns and said Armstrong’s remarks made her feel like she and her family were “greedy consumers of health care benefits.”

Armstrong later personally apologized to Fei and he also reversed his controversial decision on the 401(k)s.

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Dr. Steffie Woolhandler, co-founder of Physicians for a National Health Program, says it never should have been an issue in the first place. “A company as big as AOL ought to be able to do this, so it is a little confusing why they would be so flummoxed a by a couple of million-dollar babies,” she said.

“A million-dollar baby is not that unusual,” added Woolhandler — citing the enormous costs of U.S. health care in general and of keeping a child in a neonatal intensive care unit.

And, several experts pointed out, even if AOL is self-insured and pays its employee health costs directly, any sensible company has what’s called a “stop-loss” health insurance policy that would pay out once expenses reached a certain point.

Some workers may worry that they may be targeted by their employers if they start running up health costs. But it’s unlikely for several reasons, including two laws that protect workers: the Employee Retirement Income Security Act, known widely as ERISA, and well as the Health Insurance Portability and Accountability Act, or HIPAA.

HIPAA means Armstrong almost certainly did not know the specific details of the two cases, says Jennifer Rathburn, a health care expert at Quarles and Brady, LLP, a Milwaukee law firm. “There is a separation between the health plan and the employer,” she said. Employers who are self-insured must use a third-party administrator, usually a major insurance company, to handle the details of the coverage, and these administrators can pass along only aggregated information on the costs.

“Large employers don’t get claims data on a per person basis. It is very hard to discriminate against a specific person,” agreed Paul Fronstin, a senior research associate with the Employee Benefit Research Institute.

This could be different at a small firm, where the boss very likely knows all of the workers personally. But ERISA makes it illegal to fire someone for making use of their benefits and the National Federation of Independent Business, which represents small businesses, advises directly against trying it.

Smaller employers do worry about the possibility of being driven out of business by high employee costs, says Alden Bianchi, an employee benefits expert at Boston-based law firm Mintz Levin.

“Every few months you get a call from a self-funded plan, asking about an employee with a rare condition,” Bianchi said. “The claim poses a threat to the company’s existence.” They might offer the employee a bigger paycheck on the understanding he will refuse the company-sponsored insurance and go buy some on the new Obamacare exchanges instead, Bianchi said.

“My fear here is that this will happen and the exchanges will become dumping grounds for bad risks,” Bianchi said.

The other argument is that the exchanges could be the answer for small employers. Starting in 2015, they’ll be able to send their employees there, if they want, and the Obama administration argues workers will have better choices there than the one or two policies typically offered by an employer.