In this episode, part of our Partners in Empowerment series, we interview Doctor Jeff Gold of Gold Direct Care (golddirectcare.com). Join us as we ask the questions you want answered regarding this innovative and interesting approach to “real” medical care.
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Trump Tax Bill Signals the Swan Song for Obamacare’s Individual Mandate
By: Sean Donnelly, Esq.
The “tax” bill that Congress passed in late December was somewhat of a wolf in sheep’s clothing from a health care perspective. It certainly overhauled the tax code and instituted tax cuts for corporations and many American taxpayers, but it also doubled as a thinly-veiled health care bill through its repealing of Obamacare’s individual mandate. Authors of the tax bill postulated that such a repeal could save the federal government more than $330 billion over the next decade as fewer Americans will end up receiving subsidies or Medicaid, savings that could then be used to finance the bill’s tax cuts and lower tax rates.1 The tax bill was not the complete eradication of Obamacare that the Trump administration had set its sights on during the first year of Trump’s presidency, but the dismantling of the individual mandate marks the first removal of a key pillar in the Obamacare foundation.
The individual mandate, one of the linchpins of the Affordable Care Act, required Americans who did not otherwise qualify for an exception to obtain minimum essential health coverage. Those Americans who did not have minimum essential health coverage for any month during the year were required to pay a penalty during tax season. This mandate was essential to pressure younger and healthier Americans to purchase insurance coverage, thereby bringing balance to the risk pools and stabilizing the health insurance marketplace.
The concept of the individual mandate was actually spawned by conservative policymakers who posited that health coverage should be mandatory in order to produce a sustainable insurance pool with the right balance of healthy and sick individuals to properly spread the risk. The underlying theory was that by compelling healthier Americans to enter the marketplace and obtain coverage, premiums would begin to decrease across-the-board as the influx of healthier participants would help to absorb the costs of those less healthy and more expensive participants. In 2006, Mitt Romney, Massachusetts’ Republican governor, was able to convince the largely Democratic state to adopt an individual mandate as part of its health care overhaul. The relative success of the mandate’s Massachusetts audition eventually paved the way for then-President Obama to include an individual mandate as a vital component of the 2010 Affordable Care Act. Even as the Trump tax bill begins to take effect this year, the individual mandate will still remain in effect in 2018. The repeal of the individual mandate won’t actually take effect until 2019. Accordingly, the mandate’s penalties will continue to be levied in 2018 unless the Trump administration otherwise attempts to have them waived.
A Short and Bumpy Ride
The individual mandate faced intense partisan scrutiny both before and after the passage of the Affordable Care Act. Republicans viewed the mandate as an unconstitutional scheme to coerce Americans to participate in a commercial activity, an act that they argued amounted to an impermissible overreach of Congress’ powers to regulate commerce. Following the enactment of the Affordable Care Act, a total of twenty-seven states challenged the law’s constitutionality in federal court.2 In the seminal case of National Federation of Independent Business v. Sebelius,3 the Supreme Court agreed with the Republican position and held that the individual mandate was outside of the scope of Congress’ authority to regulate commerce because the Constitution’s Commerce Clause does not afford Congress the power to force people to engage in commerce. However, the individual mandate ultimately managed to withstand judicial scrutiny as the Supreme Court held in its 5-4 decision that the mandate penalty amounted to a permissible tax that Congress could lawfully levy under its taxing and spending power.
Even though the mandate survived its main Constitutional challenge, it nonetheless sustained a shellacking in the court of public opinion. A tracking poll conducted by Kaiser Health4 just a week after the presidential election in November 2016 found that sixty-three percent of Americans viewed the individual mandate as “very unfavorable” or “somewhat unfavorable.” Comparably, only thirty-five percent of Americans viewed the mandate as “very favorable” or “somewhat favorable.” A whopping sixty-one percent of Republicans polled perceived the individual mandate as “very unfavorable.”
The Heritage Foundation, the conservative think tank that many credit as the originator of the concept of the individual mandate, renounced any affiliation with Obamacare’s iteration of the mandate and opposed it as an unconstitutional anachronism no longer considered necessary to achieve universal coverage.5 Notable among those who continued to champion the repeal of Obamacare and its individual mandate in the wake of the Sebelius decision was Mitt Romney, the very same architect behind the individual mandate’s debut in Massachusetts. The mandate was branded by its challengers as an un-American and officious overreach of government authority, a pariah in the land of free people, free markets, and free choice.
Broad Implications of the Repeal
Despite President Trump’s pronouncement that the tax bill “essentially repealed Obamacare,” the Affordable Care Act will continue to be the law of the land. Left untouched in the wake of the tax bill are the federal income-based subsidies intended to assist American consumers with purchasing individual policies, the expansion of Medicaid for low-income adults, the prohibition against denying coverage to consumers with pre-existing health conditions, and the edict that insurers must cover those health benefits deemed “essential” by the Department of Health and Human Services. Also surviving is the employer mandate, which requires certain employers to provide affordable health care coverage to their employees or else face a penalty. However, the repeal of the individual mandate will undoubtedly trigger some significant shifts in the health care landscape.
The majority of Americans won’t be personally impacted, since most people already obtain health insurance either through their employer or through a public program such as Medicare, and thus were never really at risk of being subjected to the individual mandate penalty. Nevertheless, for those Americans who do not receive health insurance from an employer or public program and who instead purchase coverage from an Obamacare health exchange, such individuals are now free to forego their coverage entirely without fear of having to pay a penalty. Those who are completely healthy and those who are financially well-off may now decide to ditch their health coverage as being needless or expendable. Comparably, even those who are sick or less financially stable may ultimately decide not to carry health insurance without the looming threat of the penalty to force them into action.
Consequently, the Congressional Budget Office (CBO) is estimating that the individual mandate repeal will result in thirteen million fewer Americans being insured within the next decade. The CBO is also forecasting that the premiums for coverage obtained on the health exchanges will rise approximately ten percent per year over the next decade due to healthy participants scattering from the markets without fear of the penalty and leaving the sicker participants behind to overburden the risk pools. Some health policy experts are expecting that the removal of the individual mandate will simultaneously give rise to increased premiums and decreased coverage rates, ultimately leading to a market collapse.7 In order to head off this potential outcome, lawmakers in states such as California are already looking to push legislation that would adopt versions of the individual mandate as state law, à la Massachusetts.
Overtones for Employer-Sponsored Plans
As a result of the repeal of the individual mandate, the CBO is projecting that fewer employees will be joining their employer’s self-funded plans with the mandate’s penalty no longer in play. Specifically, the CBO anticipates that the removal of the individual mandate will result in three million fewer Americans having coverage through their employer over the next decade.8 Accordingly, employers may begin to experience a decline in health plan enrollees.
As noted earlier, however, the Affordable Care Act’s employer mandate will remain after the enactment of the Trump tax bill. Employers subject to the mandate, those with fifty or more “full-time equivalent employees,” face penalties if they fail to offer minimum essential coverage that provides minimum value and at least one full-time employee receives a premium tax credit for purchasing individual coverage on the health insurance marketplace. Timothy Jost, a law professor at the Washington and Lee University School of Law, deduced that if fewer Americans end up seeking coverage through the health care exchange, then it follows that some employers may be able to avoid paying the employer mandate penalties that are only levied if at least one full-time employee receives a premium tax credit through the exchange. In this way, the individual mandate repeal is somewhat of a double-edged sword; fewer employees may end up enrolling in employer-sponsored plans, but fewer may also look to purchase coverage on the exchange, thereby reducing the risk to their employers who would otherwise be exposed to the strict penalties imposed by the employer mandate. Still, Jost surmises that as over 150 million Americans already have health coverage through their employers, the “effects of the individual mandate repeal on the employer-sponsored market will be marginal.”9
The repercussions of the repeal will certainly be felt hardest in the individual market, but employer-sponsored plans will likely experience some fallout as healthier, lower-risk employees begin to question if it might make more financial sense to withdraw from their plans entirely. As these healthier, less expensive employees begin to disenroll, the all-important balance each plan seeks to achieve will be disrupted as the scales start to tilt back towards the sicker, higher-risk and more expensive employees. A resulting risk pool made up of a disproportionate number of the costliest employees is the kiss of death for an employer-sponsored plan. As employees are no longer “mandated” to enroll in the plans offered by their employers, self-funded plans will need to devise more alluring and increasingly innovative methods to retain their healthiest participants. With the individual mandate repealed, the driving force of the mandate’s penalty can no longer be relied upon to funnel low-risk lives towards enrollment. Employer-sponsored plans will need to fill this void by offering more comprehensive benefits, designing more creative incentive programs, and prioritizing enrollee engagement in order to secure these vital, low-cost lives.
1See Congressional Budget Office, Repealing the Individual Health Insurance Mandate: An Updated Estimate (November 2017), https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53300-individualmandate.pdf.
2Park, Katie & Rolfe, Rebecca (2013, September 23). How states approached health-care reform. The Washington Post. Retrieved from http://www.washingtonpost.com/wp-srv/special/politics/state-healthcare-progress/.
3See 567 U.S. 519 (2012).
4Kirzinger, Ashley, Sugarman, Elise & Brodie, Mollyann (2016, December 01). Kaiser Health Tracking Poll: November 2016. The Henry J. Kaiser Family Foundation. Retrieved from https://www.kff.org/health-costs/poll-finding/kaiser-health-tracking-poll-november-2016/.
5Butler, Stuart M., Ph.D. (2012, February 06). Don’t Blame Heritage for ObamaCare Mandate. The Heritage Foundation. Retrieved from https://www.heritage.org/health-care-reform/commentary/dont-blame-heritage-obamacare-mandate.
6See Congressional Budget Office, Repealing the Individual Health Insurance Mandate: An Updated Estimate (November 2017), https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53300-individualmandate.pdf.
7Sanger-Katz, Margot (2017, December 21). Requiem for the Individual Mandate. The New York Times. Retrieved from https://www.nytimes.com/2017/12/21/upshot/individual-health-insurance-mandate-end-impact.html.
8See Congressional Budget Office, Repealing the Individual Health Insurance Mandate: An Updated Estimate (November 2017), https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53300-individualmandate.pdf.
9Jost, Timothy (2017, December 20). The Tax Bill And The Individual Mandate: What Happened, And What Does It Mean? Health Affairs. Retrieved from https://www.healthaffairs.org/do/10.1377/hblog20171220.323429/full/.
iBennett, Brian (2017, December 20). ‘We have essentially repealed Obamacare,’ Trump says after tax bill passes. Los Angeles Times. Retrieved from http://www.latimes.com/politics/washington/la-na-pol-essential-washington-updates-trump-sees-an-end-to-obamacare-in-the-1513794883-htmlstory.html.
The Best of Times and the Worst of Times … How Imperfect Regulatory Action May Still Create Opportunities for Self-Funding
By: Jen McCormick, Esq.
Regulators have been busy over the course of the past few months. Between the issuance of executive orders, a tax bill, and state regulatory action, employers are scrambling to understand the implications. And while regulatory action has been quick, it has not necessarily been thorough, creating possibilities and opportunities for self-funded health plans.
Upon review of the various regulations, it seems new incentives for the creation of self-funded employer plans now exist. Employers may investigate taking advantage of this environment to form, create, or modify their self-funded benefit plans. Let’s examine certain recent regulatory developments.
Executive Order 13813
On October 12, 2017 President Trump issued Executive Order 13813 to save “the American people from the nightmare of Obamacare.” While this executive order did not modify any laws or regulations, it did direct the Department of Labor (DOL), the Department of Health and Human Services (HHS), and the Department of the Treasury to issue proposed regulations concerning expanded coverage under health reimbursement arrangements (HRAs) and association health plans (AHPs).
HRAs are tax advantaged arrangements subject to the Affordable Care Act (ACA) regulations. As a result, an HRA may not impose annual dollar limits on benefits unless it is integrated with a group health plan. An exception exists, however, for small employers. Pursuant to a provision within the 21st Century Cures Act, certain small employers may offer a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). This provision allows small businesses (i.e. employers with under 50 employees) to reimburse employees for out of pocket costs and premiums on the individual market. The regulations, however, impose tight restrictions on the employers’ ability to offer a QSEHRA.
Based on the current regulations and guidance for QSEHRAs issued by the Internal Revenue Service (IRS) in Notice 2017-67, an employer offering any group health plan is ineligible. As a result, even employers who only offered group dental coverage, for example, would be disqualified. The IRS did request comments on this guidance (due January 19, 2018).
The anticipated comments on Notice 2017-67, combined with the executive order directing the agencies to propose regulations expanding opportunities for employers to offer an HRA, may loosen current restrictions and expand the employer eligibility requirements. Guidance is still pending, but the proposed regulations could present options for self-funding which do not currently exist.
Proposed DOL Regulations
In addition to the expansion of HRAs, the executive order directed regulators to increase access to health care by allowing a broader pool of employers to create AHPs. In early January 2018, responding to the executive order, the DOL issued proposed regulations to extend the circumstances under which an association may function as an employer under the Employee Retirement Income Security Act (ERISA).
Currently, coverage provided via an AHP is regulated pursuant to the same standards applicable to the individual and small employer health insurance market. Under ERISA, an AHP’s reach is currently limited to circumstances where it is an employer sponsored plan. Specifically, association members must share a common interest, connect for reasons other than providing health insurance, exercise sufficient control over the health plan, and have at least one non-business owner employee.
The proposed rules may be game-changing for working owners (i.e. sole proprietors and self-employed individuals), allowing them to function as both the employer – for purposes of joining the association – and as the employee – for purposes of being covered by the plan. This unique dual status could allow working owners to participate in association health plans, and the adjustment could allow a new class of individuals (and potentially attract a large and previously ineligible pool of individuals) to self-funding.
Additionally, the proposed regulations contemplate the formation of an association for the purpose of offering health insurance. The rule does not impose prohibitions on forming new associations (or specify size limitations), but it does provide formal organizational requirements for associations. These newly formed associations would need affordable health insurance options, and may want to explore the benefits of self-funding. This could also create a new pool of entities for self-funding.
Tax Cuts and Jobs Act
In December 2017, the Tax Cuts and Jobs Act (Act) was signed into law, reforming both individual and corporate income tax issues in the most sweeping and drastic changes to the Tax Code since 1986.
While the Act maintains 7 tax brackets for individuals, it reduces the rates and increases the thresholds on the brackets for individuals. Potentially even more significantly, the Act reduces the individual mandate penalty to $0 (as of January 1, 2019). While the elimination of the individual tax penalty will likely have a significant negative impact on employers, and their employer sponsored health plans, the greater fear is that if individuals are no longer required to have coverage, the healthy, low risk individuals will terminate coverage altogether (whether individual or employer based). Without healthy lives the risk pools will suffer.
While the Act affects the individual mandate, it does not alter current employer mandate requirements; employers are still required to offer affordable coverage meeting minimum value requirements, or face an excise tax. This is troubling for employers. If, with the reduction of the individual mandate penalty to $0 employees are effectively no longer required to maintain coverage, employers anticipate covering a less balanced risk pool, making (still) mandated employer coverage more expensive.
While the individual and employer mandate were intended to work together to increase access to care and balance risk, the elimination of the individual mandate does not fully undermines the continued value of offering employer sponsored coverage as an employee benefit. Employers still recognize the culture and corporate benefits that attract and retain a talented work force, like employee health plans. Many employees (even healthy ones) value the benefit of comprehensive healthcare and the elimination of the individual mandate will not deter them from continuing coverage under an employer plan, or seeking an employer that provides one.
This does mean, however, that employers will need to be creative and flexible to counterbalance the potential new costs. One way to offset costs would be to create a tailored plan, designed specifically for the individuals that value healthcare as an employee benefit, and the best way to offer flexibility is via a self-funded plan. This might be an opportunity to attract more employers who are concerned about rising costs and investigating new solutions. Only with self-funding can an employer implement a targeted health plan that is loaded with unique benefits and creative cost-containment methodologies.
The Act also creates tax savings for businesses by slashing the corporate income tax rate from 35% to 21%, and creating a 20% deduction for qualified business income (QBI). While the specifics of the business tax changes are beyond the scope of this discussion, and the determination of QBI is not a straightforward analysis, the takeaway is that these tax benefits should (in theory) generate opportunities for employers to save on their tax bill. With the savings, employers invest in more creative employee benefits, like self-funded healthcare plans.
Despite the complexity of the Act and the continued uncertainty of some of its implications, the potential opportunities for self-funding should not be overlooked. Employers should discuss the impact of the Act on their individual situation with their tax advisors to better understand planning opportunities.
In response to the Act’s repeal of the individual mandate, certain states are taking action. For example, a Maryland proposal would require individuals to have insurance or pay a penalty of 2.5% of their income or $696 (whichever is greater). The imposition of insurance mandates at the state level would encourage participation in employer plans, making employer sponsored coverage an attractive option and broadening the risk pool. If states like Maryland join Massachusetts in mandating coverage it could positively impact self-funding. More individuals would be looking for cost effective health plan options, something that an employer with a self-funded plan would be able to provide.
While recent regulatory developments have been swift, leaving anxiety over their interplay and interaction, employers should look for opportunities to embrace change as it relates to benefits they must offer (i.e. employers are still subject to the employer mandate), and those that could be advantageous or strategic to offer.
With new challenges come new opportunities for HRAs, AHPs, and employers under the executive orders, proposed DOL regulations, tax reform, and state level developments. Self-funding, with unmatched flexibility for employers of all sizes, could be a cornerstone of the solution to reduce costs in the provision of healthcare.
Buyer Beware – No Good Deed Goes Unpunished
By: Ron E. Peck, Esq.
Employers and their advisors may soon find themselves accused of breaching their fiduciary duty if they continue to allow their benefit plans to pay inflated rates for medical services, without any justification for the excessive prices. Blindly paying fees that are not revealed until after the service is provided, to practitioners who cannot explain why their rates are many times more than comparable providers of equal or greater skill, is not a prudent use of plan assets and does violate one of the core tenets of the Employee Retirement Income Security Act of 1974 (“ERISA”) and fiduciary law.
Employers who choose to provide quality health insurance for their employees are generally performing an act of generosity. Certainly studies show that employers who offer health benefits recruit and retain the best employees, but not all benefit plans are equal - and those employers who choose to offer more than the mandated minimum coverage are indeed combining generosity with good business sense.
As mentioned, however, not all benefit plans are the same. For many, purchasing what we label as “fully funded” or “fully insured” traditional insurance, is enough. For these consumers, risk aversion is king, and they will pay a premium (more likely than not more costly than their employees’ health expenditures) to an insurance carrier. In exchange for that premium, said carrier will take on the risk associated with paying the employees’ medical bills. Is there a chance some catastrophic claim, injury, or illness will cause the total medical expense to exceed the collective value of the premium? Sure. Is it likely? No. Insurance carriers are in the business of assessing risk, and calculating premium that will earn profit.
For other employers less concerned with risk, the decision to keep the profit that would otherwise be paid to the carrier, and fund only the actual medical expenses, leads them to engage in the act of self-funding or self-insuring. It is to those employers that I now direct my commentary.
Studies have shown time and again that employers who self-fund their benefit plan are more likely to save money over five years of doing so, when compared to a comparable fully insured policy. This is due in part to customizing the plan to address only that population’s needs, adjusting benefits as the data requires, quickly implementing cost containment programs, shopping around for the best vendors, stop loss, and other elements of the plan, and otherwise ensuring that a customized approach trims the fat and applies each plan dollar where it will do the most good. So, you ask, if self-funding is such a panacea, why doesn’t everyone do it?
The answer is multifaceted. First of all, if you plan to provide benefits to a population with high medical expenses, you may benefit from fully insuring and working with the carrier to spread the risk over their entire risk pool. A self-funded employer takes on the entire plan’s expense, with few exceptions. Next, some employers prefer to pay “more” when that amount is something they can afford, to avoid the risk of paying “MORE” when that amount is something they cannot afford (even if the likelihood of such a massive claim is slim).
Another consideration employers seeking to self-fund must consider (but few sadly do) is the matter of fiduciary authority. Indeed, ERISA dictates, among other things, that an employer who self-funds a benefit plan either acts as or appoints a plan administrator. That administrator is a fiduciary of the plan and its members, with a very serious legal obligation to perform numerous tasks – all with the plan’s best interest in mind. Make one wrong move, and you’ll not only have to fix the damage you cause, but potentially be liable for up to treble-damages.
It is true that a self-funded plan administrator can transfer some or all of their fiduciary duties – meaning they share the burden – but most agree that at best the plan administrator is still responsible to monitor that assignee’s actions, and at worst, they maintain the burden as well.
As a result, employers who self-fund are not only at risk for the medical bills they will pay on their employees’ behalves, but are also at risk of being deemed to have “breached” their fiduciary duty if and when they make a mistake resulting in expenditures not in the best interest of the plan, and take action not in accordance with the terms of the plan document.
This may not sound like a big deal to you. You may be saying, “Ron! I ain’t afraid of no breach!” Indeed; it would be great if all we had to do was follow the terms of the plan document like the instructions that come with your kid’s new toy. Yet, like those instructions, saying is easier than doing; (where did I put that screw driver)? This is particularly true in today’s self-funded industry. Why? Because things are so good! Because today is a great time to be self-funded. What??? At this point you should be thoroughly confused. I did just say that today is the riskiest time to be a plan fiduciary because it is the best time to be a plan fiduciary. Let me explain.
More so now than ever before, innovators are developing new services, products, and methodologies to maximize benefits while minimizing costs. They are taking advantage of the self-funded plan structure, using our ability to customize, and targeting the high cost claims while increasing coverage elsewhere. Everything is being examined and new approaches are being applied to old issues and new. From medical tourism, to carve outs. From technologically advanced subrogation tactics to reference based pricing network alternatives. These are just a few examples of new and amazing ideas helping self-funded plans to evolve. Unfortunately, just like Kevin McCallister (Macaulay Culkin) who, in that 1990 classic film, is left “Home Alone” when the rest of his family rushes out the door to embark on an exciting adventure… so too are plan administrators and their supporting cast rushing into fun and exciting adventures without making sure their plan document is along for the ride.
Too often, these self-funded benefit plans – which are controlled by the terms of their plan document – implement a new, shiny service, product, or process and forget to update their plan document to match. The plan document is how the plan administrator communicates to the plan members (current and prospective), providers, department of labor, etc., what the plan does and doesn’t do – and sets forth the terms by which people decide whether to enroll and contribute their hard earned money in exchange for membership. If the plan in practice doesn’t match the plan in writing, that is bad news.
Many self-funded employers believe that by hiring brokers, third party administrators, and advisors, they can somehow protect themselves from this fiduciary threat. Yet, case after case has shown that – even though the broker, TPA, and the rest may ALSO be a fiduciary – the employer / plan administrator is still going to come along for the ride.
The case that has “set me off” and gotten me to head down this mental-path is the case of Acosta v. Macy's, Inc., S.D. Ohio, No. 1:17-cv-00541; (August 29, 2017). In that case, among other things, we see a benefit plan sponsor and their TPA attempting to contain costs by applying a reference based pricing methodology to their claims. This is great, and I applaud their efforts. Unfortunately, however, it appears that they may not have adjusted the applicable plan document to adequately reflect this new approach. While I’m sure this employer is thinking, “I thought the TPA does this for me?” Regardless of the truth of the matter, the employer – as a fiduciary – will be dragged into the complaint. This will – at best – harm the relationship between the plan and TPA, but – at worst – it will cause the plan to leave the TPA and possibly self-funding altogether.
This is why I feel that TPAs, and all of us in the business of servicing self-funded employers, need to protect employers even when we’re not obligated to do so. I fear, as in this case, that even if a self-funded employer “gets burnt” by something that is in no way, shape, or form our “fault” or “responsibility,” it’s still a black eye for the industry as a whole.
This takes me, then, to my next concern. For some time now, (since the last major economic downturn), we’ve been hearing via mass media all about situations where employees are suing employers, and their brokers, over mismanagement of 401(K) and pension plans. Indeed, these advisors are in many instances fiduciaries of these employee investors, and – in most of these cases – the employees are accusing their “fiduciaries” of wasting the plan’s (aka their) money on less-than-advisable investments. Consider, for instance, the case of Lorenz v. Safeway, Inc., 241 F. Supp. 3d 1005, 1011 (N.D. Cal. 2017). In this class action suit, the Plaintiff (Dennis M. Lorenz) asserted claims under ERISA against the “Safeway 401(K) Plan's” fiduciaries. Lorenz alleged, amongst other things, that the Defendants breached their fiduciary duty by selecting and investing the plan’s assets with funds that charged higher fees than comparable, readily-available funds, and which had no meaningful record of performance so as to indicate that higher performance would offset this difference in fees. Why does this scare me? I am scared because we could just as easily take this lawsuit (and the many like it) and replace the players with members of our own industry. Health benefit plans routinely spend plan assets to pay medical bills and compensate providers that may be more costly “than comparable, readily-available [providers], and which had no meaningful record of performance so as to indicate that higher performance would offset this difference in fees.” Ouch! If I am a member of a self-funded health plan, and my administrator is taking my money, and using it to pay for a $3,000 colonoscopy, when a facility down the road would do it for $750… and the more expensive facility has an “as good” or “worse” record when it comes to quality and outcomes… wouldn’t I say: “Hey! It looks like that fiduciary isn’t prudently managing my assets.” I truly believe that, for anyone that is a fiduciary of these plans, the day participants turn on us may not be a matter of “if,” but rather, “when.”
Consider also the recently filed, McCorvey v. Nordstrom, Inc. filed in the California Central District Court on November 6, 2017. In this case, a former participant in the Nordstrom Inc. 401(K) Plan sued plan executives alleging breaches of fiduciary duties in the management of the plan, and is seeking class action status for their claim. The basis of the claim, similar to the Safeway case discussed above, challenges the reasonableness of fees paid with plan assets, and further, that the plan fiduciaries failed to take advantage of cost-cutting alternatives. The lawsuit literally contends that the defendant failed to adequately and prudently manage the plan, by allowing plan funds to be used in the payment of unreasonable fees and not acting prudently to lower costs.
It doesn’t take a rocket scientist to see the parallels between these lawsuits, and out of control spending by health plans. Whether you are someone offering better care for less cost, or someone who can revise the plan’s methodologies to maximize benefits while minimizing costs, these trends in fiduciary exposure should galvanize us all to either offer help, or seek it, when it comes to prudent use of plan assets.
“But Ron,” you say, “even if we (or the TPA and broker) are fiduciaries of the plan, the decision to contract with over-priced facilities, agree to their fees, and pay these claims, is ultimately a decision made by the plan sponsor (employer) – right? So, while your previous comments about self-funded employers leaving the market when they realize they’ve been taken for a ride may be true, we are at least safe from liability for fiduciary breach. Right?” Maybe not. Consider Longo v. Trojan Horse Ltd., 208 F. Supp. 3d 700, 712 (E.D.N.C. 2016). In this case, the plaintiff employees of Trojan Horse and Glen Burnie Hauling filed a putative class action against defendant Ascensus Trust. In this case, the Defendant was collecting contributions, submitting them for investment, and keeping a fee for themselves. There is some dispute regarding what happened to the investments, but ultimately it appears the funds weren’t properly invested. The Defendant argued that they did their job, and the issues about which the complaint was filed was outside their immediate control. Yet, the court held that Defendant had a fiduciary duty in regard to the contributions, and that they failed to take affirmative steps to investigate. In other words, pursuant to 29 U.S.C. § 1132(a)(2), fiduciaries are responsible to ensure the plan’s welfare is priority number one, even when the actions in question may be taken by another entity or fiduciary. So… following that line of logic… if a TPA, broker, or other advisor is a fiduciary of the plan, and we are aware (or should reasonably be aware) of actions being taken by another fiduciary, that are detrimental to the plan … or options that available to the plan to contain costs, but we knowingly allow another fiduciary to ignore them… we may be on the hook too!
So – in summary – I believe it is proper and necessary for any and all fiduciaries of these self-funded plans to step back, look for wasteful or imprudent behavior – both by the fiduciary itself, and other fiduciaries of the plan – and determine whether there is any action, option, or alternative that would constitute a more prudent use of plan assets. Likewise, those who seek to help these fiduciaries and the plan reduce their expenditures without harming the plan need to raise their voices and warn their prospective clients of the cost of not working with them. In other words, fiduciaries need to stop clinging to the status quo, and the onus is on all of us to help them do so.
By: Erin Hussey, Esq.The IRS has recently been enforcing the Employer Shared Responsibility Mandate (“employer mandate”) by sending letters to employers implicating that they may have violated the employer mandate rules and may owe a substantial penalty called an Employer Shared Responsibility Payment (“ESRP”). This employer mandate was put in place by the Affordable Care Act (“ACA”). The ACA requires Applicable Large Employers (“ALEs”) who have 50 or more employees to (1) provide minimum essential health coverage to all full-time employees and their dependents (or the employer will face a subsection (a) penalty); or (2) offer eligible employer-sponsored coverage that is “affordable” and meets “minimum value” (or the employer will face a subsection (b) penalty). Employers who receive these letters may have to pay the ESRP, but have a chance to respond to the letter before the penalty is mandated.A client was presented with one of these letters from an employer. The employer was facing over $50,000 dollars in penalties if they did not respond to the letter properly and explain why they were/were not at fault. The IRS has specific guidelines of how to respond to these letters. This can become very daunting and confusing for employers facing these high penalties. The client reached out to The Phia Group for consultation. Krista Maschinot and Erin Hussey analyzed the situation and explained what the employer may or may not have done wrong to receive this large employer mandate penalty, and with their consultation, the employer was able to identify their mistake and properly respond to the IRS letter. After the employer explained their mistake and properly responded to the IRS letter, the IRS sent a second letter to the employer which lowered their penalty to less than $2,500, saving the employer thousands in penalties.Disclaimer: As these forms are heavily based in IRS regulations and taxation, we strongly recommended to the broker that the employer should discuss this with their tax advisor and/or the entity that assisted in preparing their tax forms.
By: Jon Jablon, Esq.
There are hundreds of novel ideas that have permeated the self-funded space over the last couple of decades, many of which have the potential to be very beneficial to self-funded plans. I mention that they have the potential to be beneficial not because it’s lawyerspeak (well, not just because of that), but because I mean exactly that: some programs could be beneficial, but are implemented in such a way that renders them either ineffective, noncompliant, or something in-between.
A perfect example, and one we face nearly every day, is the phenomenon of claim repricing – whether based on Medicare rates, “traditional” U&C, the “black box” approach (the “black box” is where claims are put into one side of the box, and then magically come out the other side with a new price attached), or anything else.
Check out the title of this post. If a rate has been negotiated and the payer has agreed to pay a certain amount, then that is a contract, and has to be adhered to! If a plan is subject to a network agreement but decides to reprice claims at a lower amount than the network rate, the plan can always – always – expect pushback. This is a phenomenon that is certainly not exclusive to this industry; imagine writing a letter to Bank of America, saying “I know I agreed to pay $2,500 per month for my mortgage, but I talked to Quicken and they told me that’s too much – so I’ll give you $1,100 a month instead.” Let me know how that turns out…
But seriously: when we suggest language for health plans to use to contain costs, the second sentence of our suggested definition – second only to a simple sentence that introduces the definition – notes that “The Maximum Allowable Charge will be a negotiated rate, if one exists….” That is designed to account for the fact that many claims (most, in fact) are subject to some sort of contract. Whether a network agreement, or a single-case agreement, or “letter of agreement,” or any other contract under any other name, a given negotiated rate must be paid, or the payor will subject itself to losing the discount, or the very real possibility of a lawsuit.
“But doesn’t the Plan Document control all other documents?” Tricky question. Does it trump the network contract? No. But does it trump all other obligations of the Plan? Yes. That’s why not having accurate plan language can be trouble. Take, for example, the alarmingly common scenario in which the plan owes a PPO rate, but the Plan Document provides that the Plan will pay 150% of Medicare for all claims. The Plan Administrator (the party responsible for compliance with the Plan Document) is required by law to follow the terms of the Plan Document, and pay all claims at 150% of Medicare – but the Plan Sponsor (the party to the network contract) is required by contract to pay the network rate. Since only one amount can be paid, the Plan Sponsor and Plan Administrator (often the same entity!) need to figure out which document will be followed, and which will be ignored.
I won’t bore you with the details of the implications of each choice, suffice it to say that it’s always a good idea to make sure the Plan Document says what the Plan will actually do. If your documents don’t line up, you’ll have all sorts of problems. If the Plan follows the network contract and doesn’t pay claims at the 150% of Medicare stated within the Plan Document, then the Plan Document shouldn’t say that! That is a compliance issue as well as a stop-loss issue.
If you want to be bored with the details of what might happen if a health plan violates its PPO contract or violates its Plan Document, feel free to contact PGCReferral@phiagroup.com. For now, though, I’ll leave you with a quote from Mark Twain: “Better a broken promise than none at all.” (That’s actually really terrible advice. Do not apply that quote in this scenario.)
By: Brady Bizarro, Esq.
A few months ago, if I had told you that a republican governor of a deeply conservative state was ignoring Obamacare and was shut down by the Trump Administration, you may have called me crazy. Yet, that is exactly what the Trump Administration did to the state of Idaho on March 8, 2018. To understand why, we need to understand the bigger picture and what was really at stake in this fight.
Recall that Idaho, like many states, is facing a crisis in its state exchanges. The combined effect of the individual mandate’s elimination and rising costs for residents who earn too much money to qualify for Affordable Care Act (“ACA”) subsidies has led many healthy people to drop out of the market, leaving the state exchanges in a crisis. In response, Governor Butch Otter issued an executive order back in January that permitted health insurers in his state to sell health plans on the individual exchange that did not comply with Affordable Care Act (“ACA”) rules. Essentially, the state’s Department of Insurance (“DOI”) would have permitted plans to charge individuals more based on a pre-existing medical condition (or to deny coverage in some cases) and to impose annual and lifetime limits on claims, among other things. Blue Cross of Idaho, the state’s largest insurer, announced that it planned to sell “Freedom Blue” plans based on the new state guidance at as much as fifty percent less than typical ACA plans.
On March 8th, the Centers for Medicare and Medicaid Services (“CMS”) warned Idaho that if it did not enforce Obamacare, the federal government would be forced to step in to do so. This reaction surprised more political experts than it did legal experts. After all, why would the Trump Administration come to the defense of Obamacare; a law which the president and his party have long decried? The answer is because much more was at stake than Obamacare; the rule of law itself was at stake.
A fundamental legal principle is that federal laws are the supreme law of the land. This is known as the Supremacy Clause of the U.S. Constitution. Another well-established legal principle is that the federal government cannot commandeer the states to force regulators to enforce federal law. Essentially, states have no obligation to enforce federal law; but if they fail to do so, the federal government must step in. That is, unless the federal government decides not to intervene. Think of the example of marijuana legalization under the Obama administration. In that case, the federal government decided that it was not worth spending millions of dollars to enforce certain federal drug laws (and it largely still maintains that position under the current administration). By contrast, in the case of “sanctuary cities,” the federal government has decided to step in and enforce immigration laws that some states and municipalities are not enforcing.
Despite the different approaches outlined above, many legal experts will tell you that it is dangerous to permit the executive branch to selectively enforce the law when it wants to. That may be why the Trump administration stepped in to block Idaho’s actions. It likely decided that it was not worth setting a precedent in this case, especially because there are still other alternatives that Idaho can pursue to alleviate the issues it is having with rising premiums. We will be following this situation to see how the state responds to this latest setback.
In this episode of Empowering Plans, Adam, Ron, and Brady go around the horn discussing a few hot button topics; from exposing what could be a significant loophole affecting health plans to explaining how certain age groups face unique barriers to obtaining health coverage. Finally, they discuss Idaho’s recent attempts to thwart Obamacare and the Trump Administration’s surprising reaction.
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By: Krista J. Maschinot, Esq. and Pat Ouellette, Esq.
If you are an applicable large employer (ALE), the Internal Revenue Service (IRS) could possibly be sending a Letter 226J notice your way. Will you be ready to respond accurately within 30 days of receipt if needed?
We discussed in a recent blog post that IRS enforcement of the Employer Shared Responsibility Provision of the Affordable Care Act (ACA) is very real and ALEs should be prepared as such.
There are two types of ESRP penalties that the IRS will assess based upon the information the ALE provided on Forms 1094-C and 1095-C:
§4980H(A) – Assessed when an employer fails to offer minimum essential coverage to enough of its full time employees
§4980H(B) – Assessed when an employee enrolls in the Marketplace and qualifies for the premium tax credit because the employer failed to offer affordable coverage
We recommend comprehensively reading and reviewing the information provided in the Letter 226J as to the reasoning for ESRP penalties and ensuring that this matches up with your internal documentation. This review is particularly significant because it will help you determine whether you have made an administrative/filing oversight or if there are larger compliance issues to deal with.
There are common mistakes to be aware of based on how Forms 1094-C and 1095-C were filled out that could trigger a Letter 226J. An ALE could, for instance, forget to check the “Section 4980H Transition Relief” box (Box C of line 22) on Form 1094-C. It may also fail to correctly code Line 14 of Form 1095-C regarding offer of coverage based on months offered coverage, as opposed to months of actual coverage. These types of errors are easy enough to make, but it is important to identify that they have been made prior to responding to the IRS. The monetary penalties will be assessed much differently based on filing mistake rather than actual ESRP non-compliance.
This industry is full of “regular” agreements, complex multi-party arrangements, handshake deals, and everything in between. For years The Phia Group has preached that transparency is a best practice for everyone from medical providers to TPAs to stop-loss carriers; that is still by far our prevailing opinion, but recently we have begun to see that transparency can also have some potentially damaging effects on the industry as a whole, stemming primarily from changes in patient behavior.
Join The Phia Group’s legal team as they discuss the need for, and effects of, contractual and price transparency on the self-funded industry – and how health plans, TPAs, and brokers can use transparency to their advantage.
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In this episode Ron and Brady are thrilled to interview LG Hanzel of Rx Results. LG digs deep on topics ranging from Specialty Drugs to PBMs, and what benefit plans can do to curb the cost of drugs in America – an issue that is big, and getting bigger every day.
Click here to check out the podcast! (Make sure you subscribe to our YouTube and iTunes Channels!)
By: Chris Aguiar, Esq.
There is no question that the vast majority of folks in self-funding, whether benefit or service providers, have a goal in mind; providing cost effective benefits to the insured. Ask many in academia or even representatives of government agencies, and the story they tell about self-funded plans isn’t quite so favorable. Despite our mission and mandate in the law, to make decisions pursuant to the terms of the benefit plan to protect ALL plan beneficiaries, decisions that plans need to make quite often put all of us on this side of the isle in contentious situations. It’s always important to remember that the personalities and agenda often drive action and decisions must be considered carefully not only for their impact today, but their impact into the future. Every decision can have a ripple effect, either financially or on future treatment of claims. On top of that, every decision has the potential to end up in Court.
“Freedom Fighters” feed on this dynamic. We’ve all dealt with them before; Attorneys who believe “justice” must be done for their clients and will stop at nothing, even waving fees or taking on costs, to have their name on the case that potentially changes the game. Just this week, a member of The Phia Group’s Subrogation Legal team approached me about a case in Ohio (the 6th Circuit) asserting that a well-known case in the 2nd Circuit (Wurtz v. Rawlings) stands for the proposition that a self-funded ERISA plan cannot obtain ERISA preemption when the plan participant brings an action to enforce a state anti-subrogation law. There are several things wrong with this his argument that Wurtz applies to this Ohio Case. First, since the Wurtz decision arose in the 2nd Circuit, it does not have any binding authority on cases in the 6th Circuit. Second, the decision makes clear in footnote 6 that the benefit plan in that case was fully insured, and not a private self-funded benefit plan – accordingly, the analysis (and possibly the outcome) would likely be different. Finally, the Court in Wurtz went to great lengths to stretch the applicable law holding that a plan cannot claim preemption on a defensive pleading when the participant brings an action to enforce a state anti-subrogation law. These holdings by the court fly in the face of everything we understand about self-funded plans – since a claim on the basis of an anti-subrogation law is essentially a claim to which the Plan participant is not entitled to benefits under the Plan, it would appear that it is without doubt “related to” the provision of benefits. Yet, the court found a way to work its way through the analysis to hold the exact opposite.
What’s more, this “Freedom Fighter” has waived his fees and costs and indicated he has no intention of reimbursing the Plan and that if the Plan wants to be reimbursed, it should bring suit and face the argument brought forth in Wurtz v. Rawlings. Now, whether his intent is to fight for his client and ensure that justice is done, or that he can bolster his resume as the lawyer that expanded that interpretation of the law to another area of the Country, is of limited consequence. The Plan is left with the prospect of brining suit on a case worth $50,000.00, and enduring the costs, time, and risks associated with litigation.
There are several strategies that can be utilized here, but it's important to understand that every action has an opposite and immediate reaction, and decisions made in this case could not only cost the plan money, but change the law in a meaningful way with respect to future claims. Being able to seamlessly maneuver all of these issues is imperative to a successful outcome. Plans also must be cognizant of their definition of success and understand the risks of making any meaningful decision.