Here's Why Tim Armstrong Knew About His Employees' 'Distressed Babies'

Last week, AOL CEO Tim Armstrong's chose to tell a company-wide conference call that two AOL employees had "distressed babies" requiring health care expenditures of around $1 million each - which was one of the reasons he had to make 401(k) benefits less generous.

Here's one aspect of the AOL story we thought people might want a clearer explanation of: Why did Armstrong know so much about his employees' health care usage in the first place? Weren't those high costs a matter between AOL's employees and AOL's health insurer?

In fact, like most large companies, AOL is its own health insurer.

A source close to AOL senior management confirmed to Business Insider that the company self-insures for health coverage. Employees carry cards with the name of an outside insurer on them (Cigna, in AOL's case) but that company is just acting as an administrator; it sends a bill to AOL for whatever claims get paid out.

Since AOL is paying the bills, it needs to know something about what kind of medical care its employees are getting. This information informs the company's decisions about changes to the health plan in future years; depending on what functions it's contracting out, it may also need to make decisions about what claims to pay and appeal.

In general, reports about high-cost claimants that get up to the CEO level should have identifying employee information stripped out. "You're not going to know who the employees are," said Paul Fronstin of the Employee Benefits Research Institute.

That is, whatever report Armstrong saw that described the medical costs related to these two births, it likely wouldn't have named Huffington Post editor Peter Goodman as the employee making the claims. (Goodman's wife, Deanna Fei, wrote a piece for Slate over the weekend responding to Armstrong's singling out of her baby, who was born four months premature but has since recovered well.)

Except, in some cases, a high-cost employee's identity might be pretty easy to figure out. Managers could deduce the employee's identity through workplace gossip or claims for related benefits, like short-term disability and family leave.

"Even at large companies this kind of anecdotal evidence can get connected to claims reports - gossip travels fast," Kyle Healy, Vice President at benefits consulting firm Lenox Advisers, told Business Insider in an email. But, Healy added, legal protections exist to protect employees from being punished for incurring high costs.

While it may be uncomfortable to think about your employer knowing about the details of your medical needs, it's important to note AOL and other firms can't just react to an employee's high costs by cutting off payment. Benefits consultants contacted by Business Insider were consistent in saying that health benefits are contractual - each year, the company agrees to a set of health plan terms, and if claims meet plan criteria, the company has to pay them.

"There is really no wiggle room here at all," said Cheryl Swirnow, co-founder of Sherpaa, which advises firms on health benefits.

"They would not have discretion over claims as they are occurring or have the power to reach out to an administrator and have that administrator stop benefits or limit benefits on an individual basis with no medical justification," said Healy.

Firms like AOL can use these cost reports to inform changes to future years' health benefits, in an effort to prevent similarly high costs from arising again. But because the Affordable Care Act prohibits annual or lifetime benefit limits, employers are limited in their ability to cut off claimants for simply being too expensive. (And even before the ACA, it was "highly unusual" for large employers like AOL to impose such limits, said Fronstin.)

Firms might react by imposing other cost-control measures, such as excluding high-cost medical providers from their networks or raising out-of-pocket cost sharing, but the savings from such measures would come from reduced costs for claimants broadly, not just from those with extraordinarily high costs.

The necessity of continuing to pay for high-cost health events - as Fei pointed out in Slate, a key purpose of health insurance is to cover unpredictably high medical expenses like hers and her child's - may be why Armstrong thought it made sense to say AOL was cutting its 401(k) benefit because of the need to care for premature babies.

The Health Insurance Portability and Accountability Act of 1996 prohibits employers from disclosing certain personally-identifying health information about their employees. "Since he didn't use the women's names, and presumably there were many pregnancies at AOL last year, it would be tough to say he violated HIPAA," said Swirnow.

Still, Swirnow adds that it was an ethical violation, even if it wasn't a legal one. Hopefully, the negative press Armstrong has drawn to AOL will remind self-insuring employers about the importance of safeguarding employees' private health information, given that they have it.