March 1, 2024

Group health plans and the CAA

Article by Steven Friedman, Bradley Crowell and James Fielding of Littler Mendelson

Employers sponsoring group health plans must understand and comply with new requirements imposed by the Consolidated Appropriations Act.
On the plus side, the new compliance requirements can provide sponsors with valuable insights into the operation of their group health plans.
To avoid potential liabilities, however, sponsors should act proactively to avoid allegations of imprudent fiduciary processes.

Many employers offer health insurance as a way to recruit and retain talent. Sponsoring a group health plan, however, can subject the employer plan sponsor to significant legal and regulatory burdens deriving from laws such as the Employee Retirement Income Security Act of 1974 (ERISA), the tax laws contained in the Internal Revenue Code and the Affordable Care Act. The Consolidated Appropriations Act of 2021 (CAA) heightens plan sponsors' obligations as fiduciaries, creating additional avenues of possible employer liability. For this reason, employers that sponsor health plans should familiarize themselves with the CAA's requirements to avoid becoming targets of class action litigation and government agency audits.

In recent years employer-sponsored benefit plans, such as 401(k) and pension plans, have become common targets for class-action lawsuits.[1] Specifically, there has been an increased focus on fees charged by employer-sponsored benefit plans to plan participants. Plaintiff's lawyers have also focused on group health plans, including the fees charged by such plans and the services offered to plan participants, and these lawsuits are currently making their way through various circuits. Understanding the new obligations imposed by the CAA can help sponsors of group health plans avoid audits and class-action lawsuits, and can even allow sponsors to take advantage of a new defense against liability. Additionally, group health plan sponsors might reap benefits if they treat the new CAA's disclosure requirements as both a challenge and an opportunity, because the new disclosure requirements should provide sponsors with new levels of detail to ensure their plan's fees are reasonable. Keep in mind, however, that the same data may also be used against plan sponsors in suits over the reasonableness of disclosed fees.

Gag Clauses

The CAA amended ERISA to prohibit so-called "gag clauses" in contracts between group health plans and service providers.[2] This means group health plan sponsors cannot agree to contracts that would directly or indirectly restrict the plan from disclosing information about costs or quality of services provided by a specific healthcare provider to the plan's sponsor, plan participants, or individuals eligible to become participants. To ensure compliance with this new rule, sponsors of group health plans must keep gag clauses out of their contracts, and also submit annual attestations to the Department of Labor confirming their group health plans comply with this requirement.[3] The first attestation was due on December 31, 2023.

Gag clauses previously prompted litigation by health care sponsors against insurers to compel the disclosure of claims data. With these clauses now prohibited, plan sponsors may get a better understanding of the economic ramifications their decisions have upon participants seeking healthcare benefits. Keep in mind that this information will also be available to plan participants and may increase the likelihood of lawsuits claiming that plan fiduciaries were aware that fees were "excessive" in light of the services provided, meaning plan sponsors could see an increase in expensive and risky litigation. Thus, plan sponsors should both ensure they are complying with the prohibition on gag clauses and also take advantage of details that will now be available about cost burdens faced by participants who utilize the healthcare benefits. Reviewing these cost realities closely may enable fiduciaries to negotiate effectively with service providers and explore plan fee options to provide maximum participant benefit.

Mental Health and Substance Abuse Parity

The CAA also requires group health plans to remain in compliance with the Mental Health Parity and Addiction Equity Act (MHPAEA). The MHPAEA prohibits group health plans from allowing the financial burdens (like copays) and limitations on treatment (like visit limits) for mental health or substance abuse disorders to be more restrictive than those applied to comparable medical or surgical benefits. The MHPAEA also prohibits group plans from imposing non-qualitative treatment limitations upon mental health or substance abuse treatments unless comparable limitations are imposed upon similar medical and surgical benefits. Non-qualitative treatment limitations include processes or standards that limit the scope or duration of benefits a participant can receive from their group health plan. For example, a plan term requiring prior authorization before a participant can receive benefits for mental health treatments would be a non-qualitative treatment limitation upon a mental health treatment.

The CAA has increased these requirements by obliging plans to perform comparative analyses of the design and application of non-qualitative treatment limitations. Each plan must be prepared to disclose these comparative analyses to the Department of Labor upon request. The disclosure must show, among other things, that the plan has a process for ensuring its non-qualitative treatment limitations are not applied more stringently against mental health or substance abuse benefits than to comparable medical or surgical benefits.

The area of mental health parity has been a hotbed of litigation for years and there are significant cases pending in appellate courts regarding mental health parity that may shape this landscape for years to come.

Even before the enactment of the CAA, the DOL had embarked on audits of plans to assure MHPAEA compliance, and we understand the DOL found many plans in violation of these rules. The CAA's new requirements, making compliance more difficult, may prompt participant claims and government audits affecting employers that fail to comply closely with these rules.

As with required cost disclosures, plan fiduciaries may find that closely reviewing these comparative analyses, and understanding their evolution over time, can provide valuable insights about economic realities faced by participants who are trying to utilize healthcare benefits. Such information can help fiduciaries ensure that their plan design serves predominant participant needs. It can also provide fiduciaries with data needed to negotiate costs with administrative service providers and medical service provider networks. Such analyses could also serve as useful defenses against claims that the fiduciaries failed to comply with these new requirements.

Reporting of Pharmaceutical Benefits

The CAA also obligates group health plans to disclose extensive data concerning the pharmaceutical benefits provided to plan participants throughout the year. Plans must now make yearly disclosures to the Department of Labor, the Department of Health and Human Services, and the Department of the Treasury.[4] The disclosures must identify the:

Beginning and end of the plan's plan year;
Number of participants and beneficiaries in the plan;
States where the plan offers coverage;
50 brand prescription drugs most frequently dispensed in connection with claims paid by the plan, and the total number of claims paid for each of those drugs;
50 costliest brand prescription drugs (based upon total annual spending), and the total amount the plan spent to cover each of those drugs;
50 brand prescription drugs causing the greatest increase in plan expenditures, and the change in plan expenditures for each of those drugs;
Total spending on healthcare services by the plan, and total spending on prescription drugs (which must be broken down by the plan's spendings and the spending of participants and beneficiaries);
Average monthly premium (which must be broken down into the amount paid by employers on behalf of participants or beneficiaries and the amounts paid by participants or beneficiaries);
Impact of rebates or fees paid from drug manufacturers to the plan or its service providers upon premiums; and
Any reductions in premiums or out-of-pocket costs attributable to the rebates or fees paid from drug manufacturers to the plan or its service providers.

The CAA's provisions ensure that health plan sponsors must gather significant information that may not have been available to them previously regarding the cost of various components of their health plans. Again, this increased information creates opportunities and challenges. These reports provide plan fiduciaries with an opportunity to understand the economic burden plan participants are shouldering with respect to prescription drug prices. This, in turn, will allow plan fiduciaries to ensure they are negotiating with medical service providers and fee arrangements so that they maximize value for plan participants.

On the other hand, the same disclosures could increase exposure to litigation by plan participants questioning the fiduciaries' choices on preferred medical services providers or administrative fee arrangements based upon the information that is now available to them. Drug pricing is currently one of the most hotly debated issues among policymakers, and plan sponsors will now understand which drugs and providers are imposing the greatest burden upon their plan. Indeed, the government is currently aware of the most expensive drugs for Medicare and is using that data to force pharmaceutical companies to the bargaining table.[5] Likewise, plan fiduciaries should take advantage of that increased data. This reporting requirement should not be viewed only as another "check the box" regulatory requirement; instead, plan fiduciaries should understand they have the responsibility to make prudent choices in light of the information they have available to them - and that they will soon have more information available to them than ever before.

Takeaways

The CAA imposes a number of new obligations that group health plan fiduciaries must familiarize themselves with to ensure their plans remain in compliance with federal law. These new requirements impact gag clauses and require a number of disclosures concerning non-qualitative treatment limitations and pharmaceutical benefits. The CAA will also result in employers' procuring significant information that will be helpful in administering their plans; however, these new disclosures could also provide government agencies and participants with a means to pursue potential adverse actions against employers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Steven Friedman, Bradley Crowell and James Fielding from Littler Mendelson, (c) Mondaq Ltd., 2024

Footnotes

1 See Wesley Stockard, Sarah Bryan Fask, Pamela Reynolds, Bradley Crowell, and James Fielding, Supreme Court Sends Case Involving ERISA Breach of Fiduciary Duty Pleading Standard Back to Seventh Circuit for Revised Analysis, Littler ASAP (Jan. 26, 2022); Rachel P. Kaercher and James Fielding, Update in ERISA Litigation Involving Breaches of Fiduciary Duty Claims, Littler Insight (Jan. 25, 2023); Wes Stockard and James Fielding, Federal Court Dismisses Case Alleging Breach of ERISA Fiduciary Duties in 401(k) Class Action, Littler ASAP (May 2, 2023).

2 29 U.S.C. §1185m(a)(1).

3 29 U.S.C. §1185m(a)(3).

4 See 29 U.S.C. §1185n(a)(1)-(9).

5 "HHS Selects the First Drugs for Medicare Drug Price Negotiation" (Aug. 29, 2023), available athttps://www.hhs.gov/about/news/2023/08/29/hhs-selects-the-first-drugs-for-medicare-drug-price-negotiation.html.

Tags: Employers' Blog Posts