Section 1557: Removing the Gender Divide in Employer Medical Plans
By Jennifer M. McCormick, Esq.

The fourth quarter is exciting. Not only do we have the holidays to look forward to, but we have so many opportunities and ideas to contemplate for the upcoming plan year. Generally, over the course of the year we see regulations take effect and guidance clarified, and even learn some new cost containment techniques. Unfortunately, this does not always mean that we know exactly what must be revised in our health plan documents for the upcoming plan year in order to ensure we fully implement these compliance updates and cost savings. To complicate matters, we’re on the edge of our seats to see whether (and how) the recent presidential election could further disrupt the Affordable Care Act (ACA).

This is particularly true for some employer groups who are questioning what (if anything) they must modify in their health plan to comply with the ACA non-discrimination rule. In order to alleviate any heartburn this specific aspect of ACA may cause for the upcoming renewal season, let’s try and break down what Section 1557 really means for plan sponsors.

What Is Section 1557?

Section 1557 prohibits discrimination in certain health programs and activities on the basis of race, color, national origin, sex, age, or disability. It’s not news that discrimination against an individual on the basis of race, color, national origin or disability is prohibited – but – Section 1557’s expansion of these protected classes to now include discrimination on the basis of sex, is. As with other new regulations, the issued guidance leaves us with a lack of clarity and many unanswered questions; however, despite confusion and uncertainty, employers are still required to review and potentially revise internal processes and documents.

This article focuses on the new classification of “sex” and the new corresponding considerations for plan sponsors. For instance, if Section 1557 is applicable to an employer’s health plan, that plan cannot discriminate based on gender identity, meaning it cannot deny coverage based on an individual’s sex or gender identity (i.e. an individual’s internal sense of gender, which may be male, female, neither or a combination).

Prior to making any Section 1557 related updates, however, it is important to understand what is required, and of whom. For example: (1) who must comply with Section 1557; (2) what does Section 1557 exactly require; (3) are there exceptions; and (4) what must change?

Who Must Comply?

When more closely examined, the scope of Section 1557 is not particularly vast as it is only applicable to particular covered entities. For the purpose of this rule, a covered entity is an entity that operates a health program or activity, any part of which receives Federal financial assistance. Specifically, covered entities include all health programs and activities, any part of which receive federal assistance from HHS, health programs and activities administered by HHS (including the Federal Marketplace), and health programs and activities administered by entities under Title I of the ACA (including State Marketplaces).
This generally means that an entity that receives a grant, loan, or subsidy or has another arrangement whether the federal government provides funds, services of federal personnel or property (real or personal) is subject to the Section 1557.

Entities likely subject to Section 1557 include those involved in the administration of health care. For example, health insurance issuers, hospitals, health clinics, physicians’ practices, pharmacies, nursing homes, dialysis facilities, community health centers, providers that accept Medicare, and issuers on the Marketplace are generally subject to Section 1557.

Once applicability of Section 1557 is confirmed, the entity must next make compliance related changes. Ensuring compliance is difficult, particularly since the text of Section 1557 describes what must not be done, instead of what must be done.

What’s Required?

According to the rule, an entity subject to Section 1557 must not: (1) deny, cancel, limit or refuse to issue health coverage based on sex; (2) deny or limit a claim; (3) impose additional cost sharing; or (4) employ discriminatory marketing or benefit design. Specifically, this means a health plan must not deny or limit treatment for any health care that is ordinarily or exclusively available to individuals of one gender based on the fact that the person seeking services identifies as belonging to another or different gender.

While effective as of July 18, 2016, if Section 1557 requires changes to a health plan, the rule does not become effective for the health plan until the first day of the first plan year beginning on or after January 1, 2017.

Changes to a health plan will be necessary if the plan design denies coverage based on gender identity, denies treatment or access to facilities for sex-specific ailments, categorically excludes services related to gender transition or excludes transition related treatment as experimental or cosmetic. As a result, health plan documents must be carefully reviewed and any relevant exclusionary language timely removed.

Additionally, entities subject to Section 1557 must comply with certain notice and tagline requirements. Unlike the health plan changes, these notice requirements took effect 90 days after the July 18, 2016 effective date.

One of the requirements is that notice be placed in significant publications and significant communications targeted to beneficiaries, enrollees, applicants, and members of the public. While the term ‘significant publications and significant communications’ has not been explicitly defined, the agencies suggested they will interpret this term broadly and it will not be limited to those publications or communications intended for a broad audience, but could also include those directed at individuals. As a result, it will be important for employers to review their communications to ensure compliance with the notice requirements.

Section 1557 outlines what must not be done with respect to benefits and requires that notices be included in certain materials, and hints at potential exceptions to these requirements.

Are There Any Exceptions?

This rule does not include an exception, unlike other ACA requirements which allow for certain exemptions and accommodations (i.e. the contraceptive piece of the preventive care requirement).

The rule, however, does state that certain protections already exist and Section 1557 would not displace regulations issued under the ACA related to preventive health services. Further, HHS did note that application of any requirement under Section 1557 which would violate applicable federal statutory protections for religious freedom and conscience is not required. Cases in multiple jurisdictions are currently underway and we expect to see additional guidance on this issue as a result of the litigation.

Additionally, a third party administrator (TPA) subject to Section 1557 does not render a plan for which it administers benefits automatically subject to Section 1557 (and vice versa). A TPA will only be liable for Section 1557 non-compliance if their own actions are discriminatory.

As it relates to the notice requirement, the preamble to Section 1557 did note that entities subject to the rule may exhaust their current supplies of significant publications and communications prior to incorporating the required notice.

What Must Change?

Guidance implies that Section 1557 will be interpreted broadly so entities must first decide if they are subject to the rule.

If subject to the rule, the health plan should be reviewed for compliance. Note that the rule does not explicitly require coverage of any particular service (either surgical or non-surgical) to treat gender dysphoria, gender identity disorder, or any individual that is transitioning genders, exclusions or coverage limitations related to sex, gender dsyphoria or sexual orientation must be removed. However, if a plan has an exclusion for sex change surgery for individuals diagnosed with gender dysphoria, it should be removed or modified.

Further, the rule does not require a plan to cover health care that is based on gender when the care is not deemed to be medically necessary (e.g. prostate exam for a woman that identifies as a transgender male). Additionally, a plan may use reasonable medical management to apply neutral, non-discriminatory standards (as long as it resulted from “a neutral rule or principle” when adopted and the reason for its coverage decision was not a pretext for discrimination).

If not subject to Section 1557, the health plan is not required to make benefit changes. The entity, however, should evaluate their risk tolerance as there is still the potential for the U.S. Equal Employment Opportunity Commission (EEOC) to investigate complaints of discrimination by the employer. Cases regarding plan exclusions of sex reassignment surgery are currently pending in the courts. Further, this should be a significant consideration after a federal court ruled on November 7, 2016 to deny a motion to dismiss a sex discrimination case that the EEOC had filed. Specifically, the EEOC’s motion explained that sexual orientation discrimination was a form of prohibited sex discrimination.

Even if an entity has a high tolerance for risk (or is not concerned about potential employment discrimination), consider other reasons for complying with Section 1557, including the impact on potential claims. According to a June 2016 study from the Williams Institute, there are an estimated 1.4 million adults who identify as transgender in the United States, or 0.6 % of the population. Many entities are opting to cover these benefits and coverage could be seen as a competitive advantage or good public relations.

Summary

Since the final rules were issued, insurers and other industry entities are taking a position on how to address Section 1557. Insurers are directly subject to 1557 and fully insured plans taking a conservative approach are being modified to include surgical and non-surgical treatment for gender dysphoria.

Employers subject to Section 1557, and those not subject but who wish to avoid EEOC scrutiny, should remove any exclusions from health plans which could be viewed as categorical exclusions of transgender services. The decision to cover or exclude transgender benefits, however, ultimately depends on the risk adversity of the employer. As a result, every employer and plan sponsor must review their situation on a case by case basis for Section 1557 applicability and modify relevant materials accordingly.

Of course all of this could become irrelevant if the ACA is repealed or replaced, so I guess we’ll have to wait and see…

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How to Avoid Common Pitfalls When Managing a Self-Funded Health Plan
By Brady C. Bizarro, Esq.

Since the passage of the Affordable Care Act in 2010, employers have become increasingly aware of the potential financial benefits that come with adopting a self-funded health plan. A primary benefit of self-funding is that under the Employee Retirement Income Security Act, self-funded plans are shielded from the reach of state insurance regulations. States are unable to regulate these self-funded ERISA plans as they would fully-insured health plans.

As a result, employers are empowered to use innovative plan language to craft an affordable, flexible plan. Additionally, employers benefit from uniform coverage and cost continuity because a single plan can cover many employees in multiple states.

Despite the real advantages of self-funding, many employers still seek out tools they can use to transfer actual or perceived risk away from their plans. That's where incentives and disincentives come into play -- but there are potential pitfalls to be aware of.

Federal law expressly prohibits discrimination against plan participants based on sex, disability, health factors, and other criteria. For example, offering incentives to enroll in Medicare is not permitted according to the Medicare Secondary Payer Act. This is part of the basic structure of the act and, as might be expected, the regulatory bodies charged with enforcement take a very broad view of what actions might constitute such an incentive. While it may be intuitive for a plan to suggest that its participants can, for a monetary incentive, terminate coverage under the plan and instead become covered under Medicare, this runs afoul of the act.

According to the Department of Labor, an employer can't give a cash reimbursement for the purchase of an individual market policy. If it does so, the payment arrangement is part of a “plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee.” Therefore, the arrangement is a group health plan under ERISA. Under the ACA, such arrangements can't be integrated with individual market policies. To be compliant with the ACA, a premium reimbursement plan (or HRA) must be integrated with a compliant group health plan.

Offering a choice between cash and health benefits is generally allowable, but the compensation can't be designated specifically for the payment of individual premiums. Any attempt to condition these payments on proof the employee enrolled in exchange coverage would therefore be noncompliant with the ACA.

An offer of cash in lieu of benefits would also be deemed discriminatory if made only to high risk or ill employees. Such an offer must be extended to all employees. It's also worth noting that if the employer offers affordable coverage which meets the minimum value requirements, employees would not be eligible for subsidies on the exchange -- and exchange coverage would therefore likely be less affordable or attractive to an employee than the employer’s group plan.

Modifying copays and deductibles is another way an employer can incentivize employee behavior. The Department of Labor indicates that a plan may waive or lower a copayment for the cost of certain services in order to encourage participants to seek a certain type of care -- such as well-baby visits or regular physicals. This can benefit the group by ensuring employees and their families are healthy. Similar to copayments, plans may waive or lower deductibles for certain services at the employer's discretion. It should be noted that a HSA-qualified high-deductible health plan is can't retain its HSA qualification if the plan pays first-dollar for services other than preventive care -- so HDHPs can't utilize deductible waivers as an incentive in most cases.

Just as providing incentives to employees may lower the cost of self-funding, so can disincentives.

The simplest type of disincentive is raising deductibles and even lowering the percentage of covered services. By doing this, the plan sends the message to participants that remaining enrolled in the plan may not be the best financial choice. At the very least, a raise in price may cause participants to explore other options.

However, employers should note that raising deductibles could adversely impact the plan in the form of driving even healthy lives to the exchanges. In other words, recklessly including high deductibles in a plan could drive away the very lives the plan needs to thrive, as well as those it wanted to disincentivize in the first place.

An alternative option to consider would be for the plan to have no deductible up to a certain point, at which point the deductible becomes applicable -- and the deductible is the highest permitted by applicable law. By doing so, the plan can ensure that the healthy lives it wants to keep on the plan are satisfied with the care offered because they won't have a deductible for their care.

A “skinny plan” is a type of plan that has been developed in the wake of the ACA. As the ACA imposes many requirements on self-funded plans, the skinny plan attempts to comply perfectly with the requirements of the ACA, and cover the bare minimum allowed by law. A skinny plan is a sort of bare-bones model -- it's generally considered not suitable to employees who have underlying conditions, who may need specialty care. The ACA doesn't require that the plan cover specialty care, so skinny plans don't cover a lot of services that many employees need on a regular basis.

The ACA requires that all large employers offer healthcare to their employees -- but there's no requirement that the employees enroll on the employer’s plan. If the employer offers a skinny plan, and many employees elect to not enroll due to its lack of coverage of services they may need, then the employer has still complied with the ACA.

One potential pitfall of offering a skinny plan may be relevant to employers with smaller employee bases; if not enough employees enroll, maintaining a self-funded plan may prove unfeasible. For this reason, offering a skinny plan is likely only a good option for larger employers.

Pursuing healthcare cost containment strategies is increasingly important for employers who wish to offer affordable health insurance to employees, especially after the passage of the ACA. Self-funded plans can benefit from creative plan design -- and managing risk with incentives and disincentives can provide even greater savings. Provided that employers can stay compliant with anti-discrimination regulations, self-funded health plans will continue to be uniquely flexible and offer real savings to both employers and employees alike.

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Confessions of a Self-Insured Employer
By Adam V. Russo, Esq.

As an employer and founder of a business, I will never forget my first experience purchasing health insurance for my employees at The Phia Group. It was 2002 and I was so excited that the company I co-founded in my mother’s basement with my best friend from college was successful enough to actually need health care coverage because we finally had employees. Excitement turned to frustration, and that experience with the health insurance market opened my eyes and sparked within me a new level of passion for revolutionary change; to change how health insurance should look and feel.

How could purchasing health coverage be so different than every other thing that we purchased for the office? I'm not talking about pens, desks, or paper; I’m talking about other employee benefit options such as life insurance, 401k plans, and our firm’s errors and omissions coverage. In every other purchase we made, there was transparency, there was true competition, and there was actual and meaningful discussion. When it came to buying health insurance there was...well, nothing.

The insurance broker walked into my office and after exchanging pleasantries she showed me three options for health insurance. The first option was with a certain insurance company that the broker clearly wanted us to use. There were color brochures for this carrier with great family photos; broad smiles and even bigger fonts. The other proposals didn't come with the fancy colorful brochures (or even brochures at all for that matter). It was clear that the broker wasn't being transparent and had her own agenda to pursue. The broker was getting great commissions from this one particular carrier and that was it. I asked basic questions that in any other industry would be easy and obvious to answer or research. She just smiled.

I was told what the premiums would be and how there were basically two options available to my employees. They could have a $20 or $50 copayment coupled with a few deductible options. So (basically), the “actual” consumers of the health services (a.k.a. the employees), would believe that the cost of the services are either $20 or $50 - in their minds this is the total bill. There was no skin in the game for my employees.

There was nothing that my employees could do to lower the overall cost of the plan. If every single one of my employees was in perfect health and never even saw a doctor, my plan's rates would be guaranteed to increase over 10% a year. So what is the incentive? For me to be creative? For my employees to care? There was nothing we or anyone else could do about the cost. We were helpless and that's how it must feel for every employer or insured group that pays insurance premiums to a fully insured carrier or exchange marketplace policy.

Like you, I figured that maybe this was just my experience and that this one broker was an anomaly, but I have since realized that this is the norm. The broker who actually offers expertise, consults with their clients and focuses on data and plan design is the anomaly. For most of us, we are at the whim of the carriers.

There is no shopping for rates unless you want to strip down or increase the contributions of your employees.

Imagine buying a car and being told every year that you will pay more for the same car (that you hardly used), or you can strip it down in an effort to maintain the payment level and keep the same monthly rates. Next year you will only have a 10% increase if you agree to remove the leather interior! That is exactly what happens with healthcare. The reason “why” is because nobody expects or demands anything different. The options available via the exchanges, for many, are even worse. Many people only have one option - like in the old Soviet Union where the select few who could afford it had the choice of buying a Russian Lada in black or white; the rest get what they’re given.

Think about this for a second. People spend more time choosing the big screen for their living room than they do where and how they get their health care. New parents spend more time researching the day care center for their children than the hospital or pediatrician that treat the same children. CFOs across the country spend so much of their time trying to find ways to increase profit and reduce expenses yet rarely think about health care costs. They look at the revenue stream and the expense lines to see what they can do to cut costs and increase profitability. Most CFOs just assume that their health insurance will go up, and compare it to the cost (penalty) of offering nothing; that the expenditures are essentially a fixed cost that grows each year. There is hardly any discussion relating to how to lower it since these individuals feel powerless to do anything about it.

As someone who risked it all and started my own business, there was no way I was going to adopt this approach with my health care spend. This was the moment I realized that I needed control over my healthcare dollars and looked at self-funding my employee benefit plan for the first time, almost a decade ago, and we have never looked back. The beauty of self-funding is that you can lay your own path. You are in total control of your health plan and you can design the features to meet the needs of your employee population.

The reality is this – a health plan design for a tire manufacturer should not be the same as for a chain of yoga studios. Unfortunately in today’s fully insured market – where a carrier sells you a cookie cutter policy, it is. By having access to the claims data, a self-funded employer can actually see how and where your employees are spending the plan's health care dollars. Using the data analytics readily available only to a self-funded plan, you can then design a plan that meets your needs.

Incentivizing Our Employees through Unique Plan Design

Medical service providers are businesses. They service customers who pick what to buy, but don’t pay the fee directly. A kid at a baseball game with dad’s credit card will buy more hot dogs, regardless of the price, and the vendor knows it. When the price isn’t something the consumer considers, the supplier has no reason to cap it.

If your employees do not care about the cost of health care, then costs will never decrease. Step one then, is to care. With fully funded insurance, savings belong to the insurance carrier. I understand not caring about that! But with self-funding, most employees (wrongfully) feel that if a self-funded plan saves money then the money just goes into the CEO’s pocket. This is not true, as every dollar recouped or not spent goes back into the general assets of the plan, which is a combination of employee and employer contributions. To combat this incorrect perception, we have educated our employees about who pays for the plan (they do), and incentivized our employees to actually care about the cost of the care they get – not just their co-pays, deductibles and out-of-pockets.

It all starts with your health insurance employee plan document. When you open The Phia Group plan document, the first thing you see is a section titled “cost containment incentives.” It truly is an actual page in the document that tells employees how they can make money and put cash in their pocket by looking at the whole bill and not just their co-pay. The first time an employee gets money in exchange for creating plan savings, word spreads like wildfire throughout the organization. People talk about it at the water cooler; and whether it’s $100 in savings or $30,000, every bit counts and adds up.

As mentioned, our plan document features numerous provisions enabling participants to enjoy substantial savings and benefits when they take proactive measures to contain overall plan expenditures. We address the various instances where responsible, cost-containment behavior is incentivized.

For instance, we created a claim audit review program designed to reward employees for identifying erroneous charges on bills recoverable by the plan. Simply put, if the patient identifies something questionable in their “bill” (actually, the explanation of benefits or “EOB” since participants rarely see the provider bill itself), and the plan doesn’t have to pay it or is able to recoup the payment, the patient gets 25% of the savings in their pocket, regardless of the amount. Trust me; we only pay for services that actually occurred and are valid! One employee received a check for over $10,000 for identifying $40,000 in claims we didn’t have to pay. This is promoted across our entire organization.

This next one has likely saved us many thousands in potential claim costs. Participants who preemptively consult with our human resources department regarding non-emergency “to-be-scheduled” medical procedures, to discuss options available to the participant, can receive a financial reward. We had a recent situation where one of our employees needed a medically necessary surgery. The employee’s surgeon could have performed the operation at two different facilities. The employee met with our HR team and after reviewing the claims data available to us we realized that the higher quality facility would have a total cost of $7,000 to perform the operation, while the other facility, using the same surgeon, would cost $40,000. We saved $33,000 and our employee received 25% of this amount in a check payable to them! That’s called having skin in the game.

At any other self-funded plan, employees would just go to the place that may be closer to their home, or maybe they know a friend who works at the hospital, or they pick one over the other for any other reason ... perhaps they choose a location with better parking because at the end of the day, they have the same co-pay and deductible regardless of where they go. They have no idea that one facility will cost the plan tens of thousands of additional dollars for the same exact procedure. However, at our company they do know and they do care ... and that’s a real difference maker.

We have another provision stating that there is no co-pay for the use of urgent care facilities in lieu of a hospital’s emergency room. Think about how much time and money this saves the patient and the large bill that doesn’t exist for the plan. We took it a step further by stating that the co-pay (normally applicable to diagnostic services if performed at a hospital) is waived if the service is sought at any self-standing non-hospital facility. What this provision has done is change the behavior of our employees. When they need testing done, they ask if it can be done at a non-hospital facility. In addition, in order to encourage the use of generic medication whenever possible, we waived any co-pay.

The cultural change affects every aspect of our health plan and the reduction of overall plan spending. Under our current network, you can purchase a nebulizer after the network discount for a total plan cost of $200. If you go to Amazon.com, you can purchase that same nebulizer for $118 with free two day shipping on Amazon Prime. It’s a savings of $82 and the employee receives a check for 25% of that amount. While it’s a small amount compared to the overall plan expense, it’s a huge change in our employees’ behavior. They look for ways to reduce the cost, whether it’s big or small, because that $20.50 is added to their paycheck.

The Future is Now

Instead of telling their employer plan sponsor clients to pay more in premium, deductibles, out of pockets and co-pays, brokers should be telling their clients and employees the real reason behind the high cost of health insurance – the unjustifiable facility charges. Facilities are taking advantage of the fact that most employees only care about their out of pocket, co-pays and deductibles – not the entire bill. This is in essence the best thing about networks and the worst thing about networks. There is no patient noise because they don’t care. If they only have to pay $20, the fact that it costs the employer $20,000 or $200,000 doesn’t matter. So how do we get the employees to care? Easy. Self-fund your health plan, teach the participants how it’s funded, instill an appreciation for the fact that the medical bills are being paid with their money, and give them cash – incentivize savings.

At the day of the day, what really matters to employers? Do they care what the network is, what the logo looks like, what the overall discount is, how many free tickets to the ballgame they receive or how fancy the website looks? I would argue no. As an employer myself, I feel that I have the right to answer this question with some level of authority. I want my employees to be happy. I want my employees to feel secure and that security includes a respectable pay check for a hard week’s work and health insurance coverage that will be there for them and their loved ones when they need it most.

The only way to ensure there is reliable health coverage for my employees in the future is to innovate and get everyone to care. When an insurance carrier collects premium, takes all the risk associated with paying medical bills, and none of us know (or have a reason to know) what things cost, we don’t care. If we don’t care, we don’t innovate. The simplest ways to innovate right now and get the most bang for our buck is to put ourselves and our employees in a position of financial risk and reward, tied to healthcare spending, focus less on discounts off of arbitrary prices and focus more on what is actually being charged.

We can revolutionize health care and insurance in this country. Self-funding is the first step towards offering the innovation, technology, plan design, and customization tied to having skin in the game, and that is what this country needs.

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What You Don't Know Can Hurt You: Be Prepared For the Unintended Consequences of Effective Cost Containment
By Christopher M. Aguiar, Esq.

The cost of healthcare in the United States is out of control, and virtually everyone operating in the world of healthcare should know the root of the problem. As stated by Gerard Anderson, a healthcare economist at the Johns Hopkins School of Public Health, ‘the prices are too @#$% high.'[i] A sweeping statement that encapsulates the healthcare conundrum in five simple words. Many in the industry are giving it their all to try to combat those prices, and in no area is that more prevalent than in the world of self-insurance, where a new cost containment idea appears to service daily. But to launch those ideas without a full understanding of all the elements of a self-funded benefit plans and all the issues that may arise can put plans and their advisors in the line of fire. Whether it is through ineffective implementation of a cost containment strategy (make sure your plan language is strong before you start repricing those medical claims), misunderstanding the many relationships a plan enters into (consider your stop loss and network obligations before you try to implement any cost containment initiative), or not evaluating the situational prudence of a particular strategy, administrators must avoid going into any cost containment venture blindly.

Why would any plan or administrator rush into a decision with such broad implications on its benefit plan? Quite simply, the pressure is on. Increasingly, courts are holding plans and advisors responsible for their duties as plan fiduciaries and careful oversight and dissemination of plan assets is under a microscope Unless you have been living under a rock, you know how aggressively health costs are rising, but just in case, consider the following statistics:

1. Healthcare inflation has outpaced inflation of the consumer price index every year dating back to at least 2005. [ii]
2. In 2015, Healthcare inflation outpaced the consumer price index by 900%. [iii]
Those statistics do not even specifically reference some of the shortfalls of the highly touted savior of healthcare, the Affordable Care Act (the ACA).
3. According to the Henry J. Kaiser Family Foundation, between 2014 and 2015, Benchmark Silver Premiums were either flat or increased up to more than 10% in the majority of the country. [iv]
4. The number of exchange participating insurers is down approximately 25% from 2013 to 2016 with major players such as Aetna, United Health Care, and Humana all pulling themselves from the marketplace. [v]

Due to the continued increase in costs, benefit plans and their advisors continue to develop viable ways to provide robust benefits. When faced with challenges, business owners rely on their entrepreneurial spirit and seek innovative answers; many are looking to self-insurance as their alternative.

An excellent example of some innovative approaches for which those who seek alternatives often underestimate the downstream consequences is a reference based pricing approach to claims payment. Perhaps the most innovative and often discussed strategies, reference based pricing is still utilized by a small percentage of plans because its implementation is complicated and can be difficult and volatile. There are different types of reference based pricing plans that can help minimize the disturbance while maximizing their impact on savings. Some plans choose to go with a very aggressive approach, severing all arrangements with networks and instead paying all claims as if they are out of network by setting pricing parameters based on several data references derived from publicly available sources such as Medicare or hospitals' cost data. On the surface, an approach like this can be sold quickly by savvy sales professionals because they can tout hundreds of points in savings, virtually overnight. Unfortunately, there are some very important details that must be considered before proceeding: 1) no pricing model will be successful unless you have airtight plan language; 2) unless you work with a stop loss insurer that understands the complexities of a reference based pricing model and who will support the efforts, any reference base pricing approach will likely fail; and most importantly, 3) any aggressive repricing model will experience backlash as hospitals use the best resource they have against the benefit plans, the patients. The stark reality and the unrest it causes often leads to the demise of such innovative endeavors. As so many self-funded professionals will tell you, and especially with the new batch of organizations looking to self-fund in a post-ACA world, once burnt, a self-funded employer flees to the world of the fully insured, never to take on the risk of self-funding again, regardless of how lucrative the rewards might be.

Amongst all of the innovative approaches discussed in the self-insured marketplace, all of which could have a separate article concerning the potential consequences of an ineffective implementation or execution of the model, many of the consequences and considerations discussed above are relatively contained within the confines of the model itself. But what about these models' impacts on other, oft overlooked, perhaps more downstream cost containment tools? Bear in mind that many of the cost containment mechanisms that are sought after and publicized today are designed to control costs before the claims are actually paid, whereas more traditional cost containment strategies (e.g. subrogation) are focused on recovering funds that are already spent. So every cost containment model designed at reducing the amount spent will necessarily have an impact on the execution of an effective third party recovery program.

Consider this example: ABC, Inc. sponsors a self-insured employee benefit plan. It utilizes a referenced based pricing model with no network obligations; instead, it has established very effective plan language that provides for payment of 200% of some reference price. John Smith is a beneficiary of the benefit plan and suffers injuries in an automobile accident. The benefit plan receives $200,000.00 in medical bills. Mr. Smith brings a third party claim and obtains the full insurance limits available to him, $50,000.00. Of that $50,000.00, he owes his attorney a 33% contingency fee, leaving him with a net settlement of $33,333.37. Assume that 200% of the reference price as established by the terms of the plan totals $100,000.00. Because the plan established its program effectively, the plan's payment is entirely defensible. On the surface, the provider received a fair payment derived from publicly available data which covers the costs incurred in providing the services as well as an additional amount to ensure profitability. So, what is the problem? Recall that the provider's initial bill for its services was for $200,000.00. When Mr. Smith went to the hospital, he signed a document wherein (the hospital will argue) he agreed to pay any balance remaining once his insurance pays for the services. As a result, the provider in this case now puts a lien on Mr. Smith's settlement for $100,000.00, i.e. the difference between the $200,000.00 charge and the $100,000.00 paid by the plan. Of course, Mr. Smith also has an obligation to reimburse the Plan the full amount of his settlement.

Balance billing, the practice by which the provider seeks the remainder of a bill from a patient after the insurance payment, is an unintended consequence of a reference based pricing strategy and can negatively impact the plan’s rights in a third party recovery case. It occurs because the only way to prevent a provider from seeking full payment from a patient is to enter into a contract wherein the provider agrees not to bill the patient upon receipt of payment from the plan, subject to other conditions. Without this agreement, in almost every situation, the provider is free to request payment from Mr. Smith. As this hypothetical example is designed to illustrate, the provider’s ability to bill Mr. Smith for the remainder of the bill causes complications in the plan's ability to recover the third party funds from Mr. Smith’s settlement. Note that even if Mr. Smith wanted to issue reimbursement to the Plan, he now has a rather large elephant in the room – a $100,000.00 provider lien. In this scenario, the best a plan can likely hope for is that the provider agrees to some split between the parties of the remaining $33,333.37 rather than insist on full payment. Otherwise, the only way to successfully recover money for the plan is with a lawsuit challenging the enforceability of the agreement Mr. Smith signed when he arrived at the hospital. In many jurisdictions, the plan participant's lawyer will simply deposit the money with the courts and file an interpleader, i.e. an action which forces all interest holders to appear before the court and prove their claim to the money.

As many who have engaged in any dispute with a hospital over a perceived debt can attest, providers will make their claim with exhaustive persistence often refusing to concede the actual value of their services or the questionable legality of their contract with patients guaranteeing payment. In order to obtain a recovery, the plan or its administrator may need to engage legal counsel and incur additional expenses thereby calling into question the prudence of such a pursuit; once those costs are factored in, and in light of the limited funds available, it may no longer make financial sense to pursue the recovery. Some advisors will stress the plan’s duty to seek every recovery dollar as required by the terms of the plan and its fiduciary duty under ERISA. While this is unquestionably a very important obligation of the plan, many plan advisors will forget the second, perhaps more important duty of a benefit plan administrator, to exercise prudence in its administration of plan assets.

In the end, it is imperative for plans and administrators to understand the complexities and consequences of every decision and benefits strategy they choose to utilize. There is a bevy of innovative tools and cost containment mechanisms that can be used to help benefit plans maximize savings. These include but are not limited to the reference based pricing strategies discussed above as well as some of the more hybrid approaches customized to give benefit plans the best of both worlds (strong plan language controlling out of network charges and some form of network for a feel as seamless as their fully-insured counterparts), self-insured plans can be tailored to fit the needs of the plan. As more benefit plans become more aggressive and experts come up with new strategies, it is important that those who establish benefit plans understand the full range of issues that may arise from their decisions. Utilizing experts that understand the self-insurance industry is an absolute necessity. Whether an administrator, a plan document drafting partner, a repricing agent, or a subrogation expert, understanding the self-insured marketplace improves the experience for the benefit plan, and puts it in the best position to succeed, and ultimately, remain self-insured.
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[i] http://www.citizen-times.com/story/opinion/contributors/2014/02/17/lets-face-it-todays-gigantic-hospitals-are-ripping-us-off/5493643/

[ii] http://www.forbes.com/sites/mikepatton/2015/06/29/u-s-health-care-costs-rise-faster-than-inflation/#5a035ef16ad2

[iii] http://www.forbes.com/sites/mikepatton/2015/06/29/u-s-health-care-costs-rise-faster-than-inflation/#5a035ef16ad2

[iv] http://kff.org/health-reform/issue-brief/analysis-of-2015-premium-changes-in-the-affordable-care-acts-health-insurance-marketplaces/

[v] Edmund F. Haislmaier: Senior Research Fellow, Center for Health Policy Studies, http://www.heritage.org/research/reports/2016/03/insurer-aca-exchange-participation-declines-in-2016

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