Employee Benefits Advisory: Department of Defense Issues Proposed Regulation Implementing the TRICARE Secondary Payer Rule
4/24/2008
Background
The U.S. Department of Defense recently issued a proposed regulation implementing the provisions of Section 707 of the John Warner Defense Authorization Act of 2007 (the “Act”). (Click here for a copy of the proposed regulation). Act § 707 prohibits employers from offering incentives to TRICARE-eligible employees to not enroll, or to terminate enrollment, in an employer-sponsored group health plan that is (or would be) primary to TRICARE under rules similar to the “secondary payer” rules that have applied to Medicare for decades. The proposed regulation implements the requirements of Act § 707. It also adopts an important regulatory exception for participation by TRICARE-eligible employees in broad-based cafeteria plans. This “cafeteria plan” exception originated with the Act’s legislative history, and its contours were initially described in a report dated May 9, 2007 from the Assistant Secretary of Defense for Health Affairs to the House and Senate Committees on Armed Services.1
This advisory explains the key features of the proposed regulation, explores its likely impact on employers, and concludes with a discussion of some unanswered questions and unresolved issues.
The Medicare Secondary Payer Rules
From its inception in 19652 until 1980, Medicare was generally the “primary” payer of medical benefits to Medicare-eligible individuals. Thus, where an individual who was covered by both Medicare and an employer-sponsored group health plan incurred a medical expense covered by both plans, Medicare would be principally responsible (i.e., it was the “primary payer”). The employer-sponsored group health plan was only secondarily liable (i.e., the “secondary payer”). Employers could, with impunity, require their Medicare eligible employees to enroll in Medicare and deny them access to the employer’s group health plan. Alternatively, an employer-sponsored group health plan could reduce the benefits provided to Medicare-eligible individuals by amounts paid by Medicare.
In the Omnibus Budget Reconciliation Act of 1980,3 Congress decreed that Medicare would henceforth be the “secondary” payer of medical benefits for individuals age 65 or older who are covered or eligible to be covered under their employer’s group health plan by virtue of their employment status. These Medicare Secondary Payer (MSP) rules were later expanded to include individuals (i) who qualify for Medicare by reason of disability and (ii) who have end-stage renal disease.
TRICARE
TRICARE is the health benefit program established and maintained by the Department of Defense for the purpose of providing coverage for active-duty and retired members of the military and their dependents. Prior to the Act, where TRICARE-eligible military retirees found employment in the civilian sector, their employers would encourage or require that they continue to be covered under TRICARE and provide them with a TRICARE supplemental group health plan. This arrangement provided TRICARE-eligible military retirees access to comprehensive (though mostly government-subsidized) health coverage, while reducing the health care costs of the employers by allowing them to shift costs to the government.
Act § 707
Act § 707 establishes rules governing the order of payment where (i) an employee is covered simultaneously under an employer-sponsored group health plan and TRICARE, and (ii) the same medical procedure or service is covered under both plans. The Act expressly requires that the TRICARE secondary payer rules be applied:
[I]n the same manner as such section 1862(b)(3)(C) applies to financial or other incentives for an individual entitled to benefits under title XVIII of the Social Security Act [i.e., the MSP rules] not to enroll (or to terminate enrollment) under a group health plan or a large group health plan which would (in the case of enrollment) be a primary plan…. (Emphasis added.)
Thus, in developing the proposed regulation, the regulators have looked to and relied on the MSP rules promulgated by the Centers for Medicare & Medicaid Services.
Simply put, the purpose of Act § 707 is the same as that of the MSP rules: to shift the costs of providing health care toward private sector employers and away from the government. The preamble to the proposed regulation says bluntly in this regard:
Many employers, including state and local governments, have begun to offer their employees who are TRICARE-eligible a TRICARE supplemental insurance as an incentive not to enroll in the employer’s primary [group health plan]. These actions shift thousands of dollars of annual health costs per employee to the Defense Department, draining resources from higher national security priorities. (Emphasis added.)
The Proposed Regulation
The proposed regulation makes clear that Medicare is a secondary payer to employer-provided health insurance. Thus, in all instances where a TRICARE-eligible employee is employed by a public or private entity and elects to participate in the employer’s group health plan, reimbursements for TRICARE claims will be paid as a secondary payer to the employer-sponsored group health plan. An important corollary to this rule is that a TRICARE-eligible employee can voluntarily choose TRICARE over the employer’s group health plan so long as it does not exclude the employee from participation in the employer plan or offer any incentive to choose TRICARE. (This is the same rule that applies under the MSP rules.)
The Act no longer permits private-sector employers that hire TRICARE eligibles to require them—or offer them incentives to choose—TRICARE coverage, but it does not prevent TRICARE-eligible employees from electing TRICARE coverage in the absence of any improper demands or incentives. Not all incentives are improper. The proposed regulations say that it is permissible to offer TRICARE supplemental insurance under an employer’s cafeteria plan, as long as it is not a TRICARE-exclusive plan. Elections of cash payments under a cafeteria plan “opt-out” arrangement—i.e., an arrangement that provides a cash payment to an employee to decline coverage under the employer’s plan where he or she has other coverage—are allowed under the cafeteria plan rules because they offer a choice between taxable and non-taxable benefits. But if the TRICARE supplemental coverage is an option on the menu of choices under an employer’s group health plan, the rule is not satisfied, because this option is not open to all employees. The TRICARE supplement option in this latter instance constitutes an improper incentive targeted only at TRICARE beneficiaries for not enrolling in the employer’s main health plan option or options.
The proposed regulation is careful to say that the regulation of TRICARE supplemental insurance plans that “are not offered by an employer; but are sold by an insurer and/or beneficiary association working in conjunction with an insurer” are not affected. Instead, this coverage will continue to be treated (and excluded) as “double coverage.” Under the TRICARE “double coverage” rules, TRICARE is generally second payer to all other plans (with certain exceptions not here relevant). Therefore, it does not run afoul of the TRICARE secondary payer rules.
Impact on Employers
The Act makes fundamental changes in the way that military retirees are treated in the civilian workplace by sweeping away arrangements that single out these individuals for coverage under a combination of TRICARE and TRICARE supplements. Under the proposed regulation, for employers that want to continue accommodating TRICARE-eligible employees, there appear to be two basic options:
Voluntary Benefits Program
The proposed regulation is silent as to the ability of an employer to offer a TRICARE supplement as a “voluntary benefit.” In their most common form, voluntary benefit programs are entirely employee-paid. They are neither designed nor endorsed by employers, and the role of the employer is limited to salary reduction. The proposed regulations regulate “group health plans,” which Code § 5000(b)(1) defines as follows:
The term “group health plan” means a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families. (Emphasis added.)
A properly structured voluntary benefit plan should not be a group health plan as defined by Code § 5000(b)(1). Therefore, while the Act bars an employer from offering a TRICARE supplement under an employer-sponsored group health plan, it should not prevent an employer from including a TRICARE supplement in a voluntary arrangement that does constitute an employer-sponsored group health plan.
Cafeteria Plan Opt-out Arrangements
The proposed regulation expressly recognizes and permits cafeteria plan opt-out arrangements, under which TRICARE-eligible military retirees may choose to forgo coverage under an employer's group health plan in favor of TRICARE and receive an opt-out payment. Generally, to be eligible for a payment under an opt-out arrangement, an employee must establish that he or she has other coverage (e.g., under the plan of a spouse or under TRICARE). Nothing would prevent the TRICARE-eligible employee from applying the opt-out payment to the purchase of a TRICARE supplement.
ExampleAn employer adopts a section 125 cafeteria plan under which any employee with access to major medical coverage other than through the employer can opt out of the employer’s plan and receive a cash payment. A TRICARE-eligible employee (who, by definition, has other coverage) opts out; gets the opt-out payment; and uses the payment to purchase a TRICARE supplement. |
Unanswered Questions
While the proposed regulation ably established the basics of the scope and application of the TRICARE secondary payer rules under the Act, it nevertheless leaves a handful of important, unanswered questions. These include:
1. Pre-Tax Treatment of TRICARE Supplement Premiums under an Opt-out
Might supplement premiums under an opt-out be afforded pre-tax treatment? While this is an issue for the IRS and Treasury, and not for the Department of Defense, recently (re)proposed cafeteria plan regulations4 allow for the purchase of individual insurance products on a pre-tax basis. These rules, though admittedly proposed and not final, should form the basis for pre-tax coverage.
2. Direct Remittance of Opt-out Payment to Carrier
The result in the example above is endorsed by the proposed regulation. But what if, instead of making the opt-out payment to the TRICARE-eligible employee, the employer forwards it directly to the carrier on the employee’s behalf? Since this leads to the same functional result as item 1 above, it would appear to be permissible.
3. Direct Remittance of Opt-out Payment/Limited Choice of Carrier
What if, in addition to making a direct payment to the carrier, the employer selects a single TRICARE supplement carrier? (The employer may be willing to impose this requirement as a concession to the carrier in return for more favorable rates.) As in the case with the arrangement described in item 2 above, this approach should not change the result. This is still a broad-based arrangement that should fit within the cafeteria plan exception established by the proposed regulation. (The employer may be willing to impose this requirement in order to select a supplemental plan that conforms with its administrative and benefit objectives, e.g., waiver of pre-existing conditions or level premium rates.)
4. Pre-Tax Treatment under a Voluntary Plan
As is the case with item 1 above, whether elective deferrals of salary can be made on a pre-tax basis is an issue for the IRS and Treasury. In a revenue ruling that predates the cafeteria plan rules, the IRS determined that medical coverage purchased in the individual market is eligible for favorable tax treatment.5 So there is a basis for a rule allowing pre-tax treatment under a voluntary plan.
Conclusion
The proposed regulation contains no surprises. It hews carefully to the statute, and it implements carefully and thoughtfully the cafeteria plan exception first suggested by the Act’s legislative history. Further clarification along the lines suggested above, however, would be most welcome. There is a great deal at stake here. For years, TRICARE eligibility gave military personnel an advantage when seeking civilian employment. The Act dents, but does not demolish, that advantage. Military retirees still have access to TRICARE on a voluntary basis and without improper incentives. It is now up to the regulators, in the process of issuing a final rule, to clarify the scope of the retiree’s options relating to TRICARE access and coverage.
Endnotes
1See House Conference Report 109-702 (requesting the Secretary of Defense to report to the House and Senate Armed Services Committees on the treatment of cafeteria plans and non-TRICARE exclusive employer-provided incentives).
2 Social Security Amendments of 1965, Pub. L. 89-97, 79 Stat. 286 (Jul. 30, 1965).
3 Pub. L. 96-499, 94 Stat. 2599 (Dec. 5, 1980).
4 Prop. Treas. Reg. § 1.125-1(m) (Aug. 6, 2007).
5 Rev. Rul. 61-146 (1961-2 C.B. 25).
