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Keeping it Straight: Essential Health Benefits and Annual, Lifetime, and Maximum Out-of-Pocket Limits

Employee Benefits Law Alert John L. Barlament, Sarah L. Fowles

There has been some confusion over how certain "essential health benefits" and annual, lifetime, and maximum out-of-pocket limits affect health plans offered by employers. We summarize the rules below. Note that these rules are part of the federal health care reform law, the Affordable Care Act (the "ACA").

What are essential health benefits and why does it matter?

Essential health benefits are "typical" benefits that many plans offer, such as emergency care, hospitalization, prescription drugs, and maternity and newborn care. A complete list can be found on this government website (first paragraph) here.

Small employer, fully insured plans. Beginning January 1, 2014, non-grandfathered insured plans in the small employer (and individual) markets will be required to offer essential health benefits.

Large employer, fully insured plans and self-funded plans. Large employer, fully insured health plans and self-funded plans technically do not have to cover essential health benefits. However, because the benefits that are considered essential health benefits are so common, nearly every health plan will cover essential health benefits, at least to some extent. Fully insured health plans may also be required by state law to cover particular benefits. Those benefits may also happen to be essential health benefits under federal law.

What rules apply to essential health benefits?

Dollar limits on essential health benefits. The ACA prohibits health plans (grandfathered and non-grandfathered) from imposing annual and lifetime dollar-based limits on essential health benefits. For example, suppose that a health plan imposes a $10,000 lifetime limit on infertility treatment. If infertility treatment is considered an essential health benefit, the $10,000 lifetime limit would violate the ACA (because the plan would impose a dollar-based limit on an essential health benefit - here, infertility treatment).  The ACA does not prevent use of limits other than dollar limits. In this example, the plan could impose a one-procedure-per-lifetime limit on infertility treatments.

Cost-sharing: out-of-pocket limits. Starting in 2014, the ACA limits the amount enrollees must pay in cost-sharing expenses - at least in some situations. Specifically, a non-grandfathered health plan must limit the total out-of-pocket costs enrollees pay for in-network, essential health benefits. Conversely, a health plan does not have to have any out-of-pocket limits for non-essential health benefits. Also, a health plan does not have to have out-of-pocket limits for essential health benefits, which are incurred for out-of-network expenses (with one possible exception, relating to emergency care). For 2014, the maximum out-of-pocket limit for in-network, essential health benefit expenses is $6,350 for self-only coverage and $12,700 for other-than-self-only coverage (e.g., family coverage). Note that a special rule generally allows, for 2014 only, some prescription drug plans to have a separate out-of-pocket limitation on essential health benefits.  Also note that a separate rule limits deductibles in the small group market for non-grandfathered plans to $2,000 for self-only coverage and $4,000 for other than self-only coverage, subject to certain exceptions.

These rules are illustrated by the following examples.

Example 1: Essential health benefits, in-network. Goodco offers a self-funded health plan. The plan covers maternity expenses. In 2014, Heather, a participant in the Goodco plan, delivers her baby at a hospital. Heather incurs $5,000 in various expenses related to the delivery. Throughout the year, Heather also has $8,000 in other out-of-pocket expenses, bringing her total out-of-pocket expenses for 2014 to $13,000. Heather has family coverage under the Goodco plan.

Assume that none of these out-of-pocket expenses are for prescription medications and all of the expenses were incurred in-network and were for essential health benefits. In this situation, the plan would need to ensure that Heather's out-of-pocket expenses are capped at $12,700 - not $13,000, as she actually incurred. If the plan has accidentally allowed Heather to pay $13,000 in out-of-pocket expenses, the plan probably should try to refund the $300 ($13,000 - $12,700) overpayment to Heather.

Example 2: Essential health benefits, out-of-network. Assume the facts are the same as above, but of Heather's $8,000 in other out-of-pocket expenses, $1,000 relates to out-of-network, non-emergency medical services. If so, Heather will have incurred $12,000 of out-of-pocket expenses towards her $12,700 maximum. So, Heather has not yet reached her maximum out-of-pocket expense limit. The plan can continue to require that Heather pay $700 ($12,700 maximum - $12,000 actual expenses) more towards out-of-pocket expenses.
Example 3: Non-essential health benefits, in-network. Lois is also a participant in the Goodco health plan and has self-only coverage. In 2014, Lois incurs $13,000 in out-of-pocket medical expenses for various non-essential health benefits, such as chiropractic care and infertility treatment. (See below for a discussion of how to determine whether chiropractic care and infertility treatments are "essential health benefits"; for purposes of this example, assume they are not.) Assume the Goodco plan covers these benefits in general, but that the plan requires participants to pay some out-of-pocket expenses for the treatments. All of Lois's treatments are performed in-network.

In this situation, Lois has incurred $0 towards her out-of-pocket maximum. The plan could require Lois to pay the entire $13,000 in medical expenses, and none of it "counts" towards her out-of-pocket maximum of $6,350 (the out-of-pocket maximum for self-only coverage).

What are cost-sharing expenses?

Cost-sharing expenses include deductibles, co-insurance, co-payments or similar charges, and any other required expenditure for medical care. Cost-sharing does not include premiums, balance billing amounts for non-network providers, or spending for non-covered services.

How does a fully insured health plan determine what is an essential health benefit?

Generally, a small employer would not be involved in this determination. Instead, the insurer would look to the essential health benefits benchmark plan in the applicable state to make this determination. For an insured large group plan, it appears that the insurer could take the same approach described below for self-funded health plans (though the insured plan would have to offer benefits mandated by the state in which the group resides).

How does a self-funded health plan determine what is an essential health benefit?

Unfortunately, the rules are somewhat unclear. The federal Department of Health and Human Services ("HHS") considered whether to require self-funded plans to use a single, nationwide definition of "essential health benefits." However, HHS rejected this idea. Instead, HHS adopted the concept of an essential health benefit "benchmark plan" designed by each state or by HHS in the absence of state action. Thus, essential health benefits vary from state to state.

In the preamble to the final essential health benefit regulations, HHS indicated that a self-funded group health plan will be deemed to use a permissible definition of essential health benefits if it uses a definition authorized by HHS, including certain "benchmark" options. In fact, it appears that employers with self-funded health plans can use any state's definition of essential health benefits (though it is riskier to choose a state where the employer has no operations, especially if the employer operates in only one state). 

We are a multi-state employer and have a self-funded plan. Which state's definition of essential health benefit should we use?

Some informal, non-binding comments from an HHS official confirm that an employer with operations in a few states (e.g., California and Washington) could even choose a definition of essential health benefits, which is based on a state where the employer has no operations (e.g., Texas). The example below illustrates why this can be important.

Choice of state definition of essential health benefits. Goodco has operations in several states, including California and Wisconsin. Under the Goodco self-funded health plan, Goodco limits bariatric surgery treatment to a $50,000 lifetime maximum. Will this lifetime maximum violate the rule that health plans cannot impose dollar-based lifetime maximums on essential health benefits?

Perhaps - but Goodco may be able to greatly reduce its risk by selecting a state benchmark that does not treat bariatric surgery as an essential health benefit. Because Goodco has a self-funded plan there is no one, "set" definition of "essential health benefits" for its plan. In California, it appears that bariatric surgery will be an "essential health benefit." On the other hand, some states - such as Wisconsin - appear not to regard bariatric surgery as an essential health benefit. It appears that Goodco could select Wisconsin's definition of essential health benefit. This would assist Goodco with regard to its bariatric surgery limitation. However, Goodco would want to examine whether Wisconsin treats other services as essential health benefits and, if so, whether the Goodco plan imposes dollar-based limits on those services. In addition to Wisconsin, Goodco may be able to choose another state as its reference for "essential health benefits" - even if Goodco has no operations in that state. Note, though, that this is a more aggressive position since it is based on informal, non-binding HHS comments and that Goodco may want to consult with its legal counsel before taking that position.

Note also that Goodco could reduce the effect of this issue by: (1) removing bariatric surgery as a benefit (although this may create other concerns, such as employee morale concerns and loss of grandfathered plan status); or (2) keeping bariatric surgery as a benefit, but imposing a non-dollar-based limit on the service (e.g., allowing plan participants only one surgery per lifetime).

For More Information:

Information about each state's essential health benefits benchmark plan can be found here. Many states' insurance regulators have posted even more detailed benchmark plan information on their state insurance departments' websites.

For more information, contact the authors of this alert: John Barlament at (414) 277-5727 / john.barlament@quarles.com or Sarah Fowles at (414) 277-5287 / sarah.fowles@quarles.com. You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (312) 715-5079 / marla.anderson@quarles.com; Amy Ciepluch at (414) 277-5585 / amy.ciepluch@quarles.com; Alyssa Dowse at (414) 277-5607 / alyssa.dowse@quarles.com; Angie Hubbell at (312) 715-5097 / angie.hubbell@quarles.com; David Olson at (414) 277-5671 / david.olson@quarles.com; Robert Rothacker at (414) 277-5643 / robert.rothacker@quarles.com; or your Quarles & Brady attorney.