There may be a rough road ahead for employers that offer medical benefits to employees through self-insured group health plans. Self-insured group health plans are group health plans that do not shift the risk of the cost of medical coverage from the employer to an insurance provider. Under the typical self-insured arrangement, the employer bears the annual risk for medical claims that exceed the amount of premiums collected, subject to any applicable stop loss coverage. Self-insured plans are common with employers that have a large enough employee population to manage effectively the risk of adverse claims experience.

The tangle of definitions in the Patient Protection and Affordable Care Act,1 as amended by the Health Care and Education Reconciliation Act of 20102 (collectively, the "Act") suggests that a self-insured group health plan (even a so-called "grandfathered" plan) may not qualify as an "eligible employer-sponsored plan" for purposes of the employer mandate provisions of the Act and the related employee excise tax and free choice voucher provisions of the Act. This may be an unintended result, and a technical amendment or regulatory guidance may be necessary to correct this problem. In addition, the Act subjects self-insured medical plans to a host of new substantive and procedural requirements, even for plans that were in existence when the Act became law.

In this client publication, we review some of the implications of the Act for self-insured group health plans sponsored by private employers. We assume our readers have basic familiarity with employer-sponsored plans and the main reform features of the Act. In later publications, we will consider other aspects of the Act that impact employers.

Self-Insured Plans and the Individual and Employer Mandates

A central feature of the Act is the individual mandate, under which most individuals will be required, starting in 2014, to maintain "minimal essential coverage" for themselves and their eligible dependents. Individuals can satisfy the mandate by being covered under a variety of programs, including a number of government arrangements, a "grandfathered health plan" and an "eligible employer-sponsored plan."3

For purposes of the individual mandate, the term "grandfathered health plan" generally encompasses group health plan or insurance coverage in which the individual was enrolled at the time of enactment of the Act.4 This provision implements President Barack Obama's oft-repeated mantra that the Act does not require individuals to give up the coverage they already have.5 While it is unclear from the Act what types of changes in plan terms would cause a plan's loss of grandfathered status, it is clear that an employer-sponsored group health plan (whether insured or self-insured by the employer) satisfies the individual mandate, as long as the individual was enrolled in the plan when the Act became law.6

Less clear, however, is whether an employer can use a self-insured medical plan to exempt itself from the excise tax provisions imposed on employers by the employer-mandate provisions of the Act. Under the employer-mandate provisions, the Act imposes one of two potential excise taxes on "large employers" beginning in 2014.7 The first applies to large employers that do not offer their full-time employees the opportunity to obtain "minimal essential coverage" through an "eligible employer-sponsored plan."8 The excise tax is triggered for any month during which any one of the employer's full-time employees is certified as having purchased coverage on an exchange and has benefited from either a tax credit or cost-sharing reduction.9 The second excise tax applies to large employers that provide minimal essential coverage through an eligible employer-sponsored plan that is generally considered unaffordable for lower income employees under the complex income and cost-sharing rules of the Act.10

Self-insured medical plans can, of course, provide "minimal essential coverage," and that is why a grandfathered self-insured plan can be used to satisfy the individual mandate. However, self-insured medical plans may not fit within the tangled definition of an "eligible-employer sponsored plan."11 And, severe excise taxes may apply to large employers that do not offer an arrangement that qualifies as an "eligible employer-sponsored plan," as defined by the Act.12

So why doesn't a self-insured medical plan meet the definition? To be an eligible employer-sponsored plan, a plan must, among other things, be either a governmental plan (not applicable to private employers) or "any other plan or coverage offered in the small or large group market within a state."13 The Act defines "small and large group market" as the health insurance market under which individuals obtain health insurance coverage...through a group health plan maintained by a large employer...or by a small employer."14 The term "health insurance coverage" is defined in a somewhat ambiguous manner, but appears to be limited to insured arrangements.15 This makes sense, of course, because self-insured plans (while often administered through an insurance company acting as a third party administrator) are typically unique to the employer sponsor and not available in the market. Further, the Act provides that a grandfathered plan may qualify as an eligible employer-sponsored plan, but only if it is a grandfathered plan "offered in a group market."16 For the reasons noted above, this reference arguably prohibits a self-insured group health plan from being grandfathered for purposes of the employer mandate. Another noteworthy byproduct of the exclusion of self-insured plans from the definition of "eligible employer-sponsored plan" is that employers offering coverage under self-insured plans would not be required to offer free choice vouchers to employees who decline the employer coverage and enroll in a qualified plan on an exchange.17

It is not entirely clear whether this apparent exclusion for self-insured plans is intentional or is the inadvertent by-product of the Act's interwoven definitions. It is possible that the exclusion is intentional, because self-insured plans cover a significant number of individuals who are effectively taken out of the group insurance market. And if the exclusion is intentional, it would have a significant impact on the many employers that might have understood that their existing arrangements could be maintained without penalty. If it is unintentional, the Act would benefit from a technical amendment or preemptory regulatory guidance that employers may rely upon.

New Substantive Requirements for Self-Insured Plans

Under the general heading "Health Insurance Market Reforms," the Act limits or prohibits a number of practices (most of which were more prevalent in the individual, rather than group insurance, market) that Congress deemed incompatible with a national framework for health reform.18 Most of these changes apply to employer-sponsored group health plans, including most self-insured and grandfathered arrangements, despite the reference to "insurance market reforms" in the heading of this section of the Act. Among the more noteworthy of these substantive requirements are the following:

  • Waiting Periods. Beginning in 2014, an employer-sponsored group health plan cannot require an otherwise eligible employee or dependent to wait more than 90 days to start coverage.19
  • Annual and Lifetime Limits. Beginning with the first plan year starting after September 23, 2010, an employer-sponsored plan cannot impose lifetime limits on benefits. Beginning with that plan year, plans are also restricted as to the type of annual limits that can be imposed on participants, and plans are broadly prohibited, starting in 2014, from imposing most annual limits on benefits. However, this restriction does not prevent a group health plan from placing annual or lifetime limits on specific benefits, as long as such benefits are not essential health benefits.20
  • Recissions. Beginning with the first plan year starting after September 23, 2010, the Act limits the circumstances under which an employer-sponsored group health plan can terminate or cancel a participant's coverage.21
  • Dependent Coverage. Beginning with the first plan year starting after September 23, 2010, an employer-sponsored group health plan must allow adult children under the age of 26 to continue to be eligible for coverage under the plan, unless they are also eligible to participate in another employer-sponsored plan. Beginning in 2014, this new coverage rule applies to all adult children until they attain age 26, regardless of eligibility for coverage in the plan of another employer.22
  • Pre-Existing Conditions. Beginning with the first plan year starting after September 30, 2010, group health plans will be prohibited from excluding any individual under the age of 19 who is otherwise eligible for coverage under the plan due to a pre-existing condition. As of January 1, 2014, exclusions for pre-existing conditions will be prohibited for all other individuals (regardless of age).23

The Act also requires employer-sponsored plans to provide participants with specific types of benefits not mandated by current law. For example:

  • The right to choose their own primary care physician;24
  • The right to visit an OB-GYN without obtaining a referral;25
  • The right to obtain emergency services without prior authorization;26 and
  • Coverage for individuals participating in approved clinical trials.27

Lastly, the Act imposes new "cost sharing" restrictions that arguably apply to non-grandfathered self-insured group health plans, in addition to insured group health plans. These restrictions provide that the cost sharing under a plan for a plan year cannot exceed the maximum out-of-pocket expenses, including the deductible, that a participant in a high-deductible plan would be required to pay.28 The restrictions also limit deductibles to $2,000 for single coverage and $4,000 for family coverage.29

New Procedural and Other Requirements for Self-Insured Plans

The Act imposes a number of procedural requirements on employer-sponsored group health plans – including self-insured plans – that do not apply under current law. A discussion of some of the most noteworthy requirements follows.

All employer-sponsored group health plans will be required to give participants at least 60 days advance notice of proposed benefit changes.30 In addition, all non-grandfathered employer-sponsored group health plans (and possibly grandfathered plans) are required to adopt a program of auto-enrollment for eligible employees.31 The Act is not clear when these provisions will go into effect.

The Act requires all non-grandfathered group health plans to implement a new appeals process for claim denials that incorporates the current claim and appeal process mandated by ERISA, but also includes a process for external review. This process must meet standards to be established by the Secretary of Health and Human Services that will be similar to the model external review process established by the National Association of Insurance Commissioners.32

The Act also subjects all employer-sponsored plans to a number of new reporting requirements including:

  • Submitting an annual report to the Department of Health and Human Services and plan participants that addresses whether plan benefits and coverage satisfy certain standards relating to the quality of health care.33
  • Reporting the cost of coverage on participants' Forms W-2.34
  • Notifying employees about the health care exchanges and, if the employer pays less than 60% of the cost of benefits provided under the group health plan, the benefits available to employees, such as a tax credits and cost sharing reductions, if the employee purchases coverage through the exchange.35

Additionally, should a self-insured plan not qualify as an eligible employer-sponsored plan and, therefore, become subject to an excise tax, the employer will have to file a tax return regarding the coverage offered under the plan. A copy of the return will have to be provided to plan participants.36

Section 105(h) of the Internal Revenue Code continues to impose discrimination requirements on self-insured group health plans and requires highly compensated employees to include in income the value of certain benefits provided to them under a discriminatory self-insured plan. The Act extends the discrimination requirements of Section 105(h) to insured plans. However, the Act subjects employers to an excise tax penalty for discriminatory insured medical plans, but does not require income recognition by employees.37

Where the Road Leads Next

The direction in which these new provisions will lead employers depends partly on whether the implications for self-insured group health plans are intentional and what, if any, changes through legislation or regulation we might expect in the coming months. If the implications are unintentional, then the form of the fix will have its own consequences. An administrative fix allowing self-insured group health plans to qualify as "minimum essential coverage" may prevent new self-insurers from incurring the employer excise taxes while continuing to exempt them from the free choice voucher requirement. Alternatively, a legislative modification of the definition of "eligible employer-sponsored plan" would exempt self-insurers from the excise tax, but would subject them to the free choice voucher requirement. Regardless, these many rules and any upcoming changes will undoubtedly alter the calculation of whether it makes economic sense for an employer to offer an insured or self-insured group health plan and, in some instances, to offer any group health plan to its employees.

Ultimately, the nearest road leads to federal regulators (most notably the Secretary of Health and Human Services) who are required to promulgate timely regulations to help parse the Act, implement its provisions and analyze the cost efficiency and effectiveness of self-insured plans. While it is often difficult to predict outcomes when such complicated legislation is involved, we suspect that, as the process unfolds, some employers may find that the road to self-insurance is increasingly more difficult to navigate.

Footnotes

1 Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (codified as amended in various sections of the U.S.C.) (hereinafter, the "PPAC").

2 Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152 (codified as amended in various sections of the U.S.C.) (hereinafter, the "Reconciliation Act").

3 PPAC § 1501(b) (adding new I.R.C. § 5000A).

4 PPAC § 1251(e). The date of enactment of the Act is March 23, 2010, so a grandfathered plan would include any group health plan in which an individual was enrolled prior to that date.

5 Press Release, The White House, Office of the Press Secretary, Remarks by the President in Town Hall on Health Care, Grand Junction, Colorado (Aug, 15, 2009) (available at www.whitehouse.gov/the_press_office/Remarks-By- The-President-In-Town-Hall-On-Health-Care-Grand-Junction-Colorado).

6 It should also be noted that individuals are not qualified for premium tax credits if they are covered under any grandfathered plan (which would include grandfathered self-insured plans). PPAC § 1401 (adding new I.R.C. § 36B(c)(2)), as amended by the Reconciliation Act § 1001.

7 A large employer is defined as an employer "who employed an average of at least 50 full-time employees on business days during the preceding calendar year." PPAC § 1513(a) (adding new I.R.C. § 4980H(c)), as amended by the Reconciliation Act § 1003.

8 PPAC § 1513(a) (adding new I.R.C. § 4980H(a)), as amended by the Reconciliation Act § 1003. "Minimum essential coverage" is defined as coverage under (i) government sponsored programs, like Medicare, Medicaid, TRICARE, etc.; (ii) an eligible employer-sponsored plan; (iii) a grandfathered health plan; or (iv) other coverage recognized by the Secretary of Health and Human Services. PPAC § 1501(b) (adding new I.R.C. § 5000A(f)).

9 PPAC § 1513(a) (adding new I.R.C. § 4980H(a)), as amended by the Reconciliation Act § 1003. It is important to note that an individual who is eligible for minimum essential coverage, including through a grandfathered self-insured employer-provided plan, may not be eligible for tax credits or for cost sharing reductions, with the result that presumably, employers with grandfathered self-insured plans may not incur the excise tax. See PPAC §§ 1401, 1402.

10 PPAC § 1513(a) (adding new I.R.C. § 4980H(b)), as amended by the Reconciliation Act § 1003.

11 See PPAC § 1501(b) (adding new I.R.C. § 5000A(f)) (defining an "eligible employer-sponsored plan" as a group health plan or group health insurance coverage offered by an employer to the employee which is (A) a governmental plan...or (B) any other plan or coverage offered in the small or large group market within a State).

12 PPAC § 1513(a) (adding new I.R.C. § 4980H(a)), as amended by the Reconciliation Act § 1003.

13 PPAC § 1501(b) (adding new I.R.C. § 5000A(f)).

14 PPAC § 1304(a)(3) (emphasis added).

15 See PPAC § 1301(b)(2) (referencing the Public Health Service Act, 42 U.S.C. 300gg et seq. (the "PHSA") § 2791(b)). Under the PHSA, "health insurance coverage" is defined as "benefits consisting of medical care...under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a health insurance issuer." A "health insurance issuer" does not include a self-insured group health plan. It is unclear if the phrase "offered by a health insurance issuer" modifies the entire definition (in which case a self-insured plan is not offered in a small or large group market) or if the phrase only modifies the reference to a health maintenance organization. If the latter, then a self-insured plan would offer benefits consisting of medical care under a medical service policy and would offer coverage in a small or large group market. Additionally, we note that the definition of "applicable employer-sponsored coverage" (describing the type of coverage that may be subject to the excise tax on "cadillac plans"), which clearly includes insured and self-insured group health plans, does not refer to health insurance coverage or a health insurance issuer. PPAC § 9001(c). This language further suggests that a self-insured group health plan may not be an eligible employer-sponsored plan. In contrast, a later section of the PPAC requires the Secretary of Health and Human Services to conduct a study of the "fully insured and self-insured group health plan markets." PPAC § 10103 (adding PHSA § 2754). One could argue that the reference to a self-insured group health plan market implies that self-insured plans could potentially be deemed in a group market. Additionally, it would seem odd for Congress to commission a study on whether self-insured plans can offer less costly, more efficient coverage if the intent was to discourage the use of self-insured plans. Id.

16 See PPAC § 1501(b) (adding new I.R.C. § 5000A(f)). Incidentally, the definition of "group market" contains a similar ambiguity to that of "small or large group market," discussed above. See PPAC § 1301(b)(3) (referencing the PHSA § 2791(b)).

17 See PPAC § 10108. The Act requires employers that offer minimum essential coverage under an eligible employer-sponsored plan and that pay any portion of such coverage to offer "free choice vouchers" to employees for whom coverage is deemed unaffordable under the rules of the Act if those employees decline enrollment in the employer sponsored plan. The voucher must be equal to the monthly portion that the employer would have paid if the employee had enrolled in the highest-cost plan. PPAC §§ 10108(b) – (d).

18 See PPAC § 1201, et seq.

19 PPAC § 1201 (adding new PHSA § 2708).

20 PPAC § 10101(a) (amending new PHSA § 2711, as added by PPAC § 1001(5)). Essential health benefits include emergency services, hospitalization, maternity and newborn care, prescription drugs, laboratory services, rehabilitative services, preventative and wellness services and pediatric services. See PPAC § 1302(b). 21 PPAC § 1001(5) (adding new PHSA § 2712).

22 PPAC § 1001(5) (adding new PHSA § 2714).

23 PPAC § 1201 (adding new PHSA § 2704), as amended by PPAC § 10103(e).

24 PPAC § 10101(h) (adding new PHSA § 2719A(a)).

25 PPAC § 10101(h) (adding new PHSA § 2719A(d)).

26 PPAC § 10101(h) (adding new PHSA § 2719A(b)).

27 PPAC § 10103(c) (adding new PHSA § 2709).

28 See PPAC § 1302(c)(3) (referencing I.R.C. § 223(c)(2)(A)(ii)). See also, PPAC 1201(4) (adding new PHSA § 2707(b)). For 2010, the limit is $5,950 for single coverage and $11,900 for family coverage.

29 See PPAC § 1302(c); See also, PPAC 1201(4) (adding new PHSA § 2707(b)). Cost sharing includes deductibles, coinsurance, copayments and similar charges. PPAC § 1302(c)(3).

30 PPAC § 10101(d) (amending PHSA § 2715, as added by PPAC § 1001(5)).

31 PPAC § 1511, (amending the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. § 201, et seq, (the "FLSA"), by adding new FSLA § 28A.

32 PPAC § 10101(g) (amending Sec. 2719 of the PHSA, as added by PPAC § 1001(4)). The model external review process is set forth in the Uniform External Review Model Act. PHSA § 2719(b).

33 PPAC § 1001(5) (adding new PHSA § 2717). This requirement applies to non-grandfathered group health plans only.

34 PPAC § 9002 (amending I.R.C. § 6051(a)).

35 PPAC § 1512 (adding new FSLA § 18B).

36 PPAC § 1514 (adding new I.R.C. § 6056).

37 PPAC § 10101(d) (amending PHSA § 2716, as added by PPAC § 1001(5)).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.