Massachusetts Division of Insurance Issues Notice Implementing the Massachusetts Health Care Reform Act’s “Insurance Nondiscrimination” Rule

Over the past year, we have been focusing on those provisions of the Massachusetts health care reform act—Chapter 58 of the Acts of 2006, An Act Providing Access to Affordable, Quality, Accountable Health Care (the “Act”)1—that affect employers. (Click here to access our Employers’ Guide to the Massachusetts Health Care Reform Act, which describes all of the Act’s employer-related provisions and summarizes the guidance issued to date.) This advisory describes a notice recently issued by the Massachusetts Division of Insurance implementing the Act’s insurance nondiscrimination rule.

In crafting the various provisions of the Act relating to employers, the Massachusetts legislature did not want to create an incentive for employers to drop coverage in favor of coverage made available from the Commonwealth Health Insurance Connector Authority—a phenomenon known 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.

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, on group health plans, but states are free under ERISA’s “insurance saving clause” to regulate insurance. Thus, the nondiscrimination rule is an insurance mandate, under which blanket policies of health insurance, Blue Cross and Blue Shield of Massachusetts, and health maintenance organizations (HMOs) must by the terms of the contract with the employer or other plan sponsor:

• 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.

The insured plan nondiscrimination requirement takes effect on July 1, 2007.2 It applies only to insured plans. Self-funded plans are unaffected.

On April 6, 2006, the Massachusetts Division of Insurance issued Notice 2007-04, entitled, “Non-discriminatory Offer and Equal Contribution by Employers of Insured Group Health Benefit Plan Contracts Pursuant to Chapter 58 of the Acts of 2006, as amended,” which fleshes out the particulars of the nondiscrimination rule and its enforcement. The notice clarifies that a “full-time” employee means an employee who is “scheduled or expected to work at least the equivalent of an average of 35 hours per week.” Excluded from the rule’s reach are retirees, temporary employees (i.e., those expected to work 12 consecutive weeks or fewer), and seasonal employees (determined under rules established by the Massachusetts Department of Unemployment Assistance). The rule does not apply to an employer that establishes separate contribution percentages for employees covered by collective bargaining agreements.

Under the notice employers may (without running afoul of the insurance non-discrimination rule) establish:

• a fixed dollar amount contribution to premium regardless of salary for all full-time employees;
• different percentage contributions or fixed dollar contributions for different plan choices as long as the contributions made with respect to each plan on behalf of full-time employees do not differ based on the salary level;
• greater contribution levels for increasing lengths of service, as long as “the schedule of contribution levels is part of a formal employee benefit plan and is designed as a reward for longevity rather than as a pretext for providing better health insurance contributions to more highly paid employees;”
• greater contributions levels for employees who participate in company-sponsored health and wellness programs; and
• contribution levels for dependents of covered full-time employees that differ from the contribution levels for full-time employees, as long as the contribution level is the same for all dependents and does not differ based on the salary level of the full-time employee.

The carrier’s obligations under the nondiscrimination rule apply at the time the insured health benefit contract is entered into or renewed, and carriers are not responsible for “actively monitoring whether employers’ practices change during a contract period.” The notice further clarifies that the insurance nondiscrimination rule applies to insured group health plan contracts entered into with employers “on or after July 1, 2007.” Thus, contracts entered into prior to July 1, 2007 that go into effect on or after that date are not subject to these provisions until their next renewal.

Going forward, the insurance nondiscrimination 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.

1 As amended by Chapter 324 of the Acts of 2006, An Act Relative to Health Care Access and Chapter 450 of the Acts of 2006, An Act Further Regulating Health Care Access.

2 Chapter 450, § 7 of the Acts of 2006 (the insured plan nondiscrimination requirement effective date prior to amendment was 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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