Alert / Employee Benefits
Three compliance updates and what they mean for employers

We come bearing three gifts …

We have traveled (virtually) from afar to bring you three holiday gifts. Ok, “gifts” is probably too strong … three compliance updates, then.

In this alert, we tee up a Supreme Court case allowing states to regulate drug payments to pharmacies, a final regulation benefitting the few remaining grandfathered health plans out there, and annual inflation and related adjustments proposed by the Department of Health and Human Services.

Supreme Court allows states to regulate drug pricing for ERISA plans; employers brace for impact

The U.S. Supreme Court has ruled that states, notwithstanding a venerable ERISA rule barring state laws from impacting ERISA plans, can regulate the amounts pharmacy benefit managers must pay pharmacies, even if the law results in cost increases to ERISA plans. An Arkansas state law that ignited the controversy will now almost certainly be copied by other states, likely adding to the cost that group healthcare plans (as well as other consumers) pay for prescription drugs.

Background

In 2015, Arkansas passed a law effectively requiring pharmacy benefit managers (PBMs), when reimbursing Arkansas-located pharmacies for prescriptions filled by those pharmacies, to pay an amount no less than the amount the pharmacy paid for the drug.

Lockton comment: Employers and insurers typically contract with PBMs to manage the prescription drug benefit under the employers’ group healthcare plans. When a healthcare plan enrollee fills a prescription at a pharmacy, the pharmacy is reimbursed by the PBM in an amount set by contract between the PBM and the pharmacy. As part of that contract, the PBM typically specifies in a schedule the maximum amount it will pay for a drug, but sometimes that amount is less than what it costs the pharmacy to obtain the drug (this is especially true where the wholesale price of a drug increases, but the PBM declines or is slow to adjust its reimbursement schedule to reflect the increase). The Arkansas law’s objective was to ensure pharmacies in the state don’t lose money on such transactions.

The Arkansas law requires PBMs to promptly update their reimbursement schedule when the wholesale cost of a drug increases, to avoid a larger gap between what the PBM is required by its contract to pay the pharmacy, and the amount the pharmacy had to pay to acquire the drug. The law also gives pharmacies the right to appeal the PBM’s reimbursement rates, and ultimately permits Arkansas pharmacies to refuse to sell a drug if the PBM’s reimbursement rate is lower than the pharmacy’s acquisition cost for the drug.

A consequence of the Arkansas law was that it forced PBMs to pay Arkansas pharmacies more for some drugs than the PBMs had contracted to pay the pharmacies. Because PBMs are central to the administration of drug benefits for employer-sponsored group health plans, the law indirectly caused some group plans (with employees in Arkansas, utilizing Arkansas pharmacies) to suffer a cost increase for the drugs paid for by the plans.

A trade association representing 11 large PBMs sued to block application of the Arkansas law, citing ERISA’s provision that bars the application, to ERISA plans, of state laws that relate or have a connection to such plans.

“Shields are down, Captain!”

Perhaps the most central and sacrosanct aspect of ERISA is its preemption of state law. While ERISA allows states to regulate the business of insurance within their borders, it does not allow the states to regulate ERISA plans through laws that have “a connection with or reference to such a plan.”

But the shield is not bulletproof. A state law that doesn’t have a connection with or reference to an ERISA plan is not preempted. The Supreme Court has allowed states, for example, to impose surcharges on claim payers for self-insured ERISA plans, even though the surcharges would ultimately be passed on through to the ERISA plan.

The Supreme Court in the PBM case noted that the Arkansas law didn’t specifically refer to ERISA plans, or have any connection to ERISA plans other than an indirect cost impact. Rather, the law sought to regulate the relationship between PBMs and pharmacies. For that reason, the Court concluded the Arkansas law is not preempted by ERISA. In fact, the vote wasn’t even close: 8-0 in favor of Arkansas (Justice Barrett took no part because the case had been argued before the Court months ago before she was sworn in).

So now what?

It’s likely other states will follow Arkansas’s lead and begin regulating what PBMs reimburse pharmacies in those states. In that event, PBMs might, when issuing contract guarantees to ERISA plan sponsors with employees in those states, exclude prescription drug claims arising from those states. That’s because the PBM will never know for sure what it’ll have to pay pharmacies in those states for any given drug.

In addition, contemporary PBM contracts allow the PBMs to modify existing pricing guarantees if there is a change in applicable law. PBMs could use laws like the Arkansas law as justification to dilute their pricing guarantees or add exclusions to those guarantees.

But without question, as PBMs begin to pay larger reimbursements to pharmacies in Arkansas and states like it, that added expense will be passed on through to healthcare plan sponsors.

 

Feds cut grandfathered plans some additional slack

Although few medical plans remain “grandfathered” under the Affordable Care Act (ACA), federal regulators have finalized rules to make it easier for those plans to retain their grandfathered status by offering the opportunity to make more significant financial changes without losing that status, effective June 15, 2021.

Background

Grandfathered medical plans are those that existed on March 23, 2010, and that have made only modest changes (or no changes at all) since then. Grandfathered plans avoid some key ACA benefit mandates, such as the requirement to cover certain preventive services without cost sharing, enhanced claims and appeals requirements, and out-of-pocket limits for in-network care.

To retain grandfathered status, grandfathered plans must limit the nature and extent of changes to their benefits and employee cost sharing rules. For example, grandfathered plans lose their grandfathered status if they:

  • Eliminate or substantially eliminate benefits for a particular condition
  • Increase any cost-sharing requirement described as a percentage (such as coinsurance)
  • Increase copays by more than $5 or a percentage equal to medical inflation plus 15%, whichever is greater
  • Raise fixed amount cost sharing other than copays, such as deductibles and out-of-pocket maximums, by more than medical inflation plus 15%
  • Reduce the employer premium contribution percentage by more than 5% for any group of covered persons, or
  • Impose certain limits on benefits.

Lockton comment: If changes to a grandfathered plan exceed those permitted above, the plan loses its grandfathered status as of the date the change becomes effective. As of that date, the plan is required to come into compliance with all ACA requirements applicable to nongrandfathered plans.

Newly final regulations

The newly final rules permit employers to shift more costs to employees without losing grandfathered status. For example, on or after June 15, 2021, an employer may amend a grandfathered health savings account-compatible high-deductible health plan to increase deductibles and out-of-pocket limits (to keep pace with annual IRS cost-of-living inflation adjustments for those cost-sharing features) without jeopardizing the plan’s grandfathered status.

Lockton comment: The IRS’s annual increases in minimum deductibles and out-of-pocket expense maximums for HDHPs have not yet exceeded, on a cumulative basis, the maximum increases in fixed amount cost sharing permitted by existing grandfathered plan rules, but they might one day. The newly final regulations are a hedge against that possibility.

Grandfathered health plans may also begin, effective on or after June 15, 2021, to use a new method to determine the extent of permissible cost-sharing increases. Under this new method, plan sponsors may calculate acceptable increases in fixed costs like copayments, deductibles and out-of-pocket maximums using a “premium-adjustment percentage,” published annually by the Department of Health and Human Services (HHS), even if that percentage results in an employee cost-sharing increase greater than what would be allowed under current grandfathered plan rules. There is some complexity to the calculation that we do not attempt to summarize here.

 

HHS proposes adjusted out-of-pocket maximums and MLR calculations, and a (sort of) new marketplace special enrollment event

Each year HHS revisits a number of topics with respect to which it has guidance responsibility under the ACA. Many of these topics have to do with the individual health insurance market, but some affect employer group plans. Here’s a summary of the changes proposed by HHS for 2022 (HHS typically finalizes these proposals in the spring prior to the year to which the changes apply; look for these proposals to be finalized in early 2021).

Out-of-pocket maximums

The ACA requires nongrandfathered plans to limit the out-of-pocket (OOP) expenses incurred by insureds for in-network, essential health benefits (once the OOP limit is reached the plan typically pays 100% of covered in-network expenses). Plans must embed an individual OOP maximum where the employee enrolls in something other than self-only coverage.

The proposed OOP maximums for 2022 are $9,100 for self-only coverage and $18,200 for other than self-only coverage, more than a 6% increase over the 2021 maximums of $8,550 for single coverage and $17,100 for other tiers.

Lockton comment: The health savings account (HSA) rules under the tax code also limit the in-network OOP expenses an insured may incur under an HSA-compatible high-deductible health plan (HDHP). Those limits are different from the ACA-imposed limits in several ways. The HSA limits are in a different amount and have been subject to different inflation adjustment calculations (the IRS will issue the 2022 HDHP OOP maximums in May of next year). The HDHP OOP limits must take into account in-network OOP expenses without regard to whether the expenses are for essential health benefits, and without regard to whether the HDHP is a grandfathered or non-grandfathered plan.  Those amounts for 2021 will be $7,000 for self-only coverage and $14,000 for family coverage.

Medical loss ratio rebates

ACA rules require medical insurance companies to spend 80-85% of premium revenue (depending on the size of the plan) on claims and administrative expenses. Insurers that fail to meet that target must refund a portion of premiums to the contract holder. The refund is referred to as a medical loss ratio (MLR) rebate. HHS proposes a pair of key changes to the MLR rules.

First, HHS will require that insurers, when performing MLR calculations for the 2022 reporting year, deduct from their claim expenses the value of prescription drug rebates and other price concessions insurers obtain from prescription drug makers. The 2022 guidance will include a definition of such rebates and concessions.

Second, HHS proposes to allow insurers that owe MLR rebates to provide those rebates in the form of a premium credit beginning with rebates made in 2021 for the 2020 year.

Marketplace special enrollment after end of employer’s COBRA subsidy

ACA marketplaces, where individuals can go to obtain individual policies of medical insurance (perhaps with the help of federal subsidies in the form of tax credits), offer annual open enrolment periods but also permit individuals to take advantage of special enrollment periods upon the occurrence of certain events, like loss of employer coverage. These events are similar to, but broader than, events giving rise to HIPAA special enrollment opportunities under employer-sponsored group medical plans.

For quite some time HHS said that merely losing an employer’s subsidy toward to the cost of COBRA coverage did not trigger a marketplace special enrollment event.  Recently, it changed its tune, mentioning on its Healthcare.gov website that complete termination of an employer’s COBRA subsidy triggered a marketplace special enrollment opportunity through Healthcare.gov. Now HHS is proposing to make that accommodation formal, including it in regulations governing ACA marketplaces (whether or not managed by Healthcare.gov) and even individual markets outside of ACA marketplaces.

Lockton comment: This special enrollment opportunity through Healthcare.gov came in handy for many employees who were furloughed due to COVID-19 and whose employers offered temporary COBRA subsidies. Not all state-run marketplaces, however, treated the loss of a COBRA subsidy as a special enrollment event. Hard-wiring this special enrollment event in regulations will authorize loss of a COBRA subsidy as a special enrollment event in marketplaces everywhere, and even in individual insurance markets outside of ACA marketplaces.

A loss or impending loss of an employer’s COBRA subsidy gives the affected individual a special enrollment period that extends for 60 days before and 60 days after the last date the employer subsidized the COBRA premium.

Lockton comment: HHS is also considering, and will likely propose, that not only a complete cessation of employer contributions to the COBRA premium triggers an individual market special enrollment opportunity, but also any reduction in an employer’s COBRA subsidy will trigger that opportunity.

Individual market insurers must accept premium payments from HRAs

While individual coverage and qualifying small employer health reimbursement arrangements (ICHRAs and QSEHRAs) have not gained significant traction, HHS is encouraging employers to adopt them by proposing that insurance carriers in the individual market be required to  accept individual market premium payments made directly by these HRAs on behalf of employees.

Edward Fensholt, J.D.
Director, Compliance Services

Suzanne Bach, J.D.
Senior ERISA Attorney

Lisa Carlson, J.D.
Senior ERISA Attorney

Contributor: Sarah Martin, ASA, MAAA
Vice President, Pharmacy Analytics

Not legal advice: Nothing in this alert should be construed as legal advice. Lockton may not be considered your legal counsel, and communications with Lockton's Compliance Services group are not privileged under the attorney-client privilege.

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