Federal Regulation in the United States

Question 1

The Role of Federal Regulation

Answer 1

1. In McCarran-Ferguson Act, states regulate insurance
2. Prior to enactment of the ACA in 2010, federal regulation of group health insurance reflected incremental attempts by Congress to reform the health care system
   a. Congress began to mandate substantive coverage requirements

b. Federal regulation did not attempt to preempt state regulation but established a floor on which states could impose additional requirements

3. ACA reforms apply directly to health insurance issuers as well as insured and self-insured plans
4. The federal government has now stepped into the role of direct regulation of group insurers and HMOs in collaboration with the states

Question 2

Federal Regulations - ERISA

Answer 2

1. The Employee Retirement Income Security Act of 1974 (ERISA)
   a. Imposes reporting and disclosure requirements on parties sponsoring employee group welfare benefit plans

b. Applicability of ERISA
i. Misconception that ERISA applies only to self-insured plans
* Governs any employee plan by employer or employee organization that provides the following benefits
- Medical, surgical, hospital or benefits in event of sickness, accident, disability, death or unemployment
- Vacation benefits
- Apprenticeship or training programs
- Day care centers
- Scholarship funds
- Prepaid legal services
- Any benefit (other than pensions) described in Labor Management Relations Act

ii. ERISA applies whether group funded by group insurance policy, group service agreement from an HMO, or self-insured

iii. The following benefit plans are exempted from ERISA
- Government plans by federal, state or local for their employees
- Church plans by a tax-exempt church for its employees
- Plans required by state law (worker compensation, unemployment, and disability)
- HMOs must be prepared to comply with ERISA on behalf of their customers

c. Operation of ERISA-Governed Plans
i. The party establishing and maintaining employee benefit plan called plan sponsor
- Plan sponsor designates plan administrator
- Normally plan sponsor serves as plan administrator

ii. ERISA establishes standards for “fiduciaries”. Fiduciary is a party that performs any or all of the following functions
- Exercises discretionary authority respecting management of plan or its assets
- Renders investment advice for compensation, direct or indirect, with respect to moneys or property of plan
- Has discretionary authority in administration of the plan

iii. Designate one individual “named fiduciary” usually the plan sponsor or plan administrator
- Any party meeting the definition is considered a fiduciary regardless of whether the party is identified in plan documents

iv. ERISA requires that fiduciaries perform in certain ways
- Act in sole interest of the plan providing benefits to participants and defraying administrative expenses
- Act with prudence
- Diversify investments to minimize risk unless this is not prudent
- adhere to plan documents

d. Plan Documents
i. Most basic requirement throughout ERISA’s is disclosure
ii. ERISA requires a Summary Plan Description provided to plan participants
iii. Written, understandable by average plan participant, must disclose appeal process when claim is denied, and information regarding parties administering plan
iv. Need not be a single document
v. Employers treat group policy or HMOs service agreement as benefit description component of its SPD
vi. ACA added to ERISA a requirement that insurers and HMOs provide a summary of benefits and coverage to individuals
* Must be provided at time of application and re-enrollment
* Required to include:
- Uniform definition of insurance terms
- Description of the coverage
- Description of any other benefits
- Exceptions, reductions, and limits of coverage o Cost sharing provisions
- Renewability and continuation of coverage
- Examples of common benefit scenarios
- Whether the plan provides minimum essential coverage
- Statement that the plan document should be consulted to determine provisions
- Contact info for the beneficiary and an internet address

e. Preemption of State Law
i. Because insurance companies and HMOs provide funding vehicle and administration for group plans, there are conflicts between ERISA requirements applicable to plans and laws regulating insurance companies and HMOs

ii. ERISA pre-empts any state law that “relates to” employee benefit

iii. Congress recognized many plans of larger employers covered multiple states

iv. The preemption insulated these plans from inconsistent state laws

v. Preemption provision excluded from preemption “any law that regulates insurance”

vi. Known as insurance “savings” clause

vii. ERISA makes clear employee benefit plans shall not be deemed insurance companies

viii. As result of preemption provision, no state law which regulates insurance may apply directly to employee benefit plan

x. However, can apply indirectly
- Plan funded and administered by insurance company or HMO subject to state regulation

xi. Self-funded plans not subject to state insurance laws
- States prohibited from considering these plans to be insurance companies
- Incentive employers to self-insure to escape costs of mandated benefits

xii. Employers too small to self-insure sought to avoid mandated benefits by participating in MEWAs
- Erlenborn-Burton Act allows self-funded MEWAs exemption from DOL (department of labor) to avoid state insurance regulation, other than state laws that relate to reserves and contribution levels
- Those who don’t obtain DOL exemption are subject to all state laws
- State regulators more aggressive requiring self-funded MEWAs to become licensed insurance companies

xiii. In 2018, new regulations broadened the definition of “employer” in ERISA to allow multiple small employers to band together to purchase group insurance
- Treating a group or association of employers as a single employer has the benefit of allowing the creation of a single ERISA plan (a plan MEWA)
* This reduces the administrative burden on employers participating in the group or association
- The 2018 guidance changes to ERISA do not affect existing state laws or any of the factors that have made MEWAs and associations unattractive to insurers from an underwriting standpoint

xiv. Insurers and HMOs attempted to take advantage of preemption provision
- State laws imposing punitive damages for “bad faith” denials of claims preempted
- However, state external review laws and any-willing-provider laws are not preempted by ERISA

f. Claim Review Procedures
i. ERISA requires reasonable procedure to appeal denial of a claim
- Procedure deemed “reasonable” if meets minimum standards of DOL
- DOL claims procedure regulation applies to all ERISA governed plans
- HMOs and insurers must adapt claim adjudication and appeal processes to satisfy ERISA

ii. ACA expanded ERISA’s claim appeal procedures
- Procedures now apply not only to health plan, but also to health insurers providing coverage to the group health plan

• Also added additional requirements to appeals process
• An external review process
• Appeal notices must be in a culturally appropriate manner
• Diagnosis and treatment codes must be provided upon request
• Definition of adverse benefit determination includes rescissions of coverage

Question 3

Federal Regulations - COBRA

Answer 3

1. Gives right to continue group health benefits beyond date coverage would otherwise terminate
   a. Entire cost (plus additional fee of 2%) paid by COBRA continuant
2. Applies to employers with 20 or more employees
   a. Federal workers have law similar to COBRA
   b. State and municipal subject to COBRA
   c. Church plans exempt from COBRA or COBRA-type extensions
3. Maximum Time Periods
   a. Continuation up to maximum 36 months after qualifying event

i. Up to 18 months when coverage terminates due to reduction of hours or termination of employment for reasons other than gross misconduct
* Individual disabled at time of termination may have coverage extended 29 months provided
- He/she disabled for Social Security purposes
- He/she notifies plan administrator within 60 days of Social
Security’s determination of disability

ii. Up to 36 months for
- Child ceases to be a covered dependent
- Covered dependent of deceased employee
- Spouse coverage ceases due to divorce or legal separation
- Dependent when employee’s coverage ceases due to eligibility for Medicare

b. There are special rules when employer declares Title 11 bankruptcy

4. Termination of COBRA Continuance
   a. Continued coverage may cease before maximum period on earliest of the following
   i. Employer ceases to provide group plan
   ii. Qualified beneficiary becomes covered under another group plan or becomes entitled to Medicare
   iii. Beneficiary fails to pay premium on time

b. Instruction on how to elect continuation must be provided by plan administrator within 14 days of notice of qualifying event
i. Beneficiaries then have 60 days to elect continuation
ii. Measured from later of the date coverage terminates or date person receives notice of right to continue

c. Excise tax of $100 per day for each beneficiary when employer fails to comply with COBRA
i. Tax can be waived if failure due to reasonable cause
ii. If failure inadvertent start of tax period can be delayed

d. Maximum liability due to reasonable cause lesser of
i. $500,000
ii. or 10% of amount paid or incurred by employer during preceding year for employer’s group plan

5. Continuation, Conversion, and COBRA
   a. When both COBRA and state law continuation apply, person given choice of benefits to take
   b. If state period longer than COBRA and COBRA’s period exhausted, the period remaining on state continuation is still available

Question 4

Other Federal Regulations

Answer 4

1. Civil Rights Act of 1964
   a. Sex and pregnancy discrimination prohibited

b. Applies to employers
- In industry affecting (interstate) commerce
- Employ at least 15 employees

c. Under Pregnancy Discrimination Act employers treat disabilities and medical claims from pregnancy same as treated for any other disability

2. Americans with Disabilities Act (ADA)
   a. Prohibits employers of more than 15 employees from discriminating based on disability in employment

b. Regarding terms, conditions, and privileges of employment, including fringe benefit plans

c. Insurance plans underwrite, classify or administer risks based on state law
- Organization’s plan may use these practices whether or not based on state law
- However, cannot use these practices to avoid ADA

3. Medicare As Secondary Payer Laws
   a. Medicare treated as secondary payer in nearly all situations
4. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)
   a. HIPAA reforms in three general areas: insurance portability and availability, administrative simplification, and health care fraud and abuse prevention

b. “Portability” and Availability Reforms
- Coverage to groups may not impose pre-existing condition exclusion (PCE) unless certain conditions are met
- Group health plan and insurer or HMO may not establish eligibility based on health status. Requiring evidence of insurability is prohibited
- Group insurers and HMOs must continue in force coverage for all groups
i. Coverage may only be terminated for nonpayment of premiums, fraud or misrepresentation, uniform modification or withdrawal of product from the market, or discontinuance of all health coverage
ii. ACA requires guarantee issue in large group market

c. Administrative Simplification and Privacy
- Encourage electronic data interchange and uniform standards for data, security standards for individual health information;
- Standards for electronic signatures and standards for transferring COB information
- Compliance will require changes at great expense
- Objective is to reduce cost through uniform data and electronic transfers of information
- Privacy regulations address individually identifiable health information in any form, orally, electronically or in writing
i. Regulation affords a patient education about privacy safeguards, access to their records, and process for correction of records
ii. Requires patient’s permission for disclosure of personal information
iii. Regulation does not preempt state laws
iv. Group insurers and HMOs contend with multiple federal and state privacy laws

5. Newborns’ and Mothers’ Health Protection Act of 1996
   a. Requires group plans to extend coverage for hospitalization for childbirth at least 48 hours of hospitalization following normal delivery, and 96 hours following a cesarean
6. Mental Health Parity Act of 1996
   a. Does not specifically require plans to provide mental health benefits
   - When mental health is included, dollar limits must at least be equal to those for medical-surgical benefits

b. Applies to employers with over 50 employees
- Exemption from law if, after six months, an increase of 1 percent in plan costs can be demonstrated
- Proponents claim it will make coverage more available at modest cost
- Others believe it will increase claims substantially and result in plans eliminating all mental benefits

c. Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008
- Expanded consumer protections – mental health benefits must be offered with some cost sharing

7. The Family Medical Leave Act (FMLA)
   a. Unpaid leave for specified family situations applies to employers with 50 or more employees, including public agencies and schools
   - Eligible employees worked 12 months or more for employer - Employee may take up to 12 weeks during a 12-month period
8. Women’s Health and Cancer Rights Act of 1998
   a. Group health plans must cover post-mastectomy reconstructive surgery
9. Michelle’s Law
   a. Prohibits plan from terminating coverage when enrolled dependent leaves school to take a necessary leave of absence
10. Genetic Information Nondiscrimination Act (GINA) of 2008
    a. Prohibits group health plans from setting group premium or contribution amounts based on genetic information
11. Affordable Care Act (ACA)
    a. ACA applies reform provisions directly to health plans and to health insurance issuers
    b. In keeping with McCarran-Ferguson Act, ACA allows states to be the primary enforcers of the reform provisions
12. The 21st Century Cures Act
    a. Funding research, addressing the opioid epidemic, and streamlining processes at the National Institute of Health and the Food and Drug Administration.

b. Instructs federal agencies to enforce mental health parity and promote access to mental health and substance use disorder care

c. Creates a new option for small employers called a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) that allows financial accounts for employees to use in purchasing health insurance from the individual market
- This option has not been widely attractive to small employers, as prices on the individual market tend to be higher, and provider networks tend to be narrow

d. In October 2017, an executive order instructed federal agencies to produce regulations allowing large employers to use the health reimbursement account strategy for individual market purchases
- In June 2019, a final rule was issued with similar guidance applicable to QSEHRAs

13. Patients’ Right to Know Drug Prices Act of 2018
    a. Bans pharmacy “gag clauses”

b. Insurers, HMOs, health plans and pharmacy benefit managers may not restrict pharmacists from providing pricing information to enrollees

14. Transparency in Coverage Rule
    a. Rules to increase price transparency among all hospitals, group health plans and health insurance issuers in the individual and group markets

b. Self-insured health plans, insurers and HMOs to provide real-time online access to cost-sharing information for all covered health care items and services

c. Hospitals, health plans, insurers and HMOs to publicly disclose online their negotiated rates with network providers and allowed amounts paid to out-of-network providers

16. The Coronavirus Aid, Relief and Economic Security (Cares) Act
    a. CARES Act focused on funding families and hospitals

b. The CARES Act directly affected insurers, HMOs and health plans in the following ways:
- Ensured access to COVID-19 testing at no enrollee cost-sharing
- Repealed the ACA requirement that over-the-counter drugs must be prescribed to be reimbursed under HSAs, HRAs and FSAs

• • Created a telehealth cost sharing safe harbor for high deductible health plans

Question 5

Taxation of Group Insurance Benefits in the US

Answer 5

1. Employer-Sponsored Benefits
   a. Favorable tax treatment as long as detailed requirements are satisfied

b. Benefits are a form of compensation
- If they don’t meet the favorable tax status, their fair value is simply taxed as income

2. Health Coverage
   a. Most tax-favored benefit

b. Employer gets a current tax deduction for expenses

c. Value of benefits is forever free of income and employment taxes

d. No limits on value of employee’s tax favored benefits (until excise tax under ACA in 2018)

e. Favorable tax treatment applies to insured and self-insured plans
- If self-insured plan discriminates in favor of highly-compensated employees (HCEs), then plan may lose tax-favored status
- If insured plan discriminates, employer must pay excise tax

f. High deductible plans with accounts associated with coverage, and the accounts are usually tax favored
- HRAs are tax favored
- HSAs are separate from the insurance policy and receives optimal tax treatment

g. ACA Tax Implications
- Employer Mandate – employer must pay penalties for not offering coverage
* ERs with 50 or more employees must pay fee of $2,000 per employee (excluding the first 30 employees)
- Small Business Tax Credits
* ERs with 25 or fewer employees and average annual wages of less than $50,000
* Purchase coverage and get premium credit of up to 35% of employer’s contribution
- Retiree Drug Subsidy
* Groups receive partial rebate for offering Part D drug plans, but ACA removed the income tax exemption, so this is less popular option

3. Group Term Life
   a. Similar tax treatment as health
   b. Employer can deduct expenses
   c. Coverage and proceeds are free from income and employment tax
   d. Tax-free amount is limited ($50,000)
   - Premiums for coverage in excess of this amount are considered imputed income
   e. Nondiscrimination requirements exist
4. Disability
   a. To extent that value of coverage (premium) is treated as taxable compensation, proceeds paid to disableds would not be taxable
   b. Where coverage is not taxable, proceeds are taxable
   c. Some employers allow employees to make this choice of how it will be treated
   d. No distinction between STD and LTD
5. Cafeteria Plans
   a. Employees have choice of taxable and non-taxable forms of compensation

b. Without cafeteria plan, employee would be taxed at the value of the most valuable taxable option, regardless of what they choose
- With cafeteria plan, only taxed based on what they actually choose

c. Must comply with detailed requirements and nondiscrimination rules

d. Only certain non-taxable benefits may be available: health, life, dependent care and disability
- Can’t offer long-term care

e. Flexible Spending Arrangements (FSAs) are popular
- Allow employees to elect to reduce taxable compensation by a certain amount to use to pay during the year for a particular nontaxable benefit
- Exist for health, dependent care and adoption assistance
- Subject to contribution limits

6. Prefunding Benefits
   a. Popular in early 1980s, but then Congress enacted rules to limit deductions on prefunded welfare benefits
   - “Welfare benefits” – medical, severance, disability and life insurance

b. Applies to tax-exempt trusts like VEBAs (Voluntary Employees’ Beneficiary Associations) as well as other benefits that use prefunding

c. Congress generally limited employer’s deduction to expenses actually incurred during the year

d. Retiree medical benefits may be funded on a tax-deductible basis over employees’ working lifetime

e. Changes over time have decreased prefunding advantages