On Aug. 21, President Clinton signed into law The Health Insurance Portability and Accountability Act of 1996 (HIPAA), which will add many new requirements that will significantly change the administration of all group health plans. Following is an analysis of the provisions that most affect employers.
President Clinton signed into law Aug. 21 legislation which overhauls the rules governing health insurance.
"The Health Insurance Portability and Accountability Act of 1996" (HIPAA), will:
The law does not include controversial provisions on mental health parity, multiple employer welfare arrangements and medical liability reform, which were in earlier versions of the bill. However, the law does have provisions that could otherwise affect health plan administration.
Swift Conclusion Follows Three Months of Inaction
The measure was one of three major pieces of legislation resolved by Congress just before its month-long August recess began on Aug. 2. The other bills, also signed into law by President Clinton, will reform the welfare system and raise the minimum wage. The final rush to finish work on the bill stood in marked contrast to the previous three months, which were marked by inaction and increasingly rancorous disagreements between Senate Republicans and Democrats over Medical Savings Accounts (MSAs).
Ultimately, the two sides agreed to compromise on the MSA issue, but not until more than three months had passed. Sen. Edward Kennedy, D-Mass., and Rep. Bill Archer, R-Tex., finally hammered out a compromise on MSAs on July 25, and the conferees acted swiftly to resolve the remaining differences between the House and Senate versions of the bill. By July 31 they had dropped the Senate's mental health provision and resolved their differences over the centerpiece of the legislation: the portability issue.
The full House approved the compromise bill on Aug. 1, and the Senate followed suit on Aug. 2. Congress began its August recess later that day; lawmakers will not return until Sept. 3. President Clinton then signed the bill into law on Aug. 21.
The law's main goal is to protect people who switch from one job to another or who leave their jobs without taking another job. To achieve the first goal, the law will limit the use of pre-existing condition exclusions, waiting periods and health status exclusions.
Under the law, a pre-existing condition limitation period cannot exceed 12 months, except in the case of late enrollment, for which the period cannot exceed 18 months. A person who has been continuously covered for 12 months or more under a previous employer's insurer must be accepted by the new employer's insurer with no pre-existing condition exclusion. In addition, exclusions cannot be applied to children who become covered within 30 days of birth, adoption or placement for adoption. Insurers will be prohibited from refusing to renew policies because of a covered employee's illness.
A participant or beneficiary must be given credit for any prior "creditable" coverage against the pre-existing condition period. If there is a break in coverage of more than 63 days, no credit will be given.
Creditable Coverage Defined
"Creditable coverage" includes coverage under employer health plans, other health insurance, public health plans, Social Security and certain other sources. Creditable coverage does not include coverage which is not general health insurance, such as accident or disability income, liability, workers' compensation or automobile medical insurance. Also, creditable coverage does not include health coverage for limited benefits, such as limited scope dental or vision benefits or long-term care plans, and plans under which health benefits are secondary or incidental.
Creditable coverage is generally determined without regard to the specific benefits provided under the plan or arrangement. However, pursuant to forthcoming regulations, an employer may determine the existence of creditable coverage based on specific categories of benefits. To do so, the plan must prominently disclose this method of determining prior creditable coverage.
Thus, group health plans may impose certain types of pre-existing condition limitations as long as the period of exclusion or limitation does not last longer than 12 months (or 18 if the individual enrolled late) reduced by any period of prior health coverage. For example, if someone worked for Employer A for six months and then went to work for Employer B, Employer B's plan could impose a 12-month pre-existing condition limitation reduced by the individual's prior six months of coverage.
However, the break-in-service rule would allow plans to disregard prior coverage in certain special cases. If an individual was without coverage for a period of at least 63 days, a plan could disregard all periods of prior creditable coverage. In determining whether an individual had a break in coverage, however, a waiting period is not considered a period without coverage.
Written Certifications of Coverage
A plan must provide written certification of a participant's period of creditable coverage: (1) at the time the individual ceases to be covered under the plan or becomes covered under COBRA coverage; (2) at the time a person on COBRA coverage ceases that coverage; and (3) upon request, if the request is made within 24 months of termination of coverage.
An employee's current employer may request information from a prior employer or other provider about categories of benefits, but the prior employer or provider may charge for the costs of disclosing that information.
Health status may not be used to exclude an individual from coverage. Health plans may not have eligibility rules based on health status, medical condition, receipt of health care, claims experience, genetic information, evidence of insurability, medical history or disability. This does not bar: (1) the use of premium discounts, modified applicable co-payments or deductibles in return for adherence to health promotion and disease prevention programs; and (2) varying premiums based on the scope of benefits. But premiums or contributions may not vary from what is paid by a similarly situated individual based on health status.
Issues to Consider
In addition to limiting the pre-existing condition exclusions, HIPAA provides a special enrollment period for individuals who did not enroll in an employer's group health plan when they were first eligible due to the existence of alternative coverage. A group health plan must permit an employee (or dependent) who is eligible but not enrolled to enroll in the plan at a date later than the initial enrollment period, if:
If a group health plan offers dependent coverage, it must also offer dependents a special enrollment period of at least 30 days if they become dependents through marriage, birth, adoption or placement for adoption. These individuals can become covered dependents of the employee during that special enrollment period. If the employee (or spouse, in the case of birth or adoption) is otherwise eligible for enrollment in the plan at that time, but he or she has not enrolled, the employee (or spouse) is also allowed to enroll at this time (presumably to allow for the dependent coverage). Coverage through this special enrollment period is to be retroactive to the date of birth, adoption or placement for adoption.
The group health portability provisions are effective for plan years beginning after June 30, 1997. Thus, for calendar year group health plans, the new rules must be implemented Jan. 1, 1998. However, there are still requirements to be aware of immediately, particularly regarding periods of creditable coverage.
In general, certifications of coverage will not have to be provided before June 1, 1997. Once the certifications have to be provided, though, the automatic certifications must cover the period from Oct. 1, 1996, forward. Upon request, employers will also have to make coverage information available for periods after June 30, 1996, and before Oct. 1, 1996. Regulations may be issued to allow individuals to prove periods of creditable coverage before July 1, 1996, if necessary, through the use of various plan documents.
A delayed effective date applies for collectively-bargained plans. Under this rule, if a plan is maintained pursuant to a collective bargaining agreement in effect on Aug. 21, 1996 (the date of enactment), the rules apply to plan years beginning on or after the later of: (1) the date the last collective bargaining agreement related to the plan terminates; or (2) July 1, 1997.
HIPAA provisions guarantee that individual health insurance coverage will generally be available. Insurers in the individual market may not refuse to offer coverage to, or deny enrollment of, an eligible individual. Nor may insurers impose any pre-existing condition exclusions regarding that coverage.
To benefit from this availability, however, an individual has to be an "eligible individual" by:
Thus, if someone has not elected and paid for all of the COBRA coverage for which they are eligible, the new federally guaranteed individual insurance policy will not be available.
Effective Date
This new requirement is effective for individual coverage that is offered or otherwise made available after June 30, 1997. However, beginning Oct. 1, 1996, plans and insurers will have to issue certifications of coverage for periods after June 30, 1996.
Because HIPAA amended ERISA, the Public Health Service Act and the Internal Revenue Code to include the various portability provisions, a variety of enforcement mechanisms are available. Private suits could be brought under ERISA and the Public Health Service Act. Under certain circumstances, the Secretary of Labor, the Secretary of Health and Human Services and the various states can also enforce the various requirements. The IRS can also impose an excise tax on violations. The new excise tax is nearly identical to the $100-per-day penalty for COBRA violations.
However, no enforcement action is to be taken prior to Jan. 1, 1998, or, if later, the date of issuance of regulations, if the plan (or insurer) has tried to comply with the rules in good faith. Initial regulations are required to be issued by April 1, 1997.
HIPAA modifies several COBRA provisions, most of which are "technical" or "clarifying" in nature.
Disability Extension Provisions
Under COBRA, special rules apply if someone is determined to be disabled at the time of a termination or reduction in hours of employment. Under these rules, the 18-month maximum COBRA period is extended to 29 months, but only if the individual is disabled as of the date of the initial termination or reduction in hours of employment and notice of that disability is provided to the plan administrator in a timely fashion--within 60 days of the Social Security disability determination and before the end of the 18-month COBRA period.
HIPAA amends these rules to clarify that the extended COBRA coverage period due to a disability applies to all qualified beneficiaries at the time of the event, including those who are not disabled. In addition, the new law provides that a disability could occur at any time during the first 60 days of COBRA coverage; it does not have to exist at the time of the termination or reduction in hours of employment.
Another clarification to the disability rules is found in the legislative history of the changes. Congress intended that the disability extension be available if any qualified beneficiary becomes disabled. It is not limited to situations where a covered employee is disabled. No specific statutory language was amended for this clarification, however.
As under current law, the disability determination still has to be made by the Social Security Administration and the notice of the disability still has to be given within the required time periods.
Coordination With Portability Provisions
HIPAA amends the COBRA provisions on termination of COBRA coverage to coordinate the rules with the new health care portability provisions of the act. COBRA coverage may be terminated if a qualified beneficiary becomes covered under another group health plan that does not limit or exclude coverage for the qualified beneficiary's pre-existing condition.
HIPAA limits the extent to which any group health plan may impose a pre-existing condition limit on active employees. For example, the maximum pre-existing condition limitation period of 12 months is reduced by a period of prior creditable coverage under another plan.
To illustrate, suppose a qualified beneficiary takes COBRA coverage and then becomes covered by another group health plan. Also assume that the prior coverage period was at least 12 months (including COBRA coverage). That means the new plan must cover the qualified beneficiary without imposing its pre-existing condition limitation or exclusion. Under HIPAA's change, such a qualified beneficiary's COBRA coverage could be terminated under these circumstances because the new plan's limit does not apply to the qualified beneficiary due to the new pre-existing condition rules. (Note, however, the delayed effective date of the HIPAA change.)
New Definition of Qualified Beneficiary
Under COBRA, the only dependents who can become "qualified beneficiaries" are dependents otherwise covered immediately before a qualifying event. Individuals who first become dependents after COBRA coverage is in effect can become covered; however, they do not acquire statutory protections and the rights of qualified beneficiaries.
HIPAA amends the definition of qualified beneficiary to include a child born to, or placed for adoption with, the covered employee during the period of COBRA coverage. This provision is intended to expand the rights of newly acquired dependents. These individuals could presumably continue COBRA coverage on their own, even if the other qualified beneficiaries chose not to do so. Also, these individuals could benefit from an extension under COBRA's multiple qualifying event rule, contrary to the existing IRS proposed regulations. The IRS' proposed COBRA regulations of June 1987 require that an individual be a qualified beneficiary at the time of the first qualifying event to benefit from a multiple qualifying event.
Technical Problems
The new definition of qualified beneficiary does not answer many important technical questions associated with making newly acquired dependents qualified beneficiaries. Following are four prominent questions.
These and other questions will have to await further guidance.
COBRA Implications of the New Pre-Existing Condition Rules
The law's new ability to transfer prior periods of health coverage from one plan to another (see Portability Provisions) has important implications for qualified beneficiaries. For example, if an employee is terminated from employment and is not being immediately re-employed, the employee will have to consider his or her COBRA election very carefully. COBRA coverage counts toward periods of creditable coverage. So, if the individual does not think he or she will find a job within 63 days of losing the prior job, the only way to retain the credit for any prior period of coverage is to elect and pay for COBRA coverage from the prior employer.
Also, the written certification requirement will force employers to review all of their COBRA and health plan documentation. Initial certifications provided when someone ceases to be covered under the plan can be provided at the same time and in the same manner as COBRA notices. Thus, it is expected that employers will simply modify their existing COBRA notices to include the necessary information concerning periods of creditable coverage.
COBRA Implications for Special Enrollments
The law's new special enrollment period for covered employees (see Portability Provisions) helps eliminate a big decision that faced qualified beneficiaries when they first became eligible for new coverage. Typically, group health plans impose restrictions or limitations on coverage if an individual does not enroll when first eligible. For example, enrollments may only be allowed once per year. If the individual misses the enrollment date, he or she might have to wait until the next annual open enrollment period to join the plan.
When qualified beneficiaries with COBRA coverage obtain a new job, therefore, they are often faced with a dilemma--should they keep the COBRA coverage or give it up for an uncertain level of coverage under the new plan? Under this new HIPAA provision, qualified beneficiaries can keep their COBRA coverage (and not the new coverage) until it is exhausted and still become covered by the new employer's plan without facing these limitations.
Note, however, that qualified beneficiaries apparently must exhaust the COBRA coverage to benefit from this new special enrollment period. Thus, the special enrollment period does not appear to be available if a qualified beneficiary merely stops paying for COBRA coverage and then seeks to join the plan.
COBRA and Medical Savings Accounts
The HIPAA will create a limited program to evaluate the effectiveness of medical savings accounts (MSAs) (see Medical Savings Account section). Employers with fewer than 50 employees may establish MSAs to fund employee's qualified medical expenses through salary reductions or employer contributions. The total number of MSAs will be limited to 750,000 accounts each year. MSA distributions are generally nontaxable. Payments from MSAs generally may not be used to purchase health insurance, although COBRA coverage is one of several exceptions to this rule.
MSAs are specifically excluded from COBRA's continuation coverage requirements.
IRA Withdrawals Could Pay for COBRA Coverage
Individuals who wish to elect COBRA coverage may now have a new way to pay for that coverage. Generally, IRA distributions prior to age 59-1/2 are subject to a 10-percent penalty in addition to ordinary income tax. The HIPAA provides that, effective for distributions made after Dec. 31, 1996, withdrawals may now be made penalty-free from IRAs for medical insurance if the individual has received unemployment compensation under federal or state law for at least 12 weeks.
Under COBRA, a qualified beneficiary has at least 60 days within which to elect COBRA coverage and another 45 days before payment is required. Thus, it is possible that an individual wishing to use IRA funds to pay for COBRA coverage could elect COBRA at the end of the 60-day election period and wait for the remainder of the 12 weeks of unemployment compensation to be paid before withdrawing amounts from the IRA for COBRA premiums.
Effective Date
The new COBRA-specific provisions of the HIPAA are effective Jan. 1, 1997, and apply to all individuals who are qualified beneficiaries on or after that date, regardless of whether the qualifying event occurred before, on, or after such date. Thus, the new provision is to be applied retroactively for all eligible qualified beneficiaries as of Jan. 1, 1997. (Note that a similar effective date was enacted as a part of COBRA's disability extension provisions in the Omnibus Budget Reconciliation Act of 1989 (OBRA '89) and at least one court, Carr v. BPS Guard Services Inc., interpreted it as applying prospectively only.
COBRA's Medicare Entitlement Rule
A provision in the new minimum wage law has clarified COBRA's Medicare entitlement rule.
Health Reform Law Requires Notice of COBRA Changes
The law requires group health plans to notify each qualified beneficiary who has elected COBRA coverage of the law's changes to the COBRA rules no later than Nov. 1, 1996.
Mandated Health Benefits will be providing a model notice to subscribers in its October 1996 supplement. For those employers that may need the notice sooner, it is reproduced at Thompson Publishing Group's home page on the Internet--http://www.thompson.com/tpg/pen_ben/heal/heal.html.
The law will create a limited trial program to evaluate the effectiveness of MSAs on a national scale. The MSA provision allows for a four-year pilot project beginning Jan. 1, 1997. After four years--that is, after Jan. 1, 2001--Congress will vote on whether to expand MSAs to the rest of the population. In any event, those who participate in the pilot project may keep their MSAs after the project ends.
The total number of MSAs will be limited to 750,000 accounts each year. The IRS will monitor the number of active MSAs twice in 1997 and once a year for the following three years. Since an account may cover more than one person, as many as 1.5 million people may be participating in the experimental MSAs at any one time, according to the congressional Joint Committee on Taxation.
Eligibility
Businesses with 50 or fewer employees may offer MSAs--coupled with high-deductible health insurance plans--to their employees. Companies that join the program and then exceed the 50-employee threshold will be allowed to continue to offer MSAs until they reach 200 employees. After that, employees who already have MSAs may keep them, but no new accounts may be opened.
MSAs will be available only to those who are not covered under another health plan, except for coverage for accidents, disability, dental care, vision care, long-term care, Medicare supplemental insurance, insurance that provides for a fixed payment for hospitalization or insurance related to workers compensation, torts or a specific illness or disease.
In addition, people who are uninsured or self-employed may open their own MSAs and purchase high-deductible health insurance policies. An "uninsured" person is defined as someone who has had no health insurance during the previous six months.
Contribution limits
Employers may contribute to employees' MSAs. Contributions will be deductible to the employer and excludable from employees' income. Contributions will be limited, however: Contributions for employees with individual coverage may not exceed 65 percent of the deductible, and contributions for employees with family coverage may not exceed 75 percent of the deductible. This 65/75 percent limit is the only dollar limit on contributions.
For self-employed MSA holders, individual contributions to an MSA will be deductible from adjusted gross income (AGI). The deduction cannot exceed the person's earned income from the trade or business with respect which the MSA/high deductible plan is established.
Withdrawals
Employees may withdraw money from their accounts on a tax-free basis to pay for qualified medical expenses. The legislation defines "qualified expenses" by reference to the Code Section 213 definition of medical care. In addition, at the time an expense is incurred, the person must be eligible to make an MSA contribution. This rule is designed to ensure that an MSA is not used by a person who does not have a high-deductible plan.
Annual deductibles may range from $1,500 to $2,250 for individuals and from $3,000 to $4,500 for family coverage. Total out-of-pocket expenses, including co-payments and deductibles, will be limited to $3,000 for individuals and $5,500 for family coverage.
Money may be withdrawn from an MSA on a tax-free basis to pay for qualified medical expenses. Amounts withdrawn for non-medical purposes will be taxed as income. In addition, a 15-percent tax penalty will apply unless the MSA holder is deceased, disabled or over age 59-1/2. MSA funds cannot be withdrawn to buy health insurance except for COBRA or state continuation coverage, long-term care insurance or health coverage while receiving unemployment compensation.
MSAs will not be subject to a use-it-or-lose-it rule. Amounts left unspent at the end of the year will remain in the account on a tax-free basis.
Issues to Consider
Long-term care (LTC) insurance is given the same tax treatment as group health plans. However, LTC insurance is not: (1) subject to COBRA continuation coverage rules; (2) eligible for favorable tax treatment if it is provided under a cafeteria plan; and (3) may not be reimbursed through a flexible spending account. Most of the law's LTC provisions become effective on Dec. 1, 1996.
Issue to Consider
Long-term care insurance as a health benefit appears to be subject to new ERISA rules established by H.R. 3103 for reporting material changes in coverage.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) includes fraud and abuse provisions which, while designed to protect federal public programs, extend criminal code sanctions to ERISA group health plans as well.
By Jan. 1, 1997, a program will be established by the Department of Health and Human Services and the Attorney General to control fraud and abuse in health plans, which are defined to include insured and self-funded ERISA group health plans.
The law's clear intent is to stop scams, such as by certain multiple employer welfare arrangements. But the provisions go farther. Fraud committed by anyone with an obligation to a group health plans would be subject to criminal punishment.
Anyone knowingly attempting to defraud any health plan or to obtain by false or fraudulent pretenses or representations any money under the plan's control in connection with delivery of or payment for health benefits or services can be fined and imprisoned for up to 10 years, or if there is serious injury, 20 years, and if death, life imprisonment.
Anyone who steals or embezzles health plan money, funds, premiums or other assets shall be fined or imprisoned up to 10 years. Anyone who falsifies or conceals a material fact, or makes false or fraudulent representations in connection with delivery of or payment for health benefits shall be fined and/or imprisoned for up to five years.
Regarding ERISA plans, these new criminal provisions appear to be directed to fiduciaries and parties in interest, such as plan sponsors and third party administrators. Other provisions could be interpreted to apply to plan participants. For example, employees who intentionally misrepresent medical history or marital status to enroll themselves or their spouses or dependents could be subject to criminal penalties for making false representations.
Under the law, it appears that a plan sponsor who knowingly has a plan reimburse the employer for expenses that legitimately should not be paid from plan assets could be criminally prosecuted. This might occur where a self-funded employer buys stop-loss insurance covering the employer and not the plan, but uses plan assets to pay the premiums.
Administrative simplification provisions in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) could put plan sponsors and benefits personnel at risk, particularly in managed care and other cost-control efforts.
The law attempts to improve the effectiveness of the health care system by requiring standardization and electronic submission and exchange of financial and administrative health plan data. It also includes penalties for violating the confidentiality of health information.
Health plans would have to begin complying with these provisions and any forthcoming regulations within 24 months of enactment. Small employers--to be defined by regulations--would have 36 months to comply.
Penalties could be imposed for failing to comply with the rules. In addition, penalties of up to $250,000 and imprisonment of up to 10 years could be imposed for disclosing individually identifiable health information to an unauthorized person.
Employers that monitor treatment utilization for cost control reasons could be at risk under these provisions. For example, some employers monitor prescription drug programs to watch for excessive use of drugs that could be sold on the street. Under the bill, improperly disclosing this information--which could reveal that an individual has a particular disease or condition--could result in substantial penalties.
The Health Insurance Portability and Accountability Act of 1996 also amends ERISA section 104(b) to provide that if there is a material reduction in coverage, plan participants must be given a summary of changes within 60 days of adoption. In the alternative, plan sponsors may provide a description at regular intervals of not more than 90 days. The Labor Secretary must issue regulations within 180 days of enactment which explains alternative mechanisms (besides delivery of mail) health plans can use to notify participants of material reductions.
The law also amends ERISA to require that summary plan descriptions include: (1) whether an insurer is responsible for financing or administration of the plan; (2) the insurer's name and address; and (3) the office of the Labor Department where plan participants can get information regarding their rights under the law.