The Massachusetts Health Care Reform Act’s Health Insurance Nondiscrimination Rule

The recently enacted Massachusetts health care reform act—H. 4850, An Act Providing Access to Affordable, Quality, Accountable Health Care (the “Act”)—imposed new health insurance requirements on individuals, insurers and employers. In earlier client advisories we provided an overview of the Act (see Health Alert, April 13, 2006), discussed the impact of a recent judicial challenge to a Maryland law with features similar to the Act (see Employee Benefits Advisory, July 28, 2006), and explained a recently issued final regulation implementing the Act’s fair share premium contribution requirement (see Employee Benefits Advisory, Oct. 13, 2006). This advisory focuses on another of the Act’s novel features—the nondiscrimination requirement that applies to fully insured health plans.

Background

The Act significantly changes the way that group health insurance is regulated in the Commonwealth of Massachusetts. These changes include the following:

Merger of the Non- and Small-Group Health Insurance Markets

The Act merges the non- and small-group health insurance markets. Of the two markets, the non-group market is by far the more adversely selected. It is anticipated that the merger will produce a drop of about 24% in non-group premium costs, but it may increase group premiums anywhere from 2% to 8%. The Act mandates an actuarial study of the consequences of merging the two insurance markets before the merger is completed.

Premium Adjustment Factors and Waiting Periods

The Act also modifies the factors (e.g., industry, age, location, gender) health insurance issuers may use to adjust premiums in the small-group market, and it places limits on waiting periods and exclusions for preexisting conditions. Waiting periods may not be imposed on individuals who have been without coverage for 18 months.

HMO Coordination with High Deductible Health Plans

The Act enables HMOs to offer High Deductible Health Plans (HDHPs), within the meaning of Internal Revenue Code (the “Code”) § 223, which will support contributions to Health Savings Accounts (HSAs). Previously, only licensed insurers could offer HDHPs that could be paired with HSAs.

Expanded Definition of “Dependent”

The definition of “dependent” is also expanded to allow young adults to stay on their parents’ insurance plans for two years past the loss of their dependent status, or until they turn 25 (whichever occurs first).

Limited Relief from Insurance Mandates

Although the Act does not generally tamper with the insurance mandates under current law, health insurance issuers are permitted to provide lower-cost, specially designed products through the Massachusetts Health Insurance Connector (a quasi-governmental entity established as a clearing house for insured group health plans) to 19–26 year-olds. Further, the Act imposes a moratorium on the creation of new health insurance mandated benefits through 2008.

The Insured Group Health Plan Nondiscrimination Requirement

In crafting the various provisions of the bill relating to employers, the Massachusetts legislature did not want to create an incentive for employers to drop coverage in favor of coverage under the Connector—a phenomenon that it referred to as “crowd out.” The legislature’s solution was to impose nondiscrimination requirements on group health plans, using as its model the nondiscrimination rules in Code § 105(h) that apply to self-funded medical reimbursement plans.

Comment: For reasons that are largely historical, no federal benefits-related nondiscrimination rules apply to insured group health plans. When it originally enacted the nondiscrimination provisions of Code § 105(h), Congress was of the view that insurance underwriting considerations could be relied upon to limit abuses in insured plans. But, as insurance underwriting practices became more sophisticated, Congress had a change of heart. In the Tax Reform Act of 1986, Congress added Code § 89, which established a comprehensive set of nondiscrimination rules that applied to a broad range of welfare and fringe benefit plans including insured group health plans. But Code § 89 was the subject of intense criticism, and lobbying pressure ultimately doomed the measure. Code § 89 was repealed in 1992 retroactive to 1989, and the prior law rules were resurrected.

Federal law (i.e., the preemption provisions of the Employee Retirement Income Security Act of 1974 (ERISA)) bars states from imposing group health plan nondiscrimination requirements, among others, directly on employers. Under ERISA’s “insurance savings clause,” however, states remain free to regulate insurance. Therefore, for the legislature to impose a nondiscrimination requirement on fully insured group health plans in Massachusetts meant amending the state’s insurance code. Act §§ 50 (relating to any “general or blanket policy of insurance”), 52 (relating to nonprofit hospital services, i.e., Blue Cross), 55 (relating to medical service corporations, i.e., Blue Shield physician payments), and 59 (relating to HMOs) require that insurance contracts or policies delivered in the Commonwealth:

• be offered by the employer to all full-time employees who live in the commonwealth, and
• prohibit the employer from making “a smaller health insurance premium contribution percentage amount to an employee than the employer makes to any other employee who receives an equal or greater total hourly or annual salary” for its group health insurance or HMO offerings.

Once this rule takes effect, it will no longer be possible to offer coverage to certain full-time employees and not other full-time employees, nor will it be possible to offer to pay a greater amount of the premium cost of the plan for full-time employees with higher incomes. The Act does not define the term “full-time” employee for this purpose. These rules govern all fully insured group health plans licensed under the provisions of Massachusetts law cited above (not just those in the small-group market), but they do not apply to self-funded arrangements. There is also an exception for coverage provided under collective bargaining agreements.

This new rule will all but eliminate disparate treatment of different classes of employees, such as hourly versus salaried employees, both as to waiting periods and contribution levels. It will also prevent small business owners from paying, say, 100% of group health care premiums for themselves, while paying some lesser amount for the rest of their full-time employees. Also prohibited are executive-premium or excess plans (at least those licensed in Massachusetts under the provisions cited above) that are marketed as “insured,” even though they are usually minimum-deposit or cost-plus arrangements. These latter plans were treated as insured in order to avoid the application of the Code § 105(h) nondiscrimination rules described above. (Whether this treatment is warranted is another matter entirely.)

The Act provides no penalties for failing to comply with the new group health plan nondiscrimination rules, nor does it appropriate funds for enforcement by the Commonwealth’s Division of Insurance. Stripped to its essentials, these provisions of the Act require only that insurance policies and HMO contracts issued or delivered within the Commonwealth contain certain provisions. It says nothing about what happens if those provisions are waived or ignored. Moreover, they do not appear to apply to policies issued by out-of-state insurers. So employees of multi-state employers covered under a policy or contract not issued or delivered in Massachusetts should be beyond the reach of the rule.

Comment: State insurance commissioners are aware that some products are licensed under the laws of other states, and they generally refrain from any attempt to regulate them for reasons based at least in part on the Constitutional law doctrines of comity and minimum contacts, among others. What is not clear is the extent to which the Massachusetts Division of Insurance could require foreign insurers to comply with these and other requirements of Massachusetts law.

ERISA Preemption

Employers are unlikely to embrace these new nondiscrimination requirements, and at some point they may be subject to challenge under ERISA (for the reasons cited above). In a 2003 case, Kentucky Association of Health Plans v. Miller, the U.S. Supreme Court adopted a two-pronged test for determining whether a state law is saved from preemption under ERISA’s insurance savings clause: First, is the state law specifically directed towards insurers’ insurance activities; and, second, does the state law substantially affect the risk pooling arrangement between the insurer and the insured? While the Act’s group health plan nondiscrimination rules appear to satisfy these standards, predicting the outcome of any challenge based on ERISA preemption is usually accompanied by some risk.

Conclusion

The Act’s group health plan nondiscrimination rules are a significant departure from prior law, and they signal the intent of the Massachusetts legislature to take radical steps to expand private sector health coverage by any means at its disposal. Employers must adjust to the new reality, mount a challenge, or (where feasible) choose to self-insure. The Division of Insurance, for its part, will need to decide on how to enforce these rules. And there is still much to learn about the contours of these new requirements and what changes they will bring. For now, however, insurers and employers need to prepare to implement the new rules by January 1, 2007.

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If you have any questions concerning the information
discussed in this advisory or any other employee benefits
topic, please contact one of the attorneys listed below or your primary contact with the firm who can direct you to the right person. We would be delighted to work with you.

Alden Bianchi
 617.348.3057 | AJBianchi@mintz.com

Tom Greene
617.348.1886 | TMGreene@mintz.com

Addy Press
617.348.1659 | ACPress@mintz.com

Pamela Fleming
617.348.1664 | PBFleming@mintz.com

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