Clients across the country have been approached by a variety of vendors claiming to have developed a “solution” for dealing with high cost participants. The particular names of the programs differ, as do some of the specific details, but in general these may be called “Affordable Access Plans,” “Affordable Care Plans,” “Alternative Care Plans” or something similar.

Regardless of what they are called, these arrangements all promise employers a no-risk way to remove high claimants from their self-insured health plans, and move them over to the public exchanges. Is this a great idea, or what? From our perspective, “or what” would apply as would the old adage: “if it sounds too good to be true, it probably is.”

In general terms, this is what these product generally look like:

• The plan sponsor or its broker or third-party administer first identifies participants with certain health condition(s) that generate high medical and prescription drug claims.

• Someone (either an officer of the company or a broker or TPA rep) has a conversation with the employee about the participant’s (who may be the employee or a spouse or dependent) high cost claims and offer the employee some alternatives:

  • The participant can remain on the employer’s plan and be subject to all plan terms, such as co-pays and deductibles; or

  • The participant can enroll in the public exchange where

    • The employer will reimburse their full premium cost on a taxable basis, and the employer will gross up the payment to make it essentially “non-taxable.”

• The participant could then choose to purchase a gold plan on the exchange which may have less cost sharing and provide a better benefit than the employer’s plan.

This is a general, broad-strokes description of the idea. The details may vary. The “play” here is that it is cheaper for the employer to pay for coverage on a public exchange than it is to provide the coverage under its self-insured group health plan. However, before employers rush to take advantage of this “too good to be true” offer, they should consider that in design and potential operation these Affordable Care Plan proposals may raise significant concerns under a variety of federal (and possibly state) laws, including the Patient Protection and Affordable Care Act (“ACA”), the Employee Retirement Income Security Act of 1974 (“ERISA”), Medicare, federal tax law and federal and state employment discrimination laws.

Consider the following:

• ACA. The Affordable Care Plans we’ve seen reimburse participants for premium and out-of-pocket expenses incurred with respect to individual insurance purchased on the exchange. Some claim this is done on a “pre-tax” or “tax-preferred” basis. The federal regulators have clearly and unequivocally stated that these pre-tax or tax-preferred arrangements violate the ACA. Why? Because they will fail to meet the ACA’s prohibition on annual dollar limits and its preventive services requirements, among other things. [See Internal Revenue Service (“IRS”) Notice 2013-54 and Department of Labor (“DOL”) Technical Release 2013-03.]

  Penalties for violating the ACA can include fines of $100 per day up to a maximum of $500,000 for each violation.

  Note: If the intent is to reimburse premium and out-of-pocket expenses on a post-tax basis, as further discussed below, the arrangement would then likely violate federal tax law.
  

• ERISA. ERISA [§ 702] prohibits discrimination in eligibility for group health plan coverage based on “health factors.” ERISA prohibits employers from establishing eligibility requirements that are based on health factors, which would include any illness or injury contributing to high cost claims. Our guess is that if the promoters of these Affordable Care Plans have thought about ERISA at all, they have concluded that this is a “voluntary” arrangement and so they are not violating these ERISA rules. We’re not convinced. It’s easy to see how a suggestion that an employee might want to voluntarily drop coverage for coverage outside of the employer’s plan might be construed as creating a situation in which the participant felt he or she had no choice but to drop coverage. Under ERISA, the participants would likely be limited to claims for benefits under the employer’s plan that were not otherwise provided elsewhere. However, the DOL would not be similarly limited and it’s possible the DOL would seek to impose its own sanctions under ERISA.
  

• Medicare. The Medicare secondary payer rules generally require that a group health plan pay primary to Medicare for active employees and their spouses and dependents. These rules prohibit employers from taking steps to make Medicare primary. The secondary payer rules do not apply to individual insurance policies. To the extent that any participant is entitled to Medicare (either because he/she is over age 65 or under 65 with certain disabilities), then it is possible that the inducement to drop employer coverage could be construed as a violation of the Medicare secondary payer rules, subjecting an employer to penalties and fines.
  

• HIPAA. The Health Insurance Portability and Accountability Act (“HIPAA”) establishes rules for the use of “protected health information” (“PHI”). An employer who uses PHI—here, claims data—to identify participants who might be approached to drop coverage would likely violate HIPAA. While HIPAA permits a plan sponsor and its agents to use PHI for the operation of group health plans, it is arguable here that using the data to notify participants that they could drop coverage might not be considered the operation of the plan and therefore violate HIPAA. While HIPAA does not provide individuals with a clear right to sue, it is conceivable that a privacy claim under state law could be filed against an employer for the use of the information in this manner. Health and Human Services and a state’s attorney general could bring an action against an employer.
  

• ADA. The Americans with Disabilities Act (“ADA”) (and state law counterparts) prohibits employers from discriminating against employees with disabilities, defined by the ADA as a physical or mental impairment that substantially limits one or more major life activities. In general, the ADA prohibits employers from, among other things, inquiring about health conditions or establishing arrangements that may require employees covered by the ADA to be treated differently. With respect to group health plans, the Equal Employment Opportunity Commission (“EEOC”) has generally taken a broad view of the application of the ADA that might prohibit even the discussion with the employee about the health condition in question and would also prohibit the suggestion that other coverage could be available that is coupled with an inducement. Lawsuits by employees (or former employees) or state actions could result.
  

• The Code. If the Affordable Care Plan is intended to reimburse employees on a taxable basis—which is the only basis that would not violate the ACA—its establishment and use will violate rules related to Section 125 of the Internal Revenue Code (the “Code”). In the proposed regulations for cafeteria plans [Prop. Treas. Regulation §1.125-1 et seq.] the IRS reiterated its position that Code Section 125 is the exclusive means by which an employer can offer employees an election between taxable and nontaxable benefits without the election itself resulting in inclusion in gross income by the employees. An employee who has an election that is not through a cafeteria plan satisfying Section 125 must include in gross income the value of the taxable benefit with the greatest value that the employee could have elected to receive, even if the employee elects to receive only the nontaxable benefits. An Affordable Care Plan is not a cafeteria plan. However, it will offer certain employees the choice between a taxable and non-taxable benefit: the employee can remain in the group health plan (the non-taxable benefit) or opt out and receive a taxable payment. Our reading of the proposed regulations is that since this benefit is not offered within a true cafeteria plan under Section 125 of the Code, the full value of the greatest benefit they could have received in the opt-out will be included in the income of highly compensated employees, even those electing not to opt out. This provision of the proposed regulations is often overlooked by promoters of Affordable Care Plans. However, we believe that the IRS will look carefully at these arrangements and could impose sanctions similar to the one described as a way to discourage implementation of these programs.

Promoters of Affordable Care Plans all have two things in common. One, they promise a magic elixir that will miraculously reduce the employer’s health care costs. Two, the promise is too good to be true and should be avoided.

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