Over the last couple of months, we have followed and reported on a particular ACA compliance strategy under which an employer subject to the Affordable Care Act’s employer shared responsibility (or “pay-or-play”) rules satisfies the requirement to make an offer of coverage under a group health plan that has the look-and-feel of major medical coverage with one significant modification: the plan offers no inpatient hospital coverage or physician services. (For a discussion of the development of these plans, please see our previous posts of September 16, October 14 and November 10.) Following the convention established by promoters of these arrangements, we refer to these arrangements as “minimum value plans” or “MVP arrangements.” Because the monthly premium cost of MVP plans is far less expensive than the cost of traditional major medical coverage that includes inpatient hospital services or physician services, the cost to the employer to make such coverage affordable—and thereby avoiding exposure for assessable payments—is also lowered significantly.

In the weeks prior to November 4, various national news outlets reported that the regulators were less than thrilled with the MVP approach.

The problem—for the regulators, however—is that the regulatory structure that enabled MVP plans was of their own making. (Well, o.k., the statute might have had something to do with it.) With Notice 2014-69, HHS and the Treasury Department made it official: HHS regulations implementing minimum value standards would be revised to put MVP arrangements off limits. A few short weeks later, on November 21, HHS issued a proposed regulation doing just that. An advance copy of the proposed (324-page) regulation, entitled Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2016, is available here. The actual rule will be published in the Federal Register on November 26, 2014 (and will be available here).

Background

Under Internal Revenue Code § 36B, low and moderate income individuals may qualify for a premium tax credit to assist with the purchase of a qualified health plan from a public exchange or marketplace. The credit is not available, however, to individuals who have other coverage that qualifies as “minimum essential coverage” or “MEC.” (The term “MEC” is potentially confusing, since it refers to the source of the other coverage, not its content.) An employer-sponsored group health plan is MEC, but for purposes of the premium tax credit an employee is generally treated as not eligible for MEC under an employer-sponsored plan unless the plan is affordable and provides minimum value (MV).

An employer-sponsored plan provides MV only if the plan’s “share of the total allowed costs of benefits provided under the plan is greater than or equal to 60 percent of the costs.” An employee who is eligible for coverage under an employer-sponsored plan that is both affordable and provides MV to the employee may not receive a premium tax credit. If the employer coverage does not provide MV, the employee may be entitled to a premium tax credit even if the coverage is affordable.

Under Code § 4980H, an applicable large employer (generally, an employer with 50 or more full-time and full-time equivalent employees during the previous calendar year) that does not offer coverage that is affordable and provides MV may be liable for an assessable payment (i.e., a non-deductible excise tax).

The Act delegates to HHS the task of prescribing MV rules for purposes of Code § 36B (relating to premium tax credits) and Code § 4980H (relating to employer shared responsibility). For the purposes of determining whether an employer-sponsored plan meets the 60% minimum threshold share of total costs, previously issued HHS final regulations define the percentage of the total allowed costs of benefits as (1) the anticipated covered medical spending for EHB coverage paid by a health plan for a standard population, (2) computed in accordance with the plan’s cost sharing, and (3) divided by the total anticipated allowed charges for EHB coverage provided to the standard population. Shortly after, the Treasury Department/IRS published proposed regulations that refer back to the HHS final regulation. The final HHS regulations and proposed Treasury regulations allow plans to determine the MV percentage by using an on-line MV Calculator published by HHS. It is the HHS on-line calculator, sanctioned by a final regulation (i.e., a regulation that has the full force of law), that gave rise to the MVP plan. Not only does the calculator allow a plan to “uncheck” and thereby exclude inpatient hospital benefits, it is possible to get to 60 percent MV without covering inpatient hospital benefits.

The Brief Against MVP Arrangements

The preamble to the recently proposed rule states the problem thus—

“It has come to our attention that certain group health plan designs that provide no coverage of inpatient hospital services are being promoted, and that representations are being made, based on the MV Calculator, that these plan designs cover 60 percent of the total allowed costs of benefits provided under the plans and thus provide MV. We understand that these designs have been promoted as a way of both minimizing the cost of the plan to the employer (a consequence not only of excluding inpatient hospitalization benefits but also of making an offer of coverage that a substantial percentage of employees will not accept) and avoiding potential liability for employer shared responsibility payments. Employers adopting these plan designs seek, by offering coverage that is affordable to the employee and that purports to provide MV, to deny their employees the ability to obtain a premium tax credit that could result in the employer becoming subject to a section 4980H employer shared responsibility payment.”

HHS correctly notes that the Act’s rules requiring individual market and small group health insurance plans to cover 10 specified categories of benefits, referred to as “essential health benefits” or “EHB”, do not apply to large fully-insured groups and self-funded arrangements. In the preamble to the newly proposed regulations, however, HHS asserts that the “MV standard may be interpreted to require that employer-sponsored plans cover critical benefits is evident in the structure of the Affordable Care Act, the context in which the grant of the authority to the Secretary to prescribe regulations under section 1302 was enacted, and the policy underlying the legislation.” To get to this result, HHS reasoned as follows: EHBs must include at least 10 specified categories of benefits, and that the benefits be “equal to the scope of benefits provided under a typical employer plan.” They also suggest that “any meaningful standard of minimum coverage may require providing certain critical benefits.” But just because large group market and self-insured employers continue to have flexibility in designing their plans “does not mean that these plans should not be subject to minimum requirements.” HHS concludes:

“A plan that excludes substantial coverage for inpatient hospital and physician services is not a health plan in any meaningful sense and is contrary to the purpose of the MV requirement to ensure that an employer-sponsored plan, while not required to cover all EHB, nonetheless must offer coverage with minimum value at least roughly comparable to that of a bronze plan offered on an Exchange.”

Or, put another way, even though the Act appears to provide otherwise, HHS asserts that it has the power to impose a benefit mandate by regulation. We wonder about that. But even if the Act does not give HHS a conclusive warrant to impose an inpatient hospital requirement in the large group and fully-insured markets, it likely provides a sufficient basis to deter a serious challenge. Nor are we advocating a different outcome. MVP arrangements clearly provide less than optimal coverage and HHS has likely reached the right policy result. Our concern is not with the policy but with the parsimonious transition rule discussed below.

The Fate of the On-Line Calculator

As we note above, the on-line calculator enabled the MVP design, which HHS unequivocally acknowledges:

“Employers have been able to claim that plans without coverage of inpatient hospital services provide MV under the current quantitative MV test by designing a benefit package that, based on standardized actuarial assumptions used in the MV calculator, offsets the absence of actuarial value derived from spending on inpatient hospital coverage with increased spending on other benefits. Accordingly, some plan designs may pass the current quantitative test without offering a critical benefit universally understood to be included in any minimally acceptable employer health plan coverage, and which the Department of Labor study determined was included in all employer plans it surveyed.” (Emphasis added.)

Put another way, under current law, MVP arrangements provide MV. They do so by offsetting the loss in actuarial value caused by the absence of inpatient hospital coverage by increased spending on other benefits. A necessary corollary is that employers who adopted MVP arrangements to minimize costs and avoid assessable tax payments acted both reasonably and lawfully.  The purpose certainly was not, as HHS implies, “to deny their employees the ability to obtain a premium tax credit.” That was a byproduct, not the purpose, of the arrangements.

The Proposed Fix

HHS has determined that plans that omit inpatient hospital services fail to meet universally accepted minimum standards of value expected from, and inherent in the nature of, any arrangement that can reasonably be called a health plan intended to provide the primary health coverage for employees. Toward this end they propose to add an additional, qualitative requirement. Specifically, HHS has proposed to amend its final MV regulations to require that, in order to provide minimum value, an employer-sponsored plan not only must meet the quantitative standard of the actuarial value of benefits, but also must provide a benefit package that meets a minimum standard of benefits. Moreover, in order to satisfy MV, an employer plan must provide substantial coverage of both inpatient hospital services and physician services. HHS has invited comments on ways to determine whether a plan has offered “substantial” benefits.

The Transition Rule

HHS proposes that the changes to its MV final regulations will apply to employer-sponsored plans, including plans that are in the middle of a plan year, immediately on the effective date of the final regulations. Because some employers adopted plans prior to publication of Notice 2014-69, HHS further proposes that the final regulations not apply before the end of the plan year (as in effect under the terms of the plan on November 3, 2014) to plans that “before November 4, 2014, entered into a binding written commitment to adopt, or began enrolling employees into, the plan, so long as that plan year begins no later than March 1, 2015.” The preamble to the proposed regulation clarifies that, “[f]or these purposes, a binding written commitment exists when an employer is contractually required to pay for an arrangement, and a plan begins enrolling employees when it begins accepting employee elections to participate in the plan.”

This is an unnecessarily stingy transition rule. Notice 2014-69 came out a mere 7 weeks from the general effective date of the employer shared responsibility rules. Many employers were well along the road to implementing an MVP arrangement, but had not yet signed the contract, and their anticipated open enrollment was just weeks away. Some employers delayed signing agreements when news reports first surfaced that the regulators might do “something.” Their caution has been rewarded with a loss of transition rule status weeks before the employer responsibility rules go into effect. The proper standard for transition relief, in our view, should be “substantial progress toward adoption” or something to that effect.  Such a standard might be marginally harder to audit, but regulators are not here seeking to remedy an abuse. They are fixing a problem of their own making.