Federal Health Updates
On April 26, 2024, the HHS Office for Civil Rights (OCR) announced that it published a final rule strengthening privacy protections for information relating to reproductive healthcare. The agency proposed the rule on April 23, 2023, which we covered in the April 25, 2023, edition of Compliance Corner.
The final rule prohibits the use or disclosure of PHI by individuals, covered entities (which includes group health plans), or their business associates (collectively, “regulated entities”) for either of the following purposes:
- To conduct a criminal, civil, or administrative investigation into or impose criminal, civil, or administrative liability on any person for the mere act of seeking, obtaining, providing, or facilitating reproductive healthcare, where such healthcare is lawful under the circumstances in which it is provided.
- The identification of any person for the purpose of conducting such investigation or imposing such liability.
The prohibition applies when a regulated entity determines that one or more of the following conditions exist:
- The reproductive healthcare is lawful under the law of the state in which such healthcare is provided under the circumstances in which it is provided.
- The reproductive healthcare is protected, required, or authorized by federal law, including the US Constitution, regardless of the state in which such healthcare is provided.
- The reproductive healthcare was provided by a person other than the covered healthcare provider, health plan, or healthcare clearinghouse (or business associates) that receives the request for PHI, and the receipt of reproductive healthcare was presumed lawful under the circumstances (in accordance with the specifications of the final rule).
Note that the final rule allows a regulated entity to use or disclose PHI for purposes otherwise permitted under the Privacy Rule. However, regulated entities can use or disclose PHI, if the request for PHI is not made primarily for the purpose of investigating or imposing liability on any person for the mere act of seeking, obtaining, providing, or facilitating reproductive healthcare.
The final rule requires regulated entities to obtain a signed attestation from whomever submits a request for PHI potentially related to reproductive healthcare. This attestation requirement would apply when the request is for PHI in any of the following circumstances:
- Health oversight activities
- Judicial and administrative proceedings
- Law enforcement purposes
- Disclosures to coroners and medical examiners
Finally, the final rule requires that the Notice of Privacy Practices, provided to all participants in a health plan, must be revised to reflect these new requirements.
Employers, particularly those with self-insured plans, should be aware of this final rule. The final rule effective date is June 25, 2024, but plans must comply with the requirements imposed by this rule by December 23, 2024, although changes to the Notice of Privacy Practices have a delayed effective date of February 16, 2026.
On May 1, 2024, the DOL, HHS, and Treasury (the departments) issued an FAQ regarding implementation of the No Surprises Act in light of the August 24, 2023, decision in Texas Medical Association, et al. v. U.S. HHS, et al. (TMA III) (see our August 15, 2023, and October 24, 2023, editions of Compliance Corner for coverage of this case). Specifically, the FAQ extends enforcement relief related to calculating equivalent in-network rates for out-of-network services covered under No Surprises Act protections until November 1, 2024.
As background, the No Surprises Act and July 2021 interim final rules provide protections against balance billing and limit cost-sharing for emergency services from out-of-network providers, non-emergency services from out-of-network providers during a visit to an in-network facility, and out-of-network air ambulance services. The participant’s or beneficiary’s cost-sharing for these services covered under the No Surprises Act must not be greater than the cost-sharing requirements for equivalent in-network services. Specifically, cost-sharing must be calculated based on the “recognized amount.” If there is no established amount set by an All-Payer Model Agreement under the Social Security Act, and there is no state law on the applicable amount, then the recognized amount, according to the interim final rules, would be the lesser of billed charges or the qualifying payment amount (QPA).
The QPA is generally the median contracted plan rate on January 31, 2019, for the same or similar service in the same geographic region and adjusted for inflation. Under the July 2021 interim final rules, the median contracted plan rate was determined based on all plans of the plan sponsor (or administering entity) or all coverage offered by the insurer in the same insurance market. On August 24, 2023, the court in TMA III held that the interim rules on calculating the QPA were unlawful. Some of the QPA calculation provisions that the TMA III court took issue with allowed the inclusion of “ghost rates” (rates for services that a particular provider has not provided) and rates for providers outside the applicable specialty, excluding bonus or other incentive provisions from the rate calculation, and allowing self-insured plan calculations to be based on the rates of other self-insured plans administered by the same TPA. The Department of Justice appealed the TMA III decision, which is currently pending.
On October 6, 2023, the departments issued FAQ guidance acknowledging the TMA III decision on QPAs and the significant challenges associated with revisiting and recalculating QPAs established prior to the decision. To address these challenges, the departments stated they would grant enforcement relief for any plan, issuer, or other party to a No Surprises Act payment dispute that applies a QPA calculated under the July 2021 interim rules to services delivered before May 1, 2024 (see our October 24, 2023, edition of Compliance Corner for coverage of the October 6, 2023, FAQ guidance).
The May 1, 2024, FAQ guidance extends this enforcement relief until November 1, 2024. This extension is in response to feedback that plans and insurers need more time to recalculate QPAs in a manner consistent with the TMA III decision, as several of the changes to the QPA calculation require manually locating data. Accordingly, the departments will grant enforcement relief for any plan, issuer, or other party to a No Surprises Act payment dispute that applies a QPA calculated under the July 2021 interim rules to services delivered before November 1, 2024 (previously May 1, 2024). The departments will continue to assess the status of QPA calculations but do not expect to extend this enforcement relief for services delivered on or after November 1, 2024.
Although the No Surprises Act payment calculation process is typically handled by insurers and TPAs, employers should be aware of the recent guidance and monitor future developments.
FAQ about Consolidated Appropriations Act, 2021 Implementation Part 67 »
On April 29, 2024, the DOL announced a final rule to rescind the 2018 Association Health Plan (AHP) rule that created alternative criteria that could be used to determine whether a group or association of employers without a commonality of interest could establish an AHP for the primary purpose of providing benefits. We covered the DOL’s proposed rule in our January 3, 2024, edition of Compliance Corner.
The intention of the 2018 AHP rule, in part, was to increase access to quality health coverage. However, the DOL determined that the rule was inconsistent with the definition of employer under ERISA. The department notes that the rule was never fully implemented and is unaware of any existing AHP formed based on the rule.
The recission will alleviate uncertainty under the rule and marks a return to a facts-and-circumstances approach to determine if a group or association of employers is a bona fide employer group capable of sponsoring an ERISA plan. Criteria include:
- Whether the employers have business purposes unrelated to the provision of benefits.
- Whether employers share a genuine organizational relationship unrelated to the provision of benefits.
- Whether participating employers exercise control over the program.
AHPs offered by bona fide employer groups remain subject to ERISA and are subject to MEWA regulations, including state-specific MEWA laws.
Employers participating in an AHP should review the rescinded rule to identify whether it continues to meet the pre-rule requirements as noted above.
HHS has published a final rule expanding protections under Section 1557 of the ACA, which prohibits discrimination in certain health programs and activities on the basis of race, color, national origin, sex, age, or disability in any health program activity that receives federal financial assistance and other covered entities. The Section 1557 regulations that took effect in 2016 under the Obama administration expanded the scope of Section 1557 prohibitions by including discrimination based upon gender identity. The 2016 regulations also required entities covered by the rule to distribute nondiscrimination notices and required them to have compliance coordinators and written grievance procedures to handle complaints concerning possible violations of Section 1557. In 2020, however, the Trump administration's HHS issued a final rule amending Section 1557 of the ACA to scale back explicit protections based on gender identity introduced by the Obama administration.
In the 2024 final rule, HHS reinstated the scope of the 2016 regulations and expanded the regulations further. The final rule is generally effective 60 days after publication in the Federal Register, but certain provisions have delayed effective dates. The complete effective dates on each provision under Section 1557 can be found in the HHS Section 1557 Final Rule: Frequently Asked Questions.
Here are highlights of the 2024 final rule on Section 1557:
Restores and broadens the definition of covered entities to include insurers and pharmacy benefit managers (PBMs).
The final rule restored and expanded the definition of covered entities of Section 1557 to health programs and activities that include health insurers and PBMs that receive federal financial assistance and all the operations of a covered entity, including an insurer's TPA activities. In contrast, group health plans are not explicitly defined as covered entities since many employers and group health plans are not direct recipients of federal financial assistance. The final rule states that Section 1557 will not be applied if it would violate federal protections for religious freedom and conscience. The final rule provided an administrative process for obtaining a written assurance of exemption.
Prohibits discrimination on the basis of sex.
The final rule affirms that protections against sex discrimination include protections against discrimination on the basis of sexual orientation and gender identity. Additionally, the final rule clarifies that sex discrimination includes discrimination on the basis of sex stereotypes, sex characteristics (including intersex traits), and pregnancy or related conditions.
Requires covered entities to take steps to identify and mitigate discrimination when they use patient care decision support tools.
The final rule requires covered entities to make reasonable efforts to identify patient care decision support tools that use input variables or factors that measure race, color, national origin, sex, age, or disability and to make reasonable efforts to mitigate the risk of discrimination that may result from the use of such tools. Within 120 days of the effective date, covered entities must begin providing an annual notice of nondiscrimination and a notice of language assistance services to participants, beneficiaries, enrollees, and applicants. FAQs accompanying the final regulations note that HHS has prepared sample notices in multiple languages to assist with this requirement.
Clarifies that nondiscrimination requirements apply to health programs and activities provided through telehealth services.
The final rule clarifies that covered entities must not discriminate in their delivery of health programs and activities provided through telehealth services. This means ensuring that such services are accessible to individuals with disabilities and providing meaningful program access to people with limited English proficiency.
The prohibition of discrimination on the basis of sex is historically one of the most litigated provisions of Section 1557. As explained above, the final rule is primarily directed at covered entities that receive federal financial assistance. However, group health plan sponsors should be aware of the issuance of the final rule, which could potentially impact their plan indirectly. Sponsors with questions regarding the specific application of Section 1557 and other nondiscrimination laws to their plan design should consult with their legal counsel.
On April 11, 2024, in Ryan S. v UnitedHealth Group, Inc., et al., the Ninth Circuit Court of Appeals (Ninth Circuit) filed a decision reversing a Middle District of California District Court dismissal of a class action suit brought under ERISA by a beneficiary (Ryan S.) of a group health plan insured, managed, and administered by UnitedHealthcare (UHC). The lawsuit, which alleged a MHPAEA violation and breach of an ERISA fiduciary duty, was remanded for further proceedings.
Between 2017 and 2019, Ryan S. completed two different outpatient and out-of-network substance use disorder programs. UHC did not cover most of the charges for that treatment, which amounted to hundreds of thousands of dollars. Ryan S. alleged that UHC systematically denied his claims and cited a 2018 California Department of Mental Health Care report that had concluded that certain UnitedHealthcare entities, including UHC, were applying a more stringent internal review process (that included the use of algorithms that added additional levels of review) to such mental health and substance use disorder (MH/SUD) claims than was applied to medical/surgical claims for treatment in violation of MHPAEA. The district court dismissed the case based on its conclusion that Ryan S. had 1) failed to allege that his claims had been “categorically” denied and 2) insufficiently identified analogous medical/surgical claims that he had personally submitted and UHC had processed more favorably.
Relying heavily on the findings and conclusions of the California state agency, the Ninth Circuit concluded that a plaintiff alleging that a defendant applied a more stringent internal process to MH/SUD claims than to medical/surgical claims may be able to allege a plausible claim without having to allege a categorical practice or differential treatment for the plaintiff’s own medical/surgical claims. In other words, it is enough for such a plaintiff to allege the existence of a procedure used in assessing MH/SUD benefit claims that is more restrictive than those used in assessing medical/surgical claims under the same classification if the allegation is adequately pled in the complaint. A plaintiff doesn’t have to allege that they had claims of both types.
Since the district court had dismissed the MHPAEA claim and the breach of fiduciary duty claims for failure to state a violative (claims) process, the Ninth Circuit reversed both of those dismissals and remanded.
The plaintiff in this case benefited from a recent state study and report that supported their allegations and allowed these claims to survive the motion to dismiss. The case has drawn greater attention to the use of algorithms in the claim review process, particularly with respect to MHPAEA claims. The Ninth Circuit has tried to clarify how to determine what violates the MHPAEA without much clear guidance from the federal agencies yet. Hopefully, the anticipated MHPAEA final rules will provide guidance that will help to clarify the law’s application to various claim review processes.
On April 13, 2024, the IRS released a set of FAQs concerning the tax treatment of work-life referral (WLR) services that employers may provide to employees. The FAQs establish that WLR services are a de minimis fringe benefit excluded from an employee’s gross income and from the employer’s employment taxes.
The FAQs define WLR services as “informational and referral consultations that assist employees with identifying, contacting, and negotiating with life-management resources for solutions to a personal, work, or family challenge.” WLR services include assistance with completing paperwork and basic administrative tasks associated with finding resources to tackle problems, such as finding childcare, eldercare, or financial advisors. Although WLR services do not provide childcare or other similar services directly, they help employees access those services. WLR services are sometimes called caregiver or caretaker navigation services.
According to the FAQs, WLR services are considered de minimis. “De minimis” is defined as “any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make accounting for it unreasonable or administratively impracticable.” In circumstances where it would be administratively difficult to determine the frequency with which fringe benefits are provided to each employee, the employer can measure the frequency using the employer-measured frequency standard.
The FAQs apply this definition and frequency standard to WLR services. As a de minimis benefit, WLR services are excluded from an employee’s gross income and from the employer’s employment taxes.
Note that these FAQs are published as general information to taxpayers and tax professionals, and the IRS will not use them to resolve any case involving WLR services. However, if a taxpayer or professional reasonably relies on them in good faith, then the IRS will not impose a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax. Accordingly, employers should be aware of the tax treatment of WLR services.
Frequently Asked Questions About Work-Life Referral Services »
In response to a request by Congress, the Government Accountability Office (GAO) recently released a report focusing on state regulation of PBMs serving private health plans. Among other things, the report describes actions selected states have taken to regulate PBMs and the views of various stakeholders regarding such state regulation.
As cited in the report, retail prescription drug spending by private health plans in the US totaled nearly $152 billion in 2021 — almost 13% of total private healthcare spending and an almost 18% increase over 2016. This increase in spending was driven by increased drug prices, including specialty drug prices, as opposed to increased drug utilization (i.e., the number of prescriptions filled).
Many health plans contract with PBMs to administer their prescription drug benefits and help contain rising costs. PBMs may negotiate drug prices and rebates with manufacturers, develop formularies, process claims, and perform other plan services. The significant role and market power of PBMs and the opaqueness of certain PBM compensation arrangements have led some industry stakeholders to call for greater transparency and other changes in PBM practices. State legislatures have responded by enacting laws to regulate PBMs. According to the report, all 50 states have enacted at least one PBM-related law since 2017.
The GAO report focuses on five states that have enacted a wide range of PBM laws — Arkansas, California, Louisiana, Maine, and New York. The GAO examined these states’ laws with respect to whether a fiduciary or other “duty of care” was imposed upon PBMs and requirements regarding transparency (including licensure and reporting), drug pricing and pharmacy reimbursements, and pharmacy network and access. The GAO also interviewed stakeholders, including regulators, pharmacy associations, and health plan associations in each of the five states and four national organizations representing the interests of PBMs, patients, employers, and drug manufacturers, respectively.
According to the report, four of the five selected states (California, Louisiana, Maine, and New York) have enacted laws to impose a duty of care on PBMs. However, only Maine’s law states that PBMs owe a fiduciary duty to the health plans with which they contract. The other state laws impose a “lesser” standard on PBMs, such as a requirement to act in “good faith and fair dealing.” Regulators in states that do not impose a fiduciary requirement cited political opposition from the PBM trade association or concerns about ERISA preemption as factors.
With respect to efforts to increase the transparency of PBMs’ operations, the report explains that all five states require PBMs to be licensed and/or registered and provide certain information, such as rebate and fee data, to the state or the health plans with which they contract. Additionally, each of the five states has enacted some type of legislation regulating drug pricing and pharmacy payments, such as a law limiting a PBM’s use of manufacturer rebates or “spread pricing” (i.e., paying pharmacies less than they charge health plans for drugs). For example, Arkansas requires that PBMs and health plans set cost-sharing amounts for prescription drugs based on post-rebate prices and prohibits spread pricing. Furthermore, all five states have enacted legislation to expand patient access to affordable drugs (e.g., by ensuring pharmacies are not prohibited in their contracts from informing enrollees when a less costly alternative to paying for a prescription through their insurance is available).
According to the report, all stakeholders interviewed expressed support for PBM transparency requirements such as licensure, registration, and annual reporting on rebates and revenue sources. However, most health plan associations and the PBM trade association opposed state laws regulating pharmacy reimbursements and network design. Additionally, some believed the laws may conflict with ERISA by preventing large employers from designing uniform plans across multiple states.
Regarding enforcement, regulators sought broad authority to respond to emerging PBM-related issues and robust enforcement measures to achieve better compliance. The regulators indicated they rely primarily on complaints to ensure PBM compliance and, in some states, had taken actions such as audits to address complaints. However, regulators also expressed concerns regarding ERISA preemption affecting their enforcement of state PBM laws with respect to self-insured plans.
Employers that sponsor prescription drug plans should be aware of the GAO report requested by Congress, although it is unclear whether any federal PBM legislation will be enacted soon. The report provides a helpful sample of various types of state PBM laws and stakeholder opinions regarding such measures. However, it is difficult to draw broad conclusions from the report, especially since much is unsettled in this area of the law. But additional regulatory action is anticipated, so employers should monitor for further developments.
GAO-24-106898, PRESCRIPTION DRUGS: Selected States’ Regulation of Pharmacy Benefit Managers »
On April 3, 2024, the DOL, HHS, and IRS (the departments) published final rules (with an accompanying fact sheet) to amend certain requirements regarding fixed indemnity excepted benefits coverage and limited duration insurance. These rules finalize some of the amendments proposed on July 12, 2023. Notably, beginning in 2025, plan sponsors offering fixed indemnity coverage must provide a new consumer protection notice to enrollees.
The final rules follow several Biden Administration Executive Orders, which direct the departments to review policies for consistency with the goals of strengthening ACA protections and providing access to affordable, comprehensive healthcare. The Biden Administration also seeks to ensure individuals understand their coverage options so they do not unknowingly purchase low-quality coverage (referred to as “junk insurance”) that may result in burdensome household medical debts. Accordingly, the final rules impose new restrictions on coverage not fully subject to the ACA mandates, such as preventive care requirements, annual and lifetime limits, and prohibitions on pre-existing condition exclusions (known as “excepted benefits”).
First, the final rules reaffirm that in order to qualify as excepted benefits, fixed indemnity policies must pay benefits per day (or other time period) of hospitalization or illness regardless of the expenses incurred, medical services received, or illness severity. Group coverage that pays benefits on a per medical item or service basis would not be considered an excepted benefit. While the proposed rules were poised to amend certain requirements on coordination of benefits (with respect to exclusions or payments) between an employer’s fixed indemnity policy and group health plan, the final rules did not include these changes, citing the need for additional time to study the concerns raised by commenters.
The final rules explain that while fixed indemnity insurance is designed to provide income replacement in the event of a hospitalization or illness, policies sold today often include certain features resembling comprehensive coverage (e.g., benefits paid based on receipt of a medical service or directly to a healthcare provider). To address this, the final rules add a required consumer protection notice be provided to employees in relation to group fixed indemnity excepted benefits coverage, applicable to plan years beginning on or after January 1, 2025. The notice is designed to highlight the differences between fixed indemnity excepted benefits and comprehensive major medical coverage and must be prominently displayed in any marketing, application, and enrollment materials. Insurers can satisfy this new notice requirement on behalf of the plan sponsor.
Second, the final rules require short-term limited duration insurance (STLDI) to be truly short-term. STLDI is health insurance primarily designed to fill temporary gaps in coverage when an individual is transitioning from one plan or coverage to another, such as during a waiting period for a new employer’s plan. Under the ACA, STLDI is not health insurance, so it is not subject to certain ACA protections (e.g., prohibitions on exclusions for pre-existing conditions, discrimination based on health status, or dollar limits on essential health benefits). Specifically, the final rules change the maximum duration of STLDI policies to four months (a three-month initial term with a one-month extension or renewal permitted within a year of the original effective date). This proposed duration is much shorter than the current 36-month maximum permitted under a 2018 Trump Administration rule. The final rules also update the STLDI notice requirements to highlight coverage limitations in concise, easy-to-understand, and prominently displayed language. To further consumer protection, the notice must be included in any marketing, application, and enrollment materials.
The departments declined to finalize proposed rules on the tax treatment of employer-provided fixed indemnity accident or health insurance plans (including hospital indemnity and specified disease coverage), citing the need for additional time to study the concerns raised by commenters. In addition, while the proposed rules requested comments on the design and operation of specified disease coverage (e.g., cancer insurance) and level-funded plan arrangements, no new guidance has been provided.
Employers should consult with their advisors regarding any potential future impact on their coverage offerings, including confirming that their plan’s fixed indemnity insurer will satisfy the new consumer protection notice requirement on behalf of the plan. Note that these final rules only partially addressed the proposed rules. Employers should continue to monitor Compliance Corner for updates regarding additional final rules or new related guidance.
On April 2, 2024, the HHS, CMS, and IRS released the 2025 Notice of Final Benefit and Payment Parameters (the 2025 final rule), an accompanying fact sheet, and, in coordination with the DOL, a related FAQ. The 2025 final rule, which follows a proposed rule issued on November 15, 2023, is primarily directed at health insurers and the ACA marketplace but includes certain information that directly or indirectly impacts group health plans.
Notably, the final rule and FAQ codify that prescription drugs in excess of those covered by a state's benchmark plan are considered essential health benefits (EHBs) and are subject to the applicable ACA out-of-pocket (OOP) maximum and prohibition on annual and lifetime dollar limits, unless the coverage of the drug is mandated by state action such that it would not be considered an EHB.
As background, the ACA requires insurers in the individual and small group markets to offer plans with a comprehensive set of benefits called EHBs. The coverage must include items and services in ten EHB categories, which include prescription drugs. Additionally, all non-grandfathered health plans, including self-insured group health plans and large group market plans, to the extent these plans cover EHBs, must comply with the ACA annual OOP cost-sharing limit and the prohibition on annual and lifetime limits. As a reminder, the 2025 ACA plan annual OOP cost-sharing limits, as specified in prior CMS guidance, are $9,200 for self-only coverage and $18,400 for other than self-only coverage. (The 2024 limits are $9,450 and $18,900, respectively.)
CMS has historically taken the position that prescription drugs covered beyond the minimum EHB-benchmark coverage requirement (unless pursuant to a state mandate) are also EHBs and thus subject to the ACA annual OOP cost-sharing limit and prohibition on annual and lifetime dollar limits. Accordingly, the 2025 final rule formalizes CMS’s position, which was previously informal guidance, for clarification purposes and to promote greater compliance. The 2025 final rule provision applies only to non-grandfathered individual and small group market plans. These plans will need to review their drug plan design immediately and work with their insurers and PBMs (if applicable) to take steps to ensure that drug coverage in excess of its EHB-benchmark plan is also subject to the annual OOP cost-sharing limit and the prohibition on lifetime and annual limits. These plans may also need to review their related policies for compliance, including how drug manufacturer assistance applies towards the plan’s OOP cost-sharing limit.
The 2025 final rule provision does not apply to large group and self-insured plans. However, the FAQ noted that the DOL, HHS, and IRS intend to propose rulemaking that would align the EHB prescription drug requirements for large and self-insured plans with those applicable to individual and small group market plans. In such event, most of the group health plans would be required to treat prescription drugs covered by the plan, including drugs in excess of the applicable EHB-benchmark plan requirements as EHBs for purposes of the ACA annual OOP cost-sharing limit and prohibition on lifetime and annual limits.
Among numerous other changes, the 2025 final rule also removes a prior prohibition against including routine non-pediatric dental services as an EHB. This change will allow states to update their EHB-benchmark plans to include routine non-pediatric dental services effective for benefit years beginning on or after January 1, 2027.
Employers that sponsor group health plans should be aware of the release of the 2025 final rule, which is effective June 4, 2024, and particularly, the provisions regarding the extent to which covered prescription drugs are considered EHBs subject to applicable ACA limits. Employers should also monitor for additional guidance; we will report on relevant developments in future editions of Compliance Corner.
Federal Register: Public Inspection: Patient Protection and Affordable Care Act, HHS Notice of Benefit and Payment Parameters for 2025; Updating Section 1332 Waiver Public Notice Procedures; Medicaid; Consumer Operated and Oriented Plan Program; and Basic Health Program »
HHS Notice of Benefit and Payment Parameters for 2025 Final Rule »
DOL FAQ about Affordable Care Act Implementation Part 66 »
On March 24, 2024, in McKee Foods Corporation v. BFP, Inc. dba Thrifty Med Plus Pharmacy, the Sixth Circuit US Court of Appeals (Sixth Circuit) held that McKee Foods’ claims that Tennessee’s “any willing pharmacy” (“any-willing-pharmacy”) laws are preempted by ERISA, and that state law does not require it to include Thrifty Med in its approved network of pharmacies, were not rendered moot following changes to the underlying state laws and other factual developments in the case. The Sixth Circuit reversed and remanded the case for further proceedings.
McKee Foods is a commercial bakery in Tennessee that offers a health benefits plan (Health Plan), governed by ERISA, for its eligible employees and their eligible dependents. Part of that plan is their Prescription Drug Program (PDP) that offers favorable benefits to participants for using in-network pharmacies. Thrifty Med is an independent pharmacy in Tennessee and was a member of PDP’s network of pharmacies until July 2019 when McKee Foods and its pharmacy benefit manager (PBM) removed Thrifty Med from the network. For the next three years, Thrifty Med actively pursued getting reinstated into PDP’s network by meeting with McKee multiple times, circulating petitions among McKee employees, paying for billboards, and paying an attorney to contact McKee to argue that Tennessee’s any-willing-pharmacy statute required McKee to admit Thrifty Med to the network. Thrifty Med also lobbied the Tennessee legislature for passage of an amendment to the any-willing-pharmacy statute, which previously applied only to insured plans. The new statute, which took effect on July 1, 2021, extended the any-willing-pharmacy law to self-insured entities (see Compliance Corner, July 7, 2021, article).
Soon after passage of the statute, Thrifty Med began submitting claims for payment to PDP, and when the claims were denied, Thrifty Med filed three administrative complaints with the Tennessee Department of Commerce and Insurance (TDCI). The complaints were dismissed by the TDCI but not before McKee filed this action in mid-November 2021 seeking, 1) a declaratory judgment that the any-willing-pharmacy statute is preempted by ERISA, 2) an order enjoining Thrifty Med from pursuing any legal or administrative action to enforce the state’s any-willing-pharmacy laws against McKee or otherwise to force McKee to include Thrifty Med in its PDP, and 3) instruction from the court as to the scope of its fiduciary duties in determining which pharmacies to include in the Health Plan and whether the Health Plan is subject to the statute.
In April 2022, the Tennessee Legislature passed yet another amendment to the any-willing-pharmacy statute, changing the application to specifically include ERISA plans. About a month later, McKee moved for summary judgment. The next day, Thrifty Med filed a competing motion to dismiss for lack of subject matter jurisdiction or, in the alternative, for summary judgment. In Thrifty Med’s filing in support of its motion, the president of Thrifty Med stipulated that Thrifty Med would “no longer pursue reinstatement to McKee’s Prescription Drug program under the [first amendment to the any-willing-pharmacy]” but also that “it remain[ed] to be determined whether Thrifty Med w[ould] pursue reinstatement under” the April 2022 amendment to the statute.
After a hearing on the pending motions, the district court held that the case was moot because 1) the TDCI dismissed Thrifty Med’s administrative complaints, 2) Thrifty Med had taken no further legal action, and 3) Thrifty Med had stipulated that it had no current plans or intentions to pursue reinstatement, so McKee’s alleged “harm” was too speculative to demonstrate the existence of a live case or controversy over which the court could exercise jurisdiction.
The Sixth Circuit addressed the issue of whether the case was moot, first finding that the April 2022 amendment to the any-willing-pharmacy statute did not render McKee’s claims moot because the new law did not substantially and materially amend the pertinent statutory language of the first amendment to the statute. Next, Thrifty Med’s qualification of its intent to continue to pursue reinstatement to the PDP network does not meet the “heavy burden” of persuading the Sixth Circuit that it is unlikely to resume its pursuit of reinstatement in the future. Thus, Thrifty Med has not demonstrated with absolute clarity that McKee will not have to defend against a renewed pursuit of reinstatement from Thrifty Med.
The case will return to the district court for further proceedings on McKee’s original complaint. The ultimate question is whether any-willing-pharmacy statutes passed by states are preempted by ERISA. If the state laws are preempted by ERISA, self-funded ERISA plans would not have to comply with them. The US Supreme Court has already ruled (under different facts) that ERISA did not preempt a state regulation of PBMs that required the PBMs to pay pharmacies regulated by the state for drugs at a price equal to or greater than wholesale cost (see Compliance Corner, December 22, 2020, article). But the Tenth Circuit Court of Appeals ruled in August 2023 that a similar any-willing-pharmacy statute in Oklahoma was preempted by ERISA (see Compliance Corner, August 29, 2023, article). We are seeing states passing laws that are worded to regulate PBMs, and not healthcare plans, in an attempt to avoid preemption. Health plan sponsors will want to follow the outcomes of these laws that could affect their prescription drug plans.
McKee Foods Corporation v. BFP, Inc. dba Thrifty Med Plus Pharmacy »
On March 19, 2024, a federal trial court held that the hearing-impaired mother and daughter stated a sufficient claim of “proxy” discrimination under ACA Section 1557 against Regence BlueShield, a health insurer, for its plans’ exclusion of all hearing devices except cochlear implants to proceed to trial.
ACA section 1557 prohibits discrimination in certain health programs or activities based on race, color, national origin, sex, age, or disability. “Proxy” discrimination can result from (in the court’s words) a “policy that treats individuals differently on the basis of seemingly neutral criteria” where excluding criteria is “so closely associated with the disfavored group,” that “facial discrimination” against that group is reasonably inferred. For example, gray hair might be used as a proxy to exclude individuals over a certain age from coverage.
Here, the plaintiffs alleged that individuals requiring hearing aids were proxies for discrimination by the plan on the basis of disability. Because hearing aids are generally prescribed when there is an objective diagnosis of hearing impairment, together with the subjective impact on daily life, nearly all individuals who are prescribed hearing aids (and who are therefore adversely affected by the exclusion) are “disabled” under federal law. Anyone requiring a hearing aid is, therefore, by proxy, a person with a hearing disability, and by barring coverage for all hearing devices but cochlear implants, the Regence plans intentionally discriminated against hearing-disabled individuals.
Finding that the plaintiffs provided enough support (which also included historical enactment and targeted enforcement data) to show that “all or very nearly all individuals who obtain prescription hearing aids are ‘disabled’ under federal law” because they “experience a substantial impact of their hearing loss in their daily lives,” and that only a “small minority” of those would qualify for cochlear implants, the court denied the insurer’s motion to dismiss the plaintiffs’ claim, allowing the case to go forward to a trial on the merits.
Employers and plan sponsors should closely monitor the developments in this case in terms of its potential effects on plan exclusions so closely related to particular disabilities that they could give rise to a plausible proxy discrimination claim against the plan in instances where there are enough facts to support such a claim.
On February 29, 2024, in Black v. Unum Life Insurance Company of America, the Federal District Court for the Northern District of Texas granted in part the motion for summary judgment by Black (the plaintiff), determining that Unum (the defendant) failed to provide a full and fair review of plaintiff’s long-term disability claim. The court remanded the matter back to the defendant to review the claim in line with ERISA requirements.
The plaintiff received long-term disability claims through her employer under a plan administered by the defendant. In September 2021, the defendant denied a claim submitted by the plaintiff, asserting that the plaintiff was no longer disabled. The defendant stated that it reviewed the medical records and talked with the treating medical providers as part of its review. The plaintiff appealed the denial. The defendant’s employee, a nurse, determined that there was no medical disagreement among the plaintiff’s physicians regarding her functionality and denied the claim on appeal. The defendant declined to review the claim denial again, so the plaintiff filed the lawsuit, alleging that the defendant failed to provide a full and fair review of her claim as ERISA requires.
The court applied a substantial compliance standard when evaluating the defendant’s review. Under ERISA, an appeal of an adverse determination of a claim based upon medical judgment must include consultation with a medical professional with training and experience in the field of medicine involved in the medical judgment. The medical professional cannot be the same person who was consulted for the original determination. Since the initial denial was based on a review of medical records and consultations with the plaintiff’s doctors, the court concluded that the initial denial was based on medical judgment. However, the court determined that the nurse who conducted the appeal review deferred to the opinions of the doctors in the original review. In addition, the nurse was not qualified to conduct the appeal review because she did not have the appropriate experience and training. Accordingly, the court determined that the defendant failed to substantially comply with ERISA requirements.
Employers that offer long-term disability benefits to their employees should be aware of ERISA claim review and appeal requirements and take steps to ensure that the applicable procedures for their long-term disability plans comply with ERISA’s requirements, including conferring with their disability carriers on the subject, where applicable.
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