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The Stacks - 3rd Quarter 2020

Be Ready For The Drug Pricing Debate To Return With A Bang

By: Nick Bonds, Esq. 

As 2020 dawned, one of the fiercest debates around containing healthcare costs pivoted on addressing the runaway prices of prescription drugs. In May of 2018, the Trump administration first floated their “blueprint” to lower drug prices, but hit a number of walls, legal and political.

Meanwhile, Congress labored on a number of pieces of legislation to curtail drug prices, with House Democrats’ approach culminating in the Elijah Cummings Lower Drug Costs Now Act. Named for the late Baltimore Democrat who pressed the Trump administration to do more to rein in drug costs, the bill was designed to empower the federal government to negotiate Medicare drug prices directly. The bill would have also placed a cap on the out-of-pocket prescription drug costs paid by those covered by Medicare Part D, while expanding dental, vision, and hearing coverage for Medicare recipients.

Though far from perfect, the legislation was ambitious policy and it received broad support from Democrats. Meanwhile, Republicans in the House and Senate released their own drug pricing plans, both echoing the Democrats’ approach of tuning up Medicare Part D. The House Republicans’ policy package, the Lower Costs, More Cures Act, included a suite of transparency measures and caps on insulin costs. Senate Republicans’ Prescription Drug Pricing Reduction Act imposed penalties for price increases above inflation for Medicare Part B and Part D drugs, and capped expenses for seniors, among other things. While there was no consensus on the precise approach, there was virtually universal acceptance that the American people wanted to see movement on drug pricing reform.

Even so, partisan gridlock kept any of those bills from becoming law. The dust up did, however, lead President Trump to put even greater pressure on HHS Secretary Alex Azar to get the ball rolling on their plan to encourage state importation of a significant number of cheaper Canadian prescription drugs – one of the many steps laid out in the aforementioned blueprint to reduce drug prices. The President then doubled down on his renewed push for drug pricing legislation at the most recent State of the Union, using his address to make the issue one of the central planks in his 2020 election platform.

Drug pricing discussions have taken a back seat to the more pressing pandemic. The federal government has understandably been more focused on dealing with the dual health and economic crises of unprecedented scale. To that end, the Families First Coronavirus Response Act (“FFCRA”) and Coronavirus Aid, Recovery, and Economic Stimulus (“CARES”) Act were passed rapidly and with wide-ranging bi-partisan support. Together, these laws took steps to ensure Americans receive testing and treatment for Covid-19, but the financial toll of contracting the virus will still be a devastating blow to most individuals.

The world may have a year or longer to wait for a vaccine to prevent Covid-19, and nascent treatments for the virus have yet to be perfected. While some therapies are showing promise (even some involving llamas), no treatment has received quite so much of the limelight as remdesivir. An experimental drug developed by Gilead Sciences, remdesivir has received the blessing of White House coronavirus task force member Dr. Anthony Fauci, and been granted an emergency use authorization (“EUA”) by the Food and Drug Administration.  

Effectively, this EUA means that under the FFCRA and CARES Act, health plans will be required to cover this therapy, but an unanswered question lingers: How much does remdesivir cost? Gilead Sciences has yet to set the price for its drug, though the company has donated 1.5 million doses. The drug maker faces a difficult decision, needing to balance the development costs and potential profits of remdesivir against the desperate public need for viable treatments. Estimates of the drug’s prospective price vary wildly. The Institute for Clinical and Economic Review (“ICER”), a Boston-based nonprofit that performs cost analyses on medical treatments, released a recent report estimating that a “cost recovery” pricing model may run as low as $10 for a ten-day course of treatment. Alternatively, under a more traditional “cost-effectiveness” pricing model, ICER estimates place the cost of that same course of treatment closer to $4,500.

To complicate matters, Gilead Sciences may actually have a viable patent on remdesivir, so until other therapies are developed the company may have a government-backed monopoly on the treatment of Covid-19. The development of the drug, however, may well have been at least partially subsidized by federal money. Gilead previously faced a similar situation with their HIV treatment Truvada – which led the government to sue for a license to the drug.

Gilead Sciences will have to balance public opinion, social responsibility, their own finances, and the potential government response as they consider how to price remdesivir. As will any other drug maker who develops a treatment for Covid-19. Whatever price point Gilead settles on, the fallout from their decision will certainly linger. A drug this high profile, coming along amid a global emergency, cannot help but reignite the drug price debate. It may be a slow burn – that debate may need to be tabled until the pandemic is under control, maybe even beyond the 2020 election – but the fuse is most certainly lit.


Continuing Coverage During COVID-19

By: Andrew Silverio, Esq.

For the last month or so, like just about every industry, self-funded plan sponsors and those serving them have been frantically grappling with how to quickly and thoroughly address issues they’ve never had to encounter before.  Entire segments of our economy have shut down essentially overnight, travel has screeched to a halt, and employers are dealing with questions of a type and scope they’ve never seen.  Against this backdrop, individuals’ healthcare needs have never been more vital, while for many employers the path to ensuring they can continue to be covered has never been more wrought with pitfalls.

As self-funding consultants, we’ve already fielded just about any question one could imagine relating to the COVID-19 pandemic.  It is encouraging though, from a human perspective, that the most common questions we’re seeing don’t relate to how to comply with new federal laws, or even how to contain costs in a time when most employers are being forced to tighten their belts dramatically.  Rather, the most common and urgent inquiries we receive are all variations on the same basic issue – how can we ensure our employees can remain covered?

This seemingly simple question often gets extremely complicated though, as plan sponsors are dealing with business decisions they never envisioned.  What if you have to close down completely for a month?  Two months?  What if you have to cut everyone’s hours to be able to ensure everyone continues receiving a paycheck?  What if employees are placed on leaves of absence or furloughed?  Will stop-loss cover continuations of coverage?  It’s very unlikely that even a well-drafted plan document is already set up to address situations like this.

The first and most important item to check off the list is to ensure that the plan document allows for continuation of coverage in whatever situation you’re dealing with.  Just how to label that situation has become a point of confusion in itself, however.  Employers are getting hung up on terminology – do we call it a layoff or a furlough? Can we call it a leave of absence?  Does this impact actively at work status?  Our general guidance has been to forget about terminology – it doesn’t matter.  If your plan clearly describes the events that would otherwise cause a loss of eligibility and clearly establishes that eligibility is intended to continue regardless, it doesn’t matter if the break in service is called a layoff, a furlough, a leave of absence, a pastrami sandwich, etc.

Another significant source of anxiety for plan sponsors is how stop-loss carriers will treat plan changes in connection with COVID-19.  Many carriers have issued releases that seem very reassuring – saying in broad terms that plans need not worry, and that stop-loss will honor COVID-19 updates and amendments won’t be required of applicable stop-loss policies.  We would caution against taking these representations too broadly, however.  A reasonable interpretation of most of these releases is that carriers will honor any plan changes to the extend necessary for plans to comply with the law (namely the Families First Coronavirus Response Ace and the CARES Act).  However, most plans are contemplating changes beyond what’s required by law.  For example, to date there is no federal requirement to extend coverage which would otherwise be terminated after layoff or due to a reduction in hours – the only required extension of coverage under these laws would fall under a new category of FMLA leave.  There’s also no federal mandate to waive cost sharing for most COVID-19 treatment, as opposed to diagnostic testing (a step many plan sponsors are taking to mirror trends in the fully-insured world).  The prudent approach is to expect collaboration, but not rely on it, and take all the proactive steps that may be necessary to protect the plan and employer.


Are Your ICs Really EEs? A Look Who’s Who on an Employee Benefit Plan

By: Kelly Dempsey, Esq.

The glory of self-funding is the flexibility an employer has to create a benefit plan that truly suits the individual employer. Employers with ERISA-governed self-funded plans have the opportunity to craft benefits and exclusions that align with the needs of their employee population, while implementing various cost containment solutions to assist the employer in offering a robust benefit plan, and, perhaps even more importantly, controlling the costs for the employees and the employer. But where does that flexibility stop?

Flexibility can begin to taper off when it comes to determining which individuals are eligible for employer-sponsored coverage. In short, the relevant regulations mandate that only employees of the employer sponsoring the health plan should be eligible to participate. So the logical next question is: who qualifies as an employee?

In general, individuals that are issued a 1099 instead of a W-2 are independent contractors (“ICs”) and are accordingly not employees (“EEs”), and thus should not be offered employee benefits; to that end, the Internal Revenue Service (“IRS”) provides various resources to assist employers in appropriately classifying workers. The IRS looks at three areas of the relationship: (1) the behavioral control the employer has on the individual, (2) the level of financial control, and (3) the type or nature of the relationship. 

Interestingly, the IRS specifically lists “benefits” under the “type of relationship” category as a consideration for classifying a worker. While the considerations are a sliding scale rather than a hard-and-fast rule (as in, simply offering benefits does not necessarily make the individual an employee), it is certainly a factor. There is also a 20-factor (yes – 20) test found in Revenue Ruling 87-41 (1987-1 C.B. 296), but the IRS is aware that certain factors may not apply to every situation.  Ultimately, misclassifying individuals may jeopardize the IC’s “IC” status, which leads to various complications for the employer, the IC, and the health plan.

As states continue to develop employment-related laws to address various aspects that either directly relate to or at least tangentially effect employee benefits, one such development is of specific interest. New Jersey in particular has issued several new laws that took effect immediately in late 2019, related to independent contractor status and worker misclassifications. The New Jersey Department of Labor and Workforce Development now has the authority to issue monetary penalties for misclassification. If a labor contractor is involved, the employer and the labor contractor have joint liability for any violations and penalties. In April 2020, New Jersey employers will also be required to post a notice regarding worker misclassification. The poster will include information about the prohibition on misclassification of workers, information on the differences between ICs and EEs, the benefits and protections employees are entitled to under state law, the remedies available to misclassified workers, and contact information for complaints or notification of alleged violations. These laws are the result of Governor Murphy issue Executive Order No. 25 in May of 2018 that established the Task Force on Employee Misclassification, making it a top priority to put guidelines in place to diminish work misclassification, which is believed to be widespread problem.

If the State of New Jersey determines that individuals are being identified as ICs when they really are EEs (and vice versa), the State may issue specific penalties and even stop-work orders, in addition to other remedies or penalties found in other applicable law. There are two penalties that can be imposed. The first is an administrative penalty for misclassifying an employee. For the first violation, the administrative penalty is $250 per misclassified employee. Subsequent violations may increase the penalty up to a maximum of $1,000 per misclassified employee. The second penalty is structured a bit differently and the monetary amount is to be no more than 5% of the worker’s gross earnings over the past 12 months. The limitation applies to the earnings from the employer that actually misclassified the individual – meaning a new employer that has contracted to work with the IC cannot be held accountable for the prior employer’s mistake. The State may dictate that the penalty is paid directly to the misclassified workers, or the employer may be required to pay into a trust account for any applicable workers. Employers are to be provided with notice and given the opportunity to appeal by requesting a hearing with the Commissioner of Labor and Workforce Development.

As with most laws, there is a good faith factor worked into the analysis. Ultimately the State must look to a variety of factors when applying penalties, including any previous violations by the employer, the seriousness of the violation, the employer size, and the good faith of the employer.   

If you’re still reading, you’re probably thinking: why does this matter to me? Over the last few years there has been an uptick in the number of self-funded plans that appear to want to include ICs as eligible, so if you’re a claims administrator, a consultant, or a broker, one of the plans you work with is likely impacted. Aside from specific state law penalties, there are a variety of considerations.

Plan language is a major consideration (as it so often is). This may seem like the easiest piece of the puzzle, but as we dig in a bit, it becomes clear that it’s not so simple. Clear eligibility language is crucial to ensure compliance with ERISA Summary Plan Description requirements, so the first step is to modify the eligibility provisions of the document, including how a covered person or participant is defined. Again, determining when to offer coverage is usually simple, but the length of coverage and termination of coverage get a bit trickier. How long will the IC be eligible? Are ICS only covered when working on a project? Would the IC be terminated immediately when a project is over? Would an IC be interested in such coverage if only offered for a limited period of time?

Benefits are usually offered when there is a permanency of the relationship between the employer and individual; generally, true employment relationships do not have defined end dates, while IC relationships usually have a more definite timeframe. That defined timeframe can make crafting the plan language offering coverage to ICs into a tedious process, and could be difficult for a TPA to administer!

Employers also need to consider whether they are inadvertently creating a MEWA – a multiple employer welfare arrangement. The offer of coverage to non-employees (i.e., the ICs) likely creates a MEWA. Generally speaking, a MEWA is created when one benefit plan is offered to two or more unrelated entities. Because each IC is a separate entity, it could create a de facto MEWA by including even one IC in the plan benefits. As the MEWA and Association Health Plan (“AHP”) space is another area of developing law, the company would need to properly form the MEWA or AHP first before modifying plan eligibility provisions, and an employer that forms a MEWA loses many of the coveted protections afforded by ERISA.

If the employer still wants to continue down this path, the next consideration is tax consequences for both the employer and the IC. By classifying an individual as an IC, an employer avoids paying employment taxes; however, the IC is likely to be taxed on the benefits provided by the employer, since pre-tax protections generally do not apply.

Certain employers may be eligible for the IRS’ Voluntary Classification Settlement Program (“VCSP”), which allows employers to reclassify workers and receive some relief from federal employment taxes that the employer was not paying. Employers can also seek a proactive determination from the IRS regarding the proper classification of workers (although it’s not easy to estimate how long that might take to receive). Last, but not least, there are resources for individuals to calculate unreported taxes and report an apparent misclassification to the IRS.

In addition to the above, stop loss is also a consideration; in order to ensure that these individuals’ claims will be covered under the stop loss policy, it need to be underwritten accordingly and the policy must be written to include coverage for ICs. It generally goes without saying, but the stop loss carrier will need to sign off on the plan language modifications as well (generally before the changes go into place).

With that said, will other states follow New Jersey’s lead? The answer to that question is unclear; however, since the passage of the Affordable Care Act in 2010, the United States Department of Labor is continuing to audit self-funded ERISA-governed plans on a regular basis, looking at a variety of things. Some audits are truly randomized, while others begin due to a complaint from a plan beneficiary. Employers should take a proactive approach to review their benefit offerings and assess whether the health plan’s actual eligibility exactly matches what is stated in the Plan Document, Summary Plan Description, and employee handbook, and update the documents accordingly (or correct any EE or IC statuses accordingly).

In summary, it’s natural for an employer to want to offer benefits, including a robust health plan, to the individuals working for the benefit of the employer; however, if those individuals are not actual employees, things can go sideways quickly. Employers should proceed with caution when deciding to offer employer benefits to independent contractors. In this ever-changing industry, states are continuing to develop new rules for employers that bleed into the employee benefit space and can impact their self-funded health plan offerings. These new state laws, combined with existing federal guidelines, can be difficult to navigate, but with some careful planning, employers are given the tools they need to figure it all out!