Qualified Health Plan Issuers

Beginning October 1, individuals will be able to shop for QHPs offered by issuers through state-based marketplaces (“Exchange”).  QHP  issuers that seek to directly enroll individuals through an Exchange will be required to meet certain minimum consumer protection requirements, including ensuring that their websites provide standardized comparative information on each available QHP offered and premium and cost-sharing information, providing summaries of benefits and coverages, identifying whether a plan is a bronze, silver, gold or platinum metal level or a catastrophic plan, disclosing the results of any enrollee satisfaction survey, notifying applicants of the availability of other QHP products through the Exchange, etc.  The issuer’s website must clearly distinguish between the QHPs for which the individual is eligible and non-QHPs that the issuer may offer and display a link to or describe how to access the Exchange website.  A QHP issuer seeking to directly enroll applicants must also enter into an agreement with the Exchange before its customer service representatives may assist individuals in the individual market with applying for an eligibility determination or redetermination, applying for financial assistance or facilitating the selection of a QHP offered by the issuer.  The premium that a QHP issuer charges an enrollee must be the same as was accepted by the Exchange in its certification of the QHP issuer.

QHP issuers will be required to accept a variety of payment formats, including but not limited to, paper checks, cashier’s checks, money orders and replenishable pre-paid debit cards in order to accommodate individuals without a bank account or credit card.

CMS anticipates providing each QHP issuer with a monthly payment and collections report that will include advance payments of the premium tax credit and advance payments of cost-sharing reductions that the Department of Health and Human Services (“HHS”) is paying to the issuer for each policy as well as any amounts owed by the issuer as adjustments from prior payments.  Issuers will have 15 days from the date of the report to confirm the accuracy of the report or describe any discrepancies.

Exchange Eligibility Standards

Individuals who are interested in obtaining health coverage with or without financial assistance (i.e., premium tax credit and cost sharing reductions) through their State Exchange must complete a Health Insurance Marketplace Application.  If an applicant does not provide sufficient information on an application for the Exchange to conduct an eligibility determination for enrollment in a QHP or for financial assistance, the Exchange will provide written notice indicating that the information necessary to complete an eligibility determination is missing, specifying the missing information and including instructions on how to provide the missing information.  CMS proposes to provide an applicant with between 15 to 90 days to provide the necessary information.

Administration of Advance Payment of Premium Tax Credit and Cost-Sharing Reductions

If a State Exchange that facilitates the collection and payment of premiums to QHP issuers discovers that it did not reduce an enrollee’s premium by the amount of an advance premium tax credit payment, it must refund the excess premium paid by the enrollee within 30 days after discovery of the failure.  The Exchange can provide a refund to the enrollee by reducing the enrollee’s portion of the premium in the following month, as long as the reduction is provided within the requisite 30-day period.  The same rules apply to a QHP issuer who collects premiums directly from an enrollee and fails to apply the advance payment of the premium tax credit to the enrollee’s portion of the premium.  In addition, a QHP issuer who fails to apply a cost-sharing reduction when the cost-sharing is collected must notify the enrollee and refund any excess cost-sharing paid by or for the enrollee within 30 days after discovery of the improper application.

Effective Date

The provisions of the proposed rule are generally effective for 2014.

In addition to the usual commentary, the preamble to the regulations include a report of the findings of a study of wellness programs sponsored by the DOL and HHS and conducted by the Rand Corp.  Seventy-three percent of respondents that offered wellness programs believed that they improved employee health and 52% believed that they reduced costs.  Larger employers were more positive in believing that wellness programs reduced costs (68% versus 51%).

Although the evidence on the effectiveness of wellness programs was, in some previous studies, found to be promising, it was not conclusive and may not be supported by the Rand survey. In a 2010 survey conducted by Buck Consultants, 40% of employers measured the impact of their wellness program, and of these, 45% reported a reduction in the growth trend of their health care costs (between two to five percentage points per year).  A recent article in the Harvard Business Review cited positive outcomes reported by employers in health care savings, reduced absenteeism and employee satisfaction.  In studies evaluating the impact of smoking cessation programs (typically education and counseling), participation decreased the smoking rate among participating smokers by 30% in the first year.  In the Rand survey, however, only approximately 50% of employers with wellness programs formally evaluated their program’s impact, and only 2% reported actual cost savings.  Further, an in-depth evaluation of an extensive wellness program involving a hospital system found that although the wellness program reduced inpatient hospitalization costs, these cost savings were cancelled out by increased outpatient costs.  A recent article in Health Affairs also found that employer savings from wellness programs may result more from cost-shifting, rather than healthier outcomes and reduced health care usage.  In another study investigating the effectiveness of a smoking cessation program, significant differences in smoking rates were found at a one-month follow-up, but showed no significant differences in quit rates at six months.  Nonetheless, employers generally seemed satisfied with their wellness programs, even those who did not know their programs’ return in investment.

Over two-thirds of Rand survey respondents use incentives to promote employee participation in wellness programs with the completion of a health risk assessment as the most commonly utilized incentive program.  In contrast, only 10% of employers with more than 50 employees use  incentives tied to health standards, only 7% link the incentives to health premiums and only 7% administer results-based incentives through their health plans. Not surprisingly, the most common form of outcome-based incentives were for smoking cessation, with almost the same percentage of employers rewarding actual smoking cessation (19%) as rewarding mere participation in a smoking cessation program (21%).  The value of incentives varied widely with the average annual value ranging between $152 and $557, or between three and eleven percent of the average cost of individual coverage.  According to the Rand survey, maximum incentives averaged less than 10% of the total cost.  In light of employers’ relatively low use of incentives in wellness programs, the Departments determined that the increase to the maximum reward for participating in a health-contingent wellness program is unlikely to have a significant impact.

Of course, the remaining question is whether the new 30% total cost threshold under the recently issued final regulations (or even the 20% threshold under the prior 2006 regulations) will pass muster with the EEOC. Although the EEOC held a public meeting last month, it sill has provided no guidance on the level of wellness program incentives which an employer may offer without causing the program to be deemed impermissibly mandatory under nondiscrimination provisions other than the HIPAA nondiscrimination provisions.

EMPLOYER MANDATE:  At the outset, let’s be clear about one fact: this does not get an employer out of play or pay.  The employer mandate rules specifically say that a plan year can only be changed for a valid business purpose and that, in this case, avoiding the shared responsibility tax is not a valid business purpose.  Renewing early is (assuming other legal niceties are satisfied) a change in plan year.  Without a business purpose, the mandate will still apply to that employer effective January 1, 2014.

Note that this restriction also applies to fiscal year plans.  A non-calendar year plan cannot now change its plan year (absent a valid business purpose) and delay the application of the play or pay penalty.  In our view, such an employer would risk losing its ability to rely on the transition relief (which is already fairly skinny to begin with) by engaging in such a practice.  Frankly, even if the employer has a valid business purpose, it is unclear whether changing the plan year would delay the application of the penalty.

INSURANCE MANDATES:  Often times, the early renewal option is “sold” as a way to delay application of the insurance mandates.  The guidance is unclear as to whether the insurance mandates can be delayed by using this tactic. Even assuming they could be, there are other issues to consider, including:

• The risk an employer takes with such an approach is getting hit with a $100/day penalty for each instance of noncompliance.  Given the number of insurance mandates becoming effective in 2014 and the fact that the penalty would apply for each employee in the employer’s workforce, the penalties could add up quickly.
• Plans and plan related documents would need to be amended to reflect the short plan year
• Plans filing Forms 5500 would need to file a Form 5500 for the short plan year that ends on the early renewal.
• While the agencies have said that they plan to take a more compliance assistance-oriented approach to enforcement, that attitude may not last if a regulator finds an employer has been playing games with its plan year.

The bottom line is that taking an early renewal of health insurance coverage is not a health care reform compliance “strategy” that should be entered into lightly.

If the employer qualifies for the first transition rule, its compliance obligations will only be delayed for certain of its employees; other employees can trigger penalties.

If the employer qualifies for the second transition rule, transition relief has the potential to apply with respect to a broader spectrum of employees.  The rules are described below.

Relief is available on an entity-by-entity basis.  In other words,  each entity in your controlled group needs to qualify independently for relief.

First Fiscal Year Rule

With respect to any employee, regardless of when hired, an employer is not subject to a penalty if

•  The employer maintained a fiscal year plan as of December 27, 2012; and

• Under the eligibility terms of the plan in effect on December 27, 2012, the employee would be eligible for coverage; and

• The employer offers that employee affordable, minimum value coverage as of the first day of its first fiscal plan year that begins in 2014;

In other words, if the employer offers affordable, minimum value coverage to that employee (who would have been eligible for the plan under its December 27, 2012 terms) that is effective no later than the first day of the 2014 fiscal plan year, the employer will not be assessed either of the two PPACA penalties under the employer mandate for the period of time before its 2014 fiscal plan year starts just because that same employee goes out and gets subsidized coverage on the Exchange.

However, penalties could still be triggered if an employee who was not eligible under the terms of the plan in effect December 27, 2012 (“outside the scope of transition relief”) gets subsidized coverage on the Exchange.

• The large penalty ($2,000 x #FT employees less 30) could be triggered by employees who are outside the scope of transition relief who get subsidized coverage on the Exchange.  It appears that the number of FT employees used to calculate this penalty would exclude those who would have been eligible for coverage under the terms of the plan in effect December 27, 2012.

• The smaller penalty ($3,000 x #FT employees who get subsidized Exchange coverage) could be assessed for each employee who is outside the scope of the transition relief and gets subsidized coverage on the Exchange

Second Fiscal Year Rule

If the employer can meet the requirements for this second fiscal year rule, transition relief has the potential to apply with respect to a broader spectrum of employees.  Under this rule, the employer will not be liable for any play or pay penalties for months before the first day of its 2014 plan year with respect to a full-time employee if ALL of the following apply:

• The employer maintained a fiscal year plan as of December 27, 2012,

• The employer did not also maintain a calendar year plan as of December 27, 2012 for which that employee would have been eligible

• The employer offers that employee affordable, minimum value coverage that is effective no later than the first day of its first fiscal year plan that begins in 2014

• At least 1/4 of its employees are covered under one of more fiscal year plans that have the same plan year as of December 27, 2012; OR the employer offered coverage under those plans to at least 1/3 of its employees during the most recent open enrollment period before December 27, 2012

• The employer may determine the percentage of its employees covered under the fiscal year plan as of the end of the most recent open enrollment period or any date between October 31, 2012 and December 27, 2012

• In calculating whether the 1/4 or 1/3 thresholds are met, it appears that the employer must consider all employees – not just full-time employees

If the employer does not maintain a calendar year plan for which that employee would be eligible, it could be excused from all penalties until the first day of the fiscal year plan year if it meets the above-stated requirements.

Note that with respect to  both transition rules,  if the employer does not offer its full-time employees affordable, minimum value coverage that is effective  as of the first day of the 2014 fiscal year (in other words, it decides to “pay” rather than “play”), it can still be subject to penalties for the months of 2014  that precede the first day of the 2014 fiscal year,  even if it meets the other criteria above.

Disclaimer/IRS Circular 230 Notice

The alert describes the requirements of the guidance, but the highlights are summarized below:

• All employers subject to the Fair Labor Standards Act are required to provide this notice, regardless of whether they provide health coverage or not.  Generally, you’re subject if (i)  you employ one or more employees who are engaged in, or produce goods for, interstate commerce or (ii) you are a hospital; a resident care institution for the sick, disabled, and aged; a school;  or a state and local government agency.  Additional details are in the alert.

• There are separate model notices for employers that offer coverage and those that do not.

• If you offer coverage, your notice must state whether the coverage provides “minimum value.”

• All employees, regardless of whether they have health coverage or are full- or part-time must receive the notice.

• Existing employees must receive the notice by October 1, 2013.

• Employees hired on or after October 1, 2013 must receive it on date of hire.

• For 2014, the DOL will consider the notice provided “on date of hire” if it is provided within 14 days of the date of hire, but as the guidance is written, this does not necessarily apply for October 1, 2013 through December 31, 2013.  Additional clarification from the DOL would be appreciated here.

• The new model COBRA notice advises employees of the availability of coverage (and possibly subsidized coverage) through the Exchange/Marketplace.

Links to relevant documents:

DOL Technical Release 2013-2

Model Exchange/Marketplace Notice for Employers Offering Coverage

Model Exchange/Marketplace Notice for Employers Not Offering Coverage

New Model COBRA Notice

Redline of New Model COBRA Notice to Prior Notice

For this purpose, the facts at issue in McCutchen are quite simple:

An ERISA plan participant suffered severe injuries in a car accident caused by a third party, and his employer, US Airways, paid nearly $67,000 toward his medical expenses through the company’s group health plan.  By its terms, the plan entitled US Airways to reimbursement of amounts paid if the participant later recovered money from the third party. After filing suit, the participant was awarded $110,000 in damages attributable to his injuries – of which the participant retained $66,000 after deducting the lawyers’ 40% contingency fee and expenses. US Airways sought reimbursement of the full amount it had paid.

When the participant refused to reimburse the plan, US Airways filed suit in the U.S. District Court for the Western District of Pennsylvania against both the participant and his attorney seeking to enforce the reimbursement provision of the plan pursuant to ERISA Section 502(a)(3) which, on its face, authorizes civil actions by fiduciaries “to obtain…appropriate equitable relief…or…to enforce…the terms of the plan.”

The district court rejected the participant’s argument that the common fund doctrine should apply to require US Airways to contribute to the costs of recovery and, instead, granted summary judgment to US Airways holding that plan terms required reimbursement from “any monies recovered.”  On appeal, the participant argued under a couple of different theories that it would be “inequitable” to reimburse US Airways in full when he had not been fully reimbursed for all his medical expenses. The Third Circuit agreed and reversed the lower court.  In its decision, the Third Circuit held “Congress purposefully limited the relief available to fiduciaries under [ERISA] Section 502(a)(3) to appropriate equitable relief.” The appellate court found that it would be inequitable for US Airways to be fully reimbursed when the participant received less than full payment for his medical expenses.

The Supreme Court granted US Airways’ petition for certiorari and ultimately reversed the Third Circuit decision.  In doing so, the high Court majority concluded that the participant could not rely on equitable defenses to trump the plan’s clear reimbursement provision. However, since the plan at issue was silent with respect to the allocation of attorneys’ fees, it was appropriate to apply the common fund doctrine The Court reinforced that US Airways could have provided in the plan that the common fund doctrine did not apply to the application of the reimbursement provision, but since it did not, “the common-fund doctrine provides the best indication of the parties’ intent.”  The majority’s analysis indicates that the well-established application of the common fund doctrine in equity cases supports the conclusion that the parties must have intended for this default rule to govern “in the absence of a contrary agreement.”

A brief dissent (authored by Justice Scalia and joined by Chief Justice Roberts and Justices Thomas and Alito) disagreed with the majority’s use of the common fund doctrine, finding that this issue was not properly before the court.  The dissenting opinion, however, agreed with the portion of the majority’s opinion concluding that equity cannot override unambiguous plan terms.

Suggested Steps for Employers

The holding of this case provides a good reminder that the reimbursement language in health plans should be dusted off and carefully reviewed.  Most notably, the issue of whether a participant’s attorneys’ fees will reduce the reimbursement obligation should be specifically addressed, with express language indicating whether the common fund doctrine or any other equity doctrine may be applied to reduce the plan’s reimbursement right.  Scrutiny should be placed on the reimbursement provision with other aspects of third party litigation in mind to ensure that the reimbursement the plan expects is what the plan ends up with.

Plaintiffs worked at the now closed automobile parts manufacturing plant in Jackson, Michigan. Under the collective bargaining agreements (“CBAs”) with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, the Company was required to establish healthcare coverage for retirees and their dependents and surviving spouses and to contribute the full premium for such coverages.  Before and after the plant closing in 2006, the Company paid all retirees’ healthcare coverage costs.  In September 2011, the Company announced plans to replace the retiree medical plan with individual health reimbursement accounts funded by the Company and to be used by retirees to purchase of individual healthcare policies.   On January 1, 2012, the Company discontinued healthcare coverage for retirees age 65 and older and made a one-time contribution of $15,000 for each retiree and spouse for 2012 and provided for an additional $4,800 credit for 2013.  Any future contributions would be at the discretion of the Company.  Retirees filed suit alleging that the Company’s unilateral modification of their health benefits constituted a breach of the terms of the CBAs in violation of ERISA.

Citing a line of cases addressing the vesting of retiree benefits, including Int’l Union v. Yard Man, 716 F.2d 1476 (6^th Cir. 1983), the court held that the CBAs’ promised “continuance” of the healthcare coverages employees had “at the time of retirement” and that such coverages “shall be continued thereafter” for retirees, their spouses and eligible dependents and that any changes could be made “by mutual agreement between the Company and the Union” was unambiguous language demonstrating the plaintiffs’ right to vested lifetime retirement healthcare coverage.  In granting summary judgment for in favor of the plaintiffs, the court noted that it had previously held that identical CBA terms unambiguously promise vested, lifetime retiree healthcare benefits.  The court further noted that an arbitrator recently considering virtually identical CBA terms found that those Kelsey-Hayes’ retirees had vested rights to medical plan coverages for their lifetime.

Based on the pre-release of guidance that is expected to be published today (May 3), wellness plan surcharges must be included in the premium for purposes of the affordability calculation.  Two exceptions are provided for arrangements that satisfy the wellness plan rules:  (1) surcharges based on tobacco use; and (2) for any plan year beginning prior to January 1, 2015, surcharges for any wellness arrangement, but only to the extent the terms of the wellness arrangement were in effect on May 3, 2013.  Under this guidance, the premium that applies to non-tobacco users is used to test affordability for all employees regardless of tobacco use; however, any other wellness surcharge (except those described above in the transitional relief provision) must be included in the employee’s share of the premium when calculating affordability.