Compliance Q&A: High-Cost Claimants: ADA, ACA, HIPAA and ERISA

Summary 

Individuals with serious, chronic illnesses are likely to incur large health care expenses. For many employers these costs, including any significant stop loss laser, are difficult to absorb. Naturally, many employers seek changes to their health plan designs as a way to manage costs. While self-insured employers might enjoy more flexibility in plan design than their fully insured counterparts, options may still be limited when it comes to managing the costs associated with chronic illnesses.

Disease and data management programs can be effective, but employers are increasingly looking for ways to exclude high-cost claimants from their plans, whether through offering a cash incentive or by more creative means. Several things limit or even prohibit an employer’s ability to do this. Compliance challenges in this context to consider include the Americans with Disabilities Act (ADA), the Health Insurance Portability and Accountability Act (HIPAA), and the ACA’s market reform provisions and its prohibition against employer payment plans.

Detail

ADA

The ADA, enforced by the Equal Employment Opportunity Commission (EEOC), generally prohibits discrimination against qualified individuals with a disability. Specifically, Title I of the ADA covers private, nonprofit and governmental employers with 15 or more employees and provides that “no covered entity shall discriminate against a qualified individual on the basis of disability in regard to job application procedures, the hiring, advancement, or discharge of employees, employee compensation, job training, and other terms, conditions, and privileges of employment.”¹ The ADA makes it unlawful to discriminate in all employment practices, including benefits.²

While one might not consider hemophilia a disability per se, “disability” under the ADA is defined as: (A) a physical or mental impairment that substantially limits one or more major life activities of such individual; (B) a record of such impairment; or (C) being regarded of having such an impairment.³ The EEOC has defined an “impairment” as a physiological disorder affecting one or more named body systems, a mental disorder or a psychological disorder.⁴

Arguably, hemophilia could be construed as a chronic and debilitating condition and could therefore come under the purview of “disability.” Any exclusion for associated treatment could potentially be viewed as discrimination in benefit offerings. Going a step further in plan design options, even shifting costs by raising the copayments for prescription drugs used to treat conditions such as hemophilia or redesigning a plan to restrict availability to treatment centers or providers more likely to be used by those with chronic illness, could be viewed as discrimination under the ADA.

We do have some guidance however under the EEOC’s Enforcement Manual that leaves open the possibility for disability-based distinctions in benefit design. The Enforcement Manual (the agency’s internal investigation manual) includes guidance on when a disability-based distinction constitutes a violation of the ADA. It states in part that employers who have made a disability-based distinction in a benefit plan will be liable for a violation of the ADA unless it can show that the distinction is justified. In its discrimination defense, an employer must show two things:

1. The benefit plan is bona fide; and
2. The plan is not a subterfuge to evade the purposes of the ADA.⁵

In order to be “bona fide,” a plan has to 1) exist and pay benefits; and 2) the terms of the plan must have been accurately communicated to eligible employees. EEOC investigators will look to the plan documents to confirm whether or not benefits have actually been paid.

The next standard is related to subterfuge, which is disability-based disparate treatment in an employee benefit plan that is not justified by the risks or costs associated with the disability. This also refers to distinctions based on a certain disability that are not “based on sound actuarial principles or related to actual or reasonably anticipated experience.”⁶ According to the EEOC Enforcement Manual, employers can do one of several things to prove that any disability-related distinction in its benefit plan offerings is not subterfuge:

1. An employer may prove that it has not engaged in the disability-based disparate treatment alleged. An example in the Enforcement Manual provides that an employer has not engaged in subterfuge where the condition predated enrollment in the plan and the exclusion was based on a preexisting condition classification.
2. The employer may provide that the disability-based disparate treatment is justified by legitimate actuarial data, or by actually or reasonably anticipated experience, and that conditions with comparable actuarial data and/or experience are treated the same way.
   • Here, actuarial data will be required to measure the likelihood that the employer will incur insurance costs related to the disability and the magnitude of those costs as they arise. Employers will need to show that any reduction in coverage for disability is required to account for an increased possibility that the benefit will be claimed or amounts required for coverage will be higher. Employers cannot rely on any actuarial data that is outdated or based on fears or stereotypes about the disability at issue.⁷
   • It is important to note that employers must produce actuarial data that proves they have treated other conditions that pose significant risks and costs in the same manner. They cannot simply produce data that shows the cost and risk to a plan for treatment of a certain condition as justification for different treatment of it.
3. Employers must prove that the disability-related disparate treatment is necessary to maintain the solvency of the plan. They can do this through:
   • Offering proof that the disability would require such substantial payments of benefits that the fiscal soundness of the plan would be at jeopardy; and
   • Showing that there is no non-disability alternative benefit plan design change that could limit those fiscal consequences.
4. An employer may prove that the practice or activity related to the disparate treatment is necessary to avoid unacceptable changes in the plan’s coverage or premiums (i.e., an increase on co-payments or deductibles, limits to the scope of coverage, etc.) that would:
   • Increase cost to other employees so much that it would in effect render the plan unavailable to a significant number of those employees;
   • Make the plan so unattractive that it would result in significant adverse selection;
   • Make it so unattractive that it effectively impacts employer recruitment and maintenance of a qualified workforce with competitive benefit offerings.
5. The employer can argue that a particular treatment it has excluded provides no medical benefit by using scientific data to show the disability-specific treatment does not cure the condition, slow the degeneration, or maintain current health status of individuals with the disability who receive the treatment.
   • Note that employers cannot use this argument if it covers treatment for other conditions that are of a similar vein, and such methodologies of treatment are of no medical value when judged under the same standards.

Subterfuge does not require that the employer intends to discriminate in hiring, promotion, termination or any other non-benefit employment decisions, as was required under a prior version of the Age Discrimination in Employment Act. The ADA expressly prohibits discrimination in benefits, so it isn’t necessary to prove that discrimination in benefits is a means to an end to discriminate in other employment related decisions.⁸

Under the ADA, if the plan has actuarial evidence to support that it is not a subterfuge under the Enforcement Manual, then the plan might pass under the standards set forth by the EEOC.

Employers should always keep in mind that any exclusion or limitation of treatment for a particular condition could be viewed as potential discrimination under the ADA and could lead to litigation. Consultation with counsel should be a priority before instituting a plan design that carves out treatment for any particular condition.

HIPAA

HIPAA’s nondiscrimination provisions generally prohibit group health plans and insurers from using health factors to discriminate among similarly situated individuals with regard to eligibility, premium contributions, and level of benefits or coverage. Generally, HIPAA provides the following: “… benefits provided under a plan must be uniformly available to all similarly situated individuals….Likewise, any restriction on a benefit or benefits must apply uniformly to all similarly situated individuals and must not be directed at individual participants or beneficiaries based on any health factor of the participants or beneficiaries (determined based on all the relevant facts and circumstances).”⁹ In other words, a benefit or treatment exclusion cannot target an individual participant or beneficiary because of a particular health factor.

HIPAA includes all of the following as health factors: health status; mental condition (both physical and mental); claims experience; receipt of health care; medical history; genetic information; evidence of insurability; disability; and any other health-status related factor determined appropriate by the Secretary of Health and Human Services.¹⁰ As you can see, what is considered a health factor under HIPAA, and therefore cannot be used as the basis for discrimination in eligibility, premiums or coverage, is broadly construed.

There is a safe harbor under HIPAA that provides if the exclusion applies to all plan participants (or one or more groups of similarly situated participants) and is effective no earlier than the first day of the following plan year, it won’t be considered targeted at any one individual. So, if a plan amendment is used to restrict or carve-out coverage for a particular condition but is effective at the beginning of the next plan year, it will not be deemed to be aimed at a specific individual. Employers may not target one individual; if it is targeted to one individual while others are covered it will be problematic regardless of the effective date as of the beginning of the next year. See the following example taken from the HIPAA regulations:

HIPAA does not prohibit group health plans from treating individuals with an adverse health status more favorably than it treats others,¹² which is also sometimes referred to as “benign discrimination.” However, offering opt-out incentives primarily to individuals with adverse health conditions is not considered permissible benign discrimination.¹³ Opt-out incentives are discussed in more detail below.

ACA

Employers are expressly prohibited from paying high-risk employees to opt out of their group coverage and cannot reimburse employees for individual health insurance policies. Guidance provided in ACA FAQs Part 22 delineates three ACA-prohibited approaches to offering employee benefits. Q&A 1 and 3 reiterate prior guidance on prohibited employer payment plans, those arrangements by which employers reimburse employees for individual health policies. Q&A 2 focuses on the prohibition against providing high-claimant employees with cash to opt out of the employer’s group health plan to purchase individual coverage.¹⁴

• Employer Payment Plans: Generally, the Internal Revenue Service (IRS), Department of Labor (DOL) and Health and Human Services (HHS) (Departments) have provided that any employer arrangements that reimburse employees (or pay directly) for individual premiums are prohibited under the Affordable Care Act (ACA), whether employers treat the money as pre-tax or post-tax for employees. According to the Departments, these arrangements are considered group health plans that cannot be integrated with individual market policies to satisfy the ACA’s market reforms.
• Reimbursing individual premiums will violate the ACA’s market reforms and can trigger penalties for employers, including excise taxes of $100 per day for each applicable employee ($36,500 per year, per employee) under Internal Revenue Code Section 4980D.¹⁵
• High-Claimant Employees: The Departments issued a set of FAQs detailing guidance on employer health care arrangements such as employer payment plans. In that set of FAQs, the Departments state that employers are expressly prohibited from paying high claimant employees to opt out of their employer-sponsored health plans.¹⁶
  This prohibition exists regardless of whether the high claimant employee actually purchases individual coverage or not.

According to the Departments, offering cash to high-claims-risk employees is discriminatory, and while prior guidance issued by the Departments might allow for benign discrimination, such as more favorable rules for eligibility or reduced premiums or contributions based on an adverse health factor, offering only high-risk employees cash to opt out of the employer’s plan is not benign discrimination; it is discrimination based on a health factor. Additionally, the Departments note that these arrangements are not considered benign discrimination because the opt-out doesn’t reduce the amount charged to the sick employee. Instead, it “effectively increases the premium or contribution the employer’s plan requires the employee to pay for coverage because, unlike other similarly situated individuals, the high-claims-risk employee must accept the cost of forgoing the cash in order to elect plan coverage.”¹⁷

In other words, it costs the high-claims-risk employee more to participate in their employer’s group health plan, and group health plans are prohibited from charging a premium differential based on a health factor.

• The Departments note that while guidance allows for expanded eligibility and subsidized coverage under an employer plan based on an adverse health factor, offering cash to those who are sick actually discourages them from participating in the employer’s group health plan, which, again, is adverse discrimination based on a health factor.¹⁸

ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for employee benefit plans maintained by private-sector employers. ERISA not only imposes certain reporting and disclosure requirements but also establishes standards of conduct for those who manage employee benefit plans and their assets, called fiduciaries.

Increased attention to welfare benefit plans and fiduciary responsibilities relating to transparency and disclosure requirements imposed by the Consolidated Appropriations Act of 2021 (CAA) and Transparency in Coverage (TiC) rules place a greater fiduciary burden on plan sponsors. As a result, there is heightened scrutiny of decisions made by plan sponsors, who are always considered to be plan fiduciaries. In looking at fiduciary duties, one of the most important responsibilities is to ensure that plans comply with the numerous laws and regulations impacting employee benefit plans. Lawsuits alleging fiduciary violations under ERISA highlight increased scrutiny of health plan sponsors and underscore the importance of prudent plan management.

While there are several fiduciary duties, we will focus on the Duty of Prudence here, which requires a fiduciary to act with the care, skill, prudence and diligence of a prudent person in similar circumstances (i.e., have expertise to manage the plan or hire and monitor someone who does). The Duty of Prudence specifically includes overseeing compliance with all benefit regulations, including those discussed above in the context of high-cost claimants.

The Duty of Prudence focuses more on the process for making decisions than on the outcome. It is important to document all health plan decisions and why a certain decision was made. As plan fiduciaries, plan sponsors should keep this in mind when considering implementing any high-cost claimant strategies.

Conclusion

Managing potentially catastrophic costs associated with chronic illness is an increasing burden on self-insured plan sponsors. As health care costs continue to rise, an influx of creative cost containment strategies is anticipated. Increased agency enforcement action and litigation in this area is also expected. Given the potential for penalties and litigation, any cost-containment strategy considered by plan sponsors, even those that do not directly pay high-cost employees to opt-out of an employer’s group health plan, need to be evaluated in the context of the ACA, ADA, and HIPAA. State and federal nondiscrimination rules might also affect this analysis. While self-insured plan sponsors may enjoy more latitude in plan design, any such latitude is limited by guidance discussed throughout this Q&A.