Employee Assistance Programs (or EAPs) have served employers and their employees for decades, providing a variety of benefits to address issues that might otherwise adversely affect the overall health and work of employees. A National Study of Employers conducted in 2008 found that 65 percent of employers in the United States provided EAP benefits, an increase of 9 percent from the same study conducted in 1998, with 97 percent of employers with over 5,000 employees and 80 percent of employers with 1,001 to 5,000 employees having EAPs.1
Due to the varying services and pricing options provided by EAPs, it can be difficult to structure an EAP to ensure compliance with applicable state laws and/or regulations. This article provides an overview of various state insurance regulatory issues that EAP providers may want to consider when structuring an EAP.2
What is an EAP?
Although there is no universal definition for EAPs, generally they provide programs to assist employees and their family members with, among other things, substance abuse, mental health, financial, legal, and various personal problems such as weight management, grief and loss, and relationship difficulties.3 The methods and programs by which EAPs assist individuals vary, with some EAPs providing simple referral services and life improvement training, while others providing professionally staffed assessment and counseling services on either a limited or unlimited basis.
In addition to the service variations, EAP pricing varies from program to program. Some EAPs are offered in conjunction with a typical group health insurance plan, and the cost for the service is included in the employer contribution for such group health plan. Others, however, are offered outside of the typical group health plan from third-party non-insurance company vendors, and can be priced on a flat fee basis or on a capitated per employee per month (PE/PM) basis.
Regulation of EAPS—Are EAPs Insurance?
State regulation of EAPs has historically been very limited, with most state regulation focusing on EAP practitioners (i.e. counselors) and substance abuse testing requirements.4 With the exception of a few states, including California and Nevada, EAPs have not been directly regulated by state insurance departments, and state insurance department guidance on EAPs is very limited.5
a. California Regulation of EAPs
California is one of the few states that directly regulate EAPs as a form of health insurance. Under California law, EAP plans providing services to employer groups with employees in California are subject to Knox-Keene, and must either be licensed or have an exemption on file with the California Department of Managed Care.6 EAP plans qualify for an exemption if the services they provide are limited to identification of problems and referrals for treatment, counseling, etc. Moreover, if the EAP is providing any direct treatment or counseling services, the number of sessions with any client cannot exceed three within a six-month period unless the EAP is licensed.7 Licensed EAP plans in California may provide such direct services on an unlimited basis.
As noted above, licensure is required when the plan is providing unlimited (or a high fixed number of services) in exchange for a premium, but not when the services are limited in number. California appears to be concerned that an EAP providing unlimited services on a PE/PM basis is assuming the utilization risk from the employer and essentially distributing that risk across the group of employees covered under the plan. Risk assumption of this type has traditionally been regulated by the states as insurance, which is the position California appears to be taking with certain types of EAPs that are subject to Knox-Keene.
b. Applicability of Prepaid Limited Health Service Organization Regulations
Unlike California, the majority of states do not have laws or regulations that expressly regulate the activities of EAPs. However, depending on what services an EAP is providing, some EAPs may be subject to state laws and regulations applicable to Prepaid Limited Health Service Organizations (PLHSO). The National Association of Insurance Commissioners PLHSO Model Act (Model Act), which has been adopted in some, but not all states, was introduced to provide a means to regulate certain limited health plans that “escape regulation in many states.” Under certain circumstances, this could apply to EAPs.
The Model Act requires all persons, corporations, or other entities that operate a PLHSO in the state to obtain a certificate of authority from the state insurance commissioner.8 Under the Model Act, a PLHSO is any entity that, on a prepaid basis, undertakes to provide or arrange for the provision of limited health services, which is defined to include “mental health services, substance abuse services ... and such other services as may be determined by the commissioner to be limited health services.”9 Accordingly, under the Model Act, an EAP providing mental health and substance abuse counseling likely qualifies as a PLHSO.
Not every state has adopted the Model Act, however, and some of the states that have adopted the Model Act have done so in a manner that deviates from the Model Act in significant respects. For example, several states, including Alabama, Arizona, Colorado, Connecticut, Hawaii, Missouri, New Jersey, New Mexico, Oklahoma, Tennessee, and Virginia have adopted legislation similar to the Model Act, but their legislation is only applicable to dental services.10 Florida, Nevada, Idaho, Indiana, Iowa, Nebraska, and North Dakota, on the other hand, have enacted legislation that includes mental health and/or substance abuse services within the definition of limited health services.11 Accordingly, in these latter States, an EAP providing mental health and substance abuse counseling on a prepaid basis may be required to obtain a certificate of authority to operate as a PLHSO.
c. Other State Insurance Law Considerations
Of course, in those states that have not adopted PLHSO laws and regulations or have adopted such on a limited basis, there is still the risk that state regulators could find EAPs offering unlimited benefits on a prepaid basis in their state are transacting insurance. The term “insurance” is generally defined as “a contract whereby one undertakes to indemnify another or pay or allow a specified amount or a determinable benefit upon determinable contingencies.”12 Courts have identified five elements that are normally present in an insurance contract: (1) an insurable interest; (2) a risk of loss; (3) an assumption of the risk by the insurer; (4) a general scheme to distribute the loss among the larger group of persons bearing similar risks; and (5) the payment of a premium for the assumption of risk.13 Generally, an entity cannot transact the business of insurance in any state without first obtaining a certificate of authority from that state.
Applying the foregoing five elements to an EAP providing unlimited counseling services and other benefits that qualify as medical or mental health care on a PE/PM basis, a state regulator could find that the EAP is insurance. First, elements one and two appear to be present—the employer has an insurable interest in the well-being of its employees and, because the employer has agreed to provide these services to the employee, the employer is at risk of loss. Element three may also be present because when the EAP agrees to provide unlimited services to the employees, it has assumed the employer’s risk. Finally, because the EAP is distributing the loss among the larger group by accepting discounted PE/PM premiums, a regulator could reasonably conclude that elements four and five are met, which could result in the regulator determining that an EAP program is insurance.14
In contrast, when an EAP’s services are limited to a fixed number, and the PE/PM fee is not steeply discounted to distribute the loss among a larger group, a reasonable argument can be made that the elements of an insurance contract are not present. Under this scenario, the EAP would not be assuming much, if any, risk because it would be accepting reasonable payments for a fixed number of services. Thus, an insurance contract likely does not exist and licensure as an insurer would not likely be required.
When structuring an EAP, consider whether the EAP would trigger various state insurance laws and regulations, as every EAP is structured differently, from the services they provide to how employers pay for the benefit. Accordingly, each program should be looked at individually, with particular attention given to the services provided, how the employer is paying for the services, and whether a risk transfer has occurred.