The following comes from Ed Fensholt, a Health Reform advisor at Lockton Companies. It is an excellent review of the Obamacare decision and its potential impact on healthcare costs.

– Eric

U.S. Appeals Court Upholds Healthcare Reform Law

In a significant victory for the White House and Congressional proponents of last year’s healthcare reform law, a federal appeals court ruled 2-1 last week that the “individual mandate” – a central component to the law’s structure – is constitutional. In short, the U.S. Sixth Circuit Court of Appeals upheld the power of Congress to require Americans, under the federal Constitution’s “commerce clause,” to purchase health insurance or pay a penalty.

Because of the political undertones of the five federal trial court decisions that have ruled on the individual mandate’s constitutionality (three Democrat-appointed judges upheld the mandate, two Republican-appointed judges struck it down), last week’s ruling was particularly interesting. The majority’s decision was written by Judge Jeffrey Sutton, an appointee of President George W. Bush. Judge Boyce Martin, an appointee of President Jimmy Carter, concurred with Sutton’s decision that Congress validly exercised its commerce clause powers in enacting the individual mandate. Judge James Graham, an appointee of President Ronald Reagan, was the dissenting judge.

While finding the arguments against the law “compelling,” Sutton in a way punted the issue to the Supreme Court. Noting that the Sixth Circuit had never considered whether Congress could regulate an individual’s inactivity – e.g., the decision to not buy insurance – under the Constitution’s commerce clause, he concluded that under existing Supreme Court precedent he was required to rule as he did. But the Supreme Court, Sutton noted, has the discretion to overturn or clarify its prior rulings, the rulings he felt compelled to rely upon in upholding the law. The high court, he wrote, “has considerable discretion in resolving this dispute.”

Writing separately, Judge Graham expressed concern that if Congress has the constitutional power to require Americans to buy an insurance product, there are effectively no limits on its power under the commerce clause.

Another federal appeals court is also considering the constitutionality of the individual mandate. If it concludes the mandate is unconstitutional, the Supreme Court will almost certainly resolve the matter, likely next year. Even if the other court upholds the mandate, however, the fact that federal courts have not previously ruled on the ability of Congress to regulate individuals’ inactivity makes the issue ripe for Supreme Court consideration nevertheless.

Federal Regulators Revisit, Soften New Claims and Appeals Rules

The healthcare reform-related rules that are quickly becoming the most challenging to track are those governing the processing of healthcare claims. The rules apply only to non-grandfathered plans, but were never issued in proposed form, which would have allowed for comments from interested parties. Rather, the rules were issued last year as “interim” final regulations, demanding compliance from non-grandfathered plans as early as September of 2010. Subsequent guidance, issued late last year and early this year, deferred the effective dates for several of the new rules, in some cases deferring them more than once.

Late last month federal authorities amended the interim final regulations, softening them in some respects and again deferring compliance for several of the requirements. Although these changes, as a general rule, are more relevant for insurance companies and third-party claim administrators of self-insured plans, it’s important that plan sponsors understand the rules as well. For example, sponsors of non-grandfathered self-insured plans should ensure their claim administrators are complying with the rules, and some employers self-administer certain healthcare programs, such as health reimbursement arrangements. In addition, employers who retroactively rescind someone’s coverage – which often happens in the wake of a dependent audit, for example – must comply with the new notice rules.

Notice of Urgent Care Claims

The recent amendments to the regulations largely roll back a requirement that would have forced plans to adjudicate urgent care claims in no more than 24 hours, instead of the pre-healthcare reform standard of not more than 72 hours. The amendment restores the old rule, subject only to the caveat that whether a claim involves “urgent care” will be made by insured’s attending physician.

Notice of Diagnostic and Treatment Codes

When a health plan denies a claim (or an appeal of a denied claim), the plan must supply a notice of that denial. Last year’s interim final regulations required plans to supply treatment and diagnostic codes, and their meanings, in these notices. The requirement raised significant privacy concerns, and also raised the specter of confusing insureds and raising costs for plans. For example, there are over 20,000 treatment and diagnostic codes, many of which are very difficult for an average patient to understand.

As a result, the recent amendments eliminate the need to automatically provide the diagnostic and treatment codes and their meanings. Rather, the notice from the plan must disclose the availability of the codes and their meanings, and then supply them upon request.

Strict Compliance or “Close Enough”?

To protect a plan from being sued prematurely over a claim dispute, courts have long provided that an insured must exhaust a plan’s internal claim review process before applying for external review, particularly through the courts. Plans sometimes failed to completely comply with relevant claims processing rules. For example, they might have been a few days late in adjudicating a claim, or might have supplied a notice that lacked one or two required elements. But as long as they “substantially complied” with ERISA’s claim processing rules, the plan’s failure did not excuse the insured from having to exhaust the plan’s internal claim review process.

Last year’s interim final regulations required plans to be perfect. Plans would have to strictly comply with the new claim adjudication rules, or the insured could proceed directly to an external review. More significantly, unless the plan were perfect in its handling of a claim, a court would not be required to give any deference to the plan’s initial decision (courts normally overturn a plan’s decision only if they find the decision to be arbitrary and lacking a reasonable basis). Rather, the court could substitute its judgment for the plan’s.

The recent amendments to the regulations soften this standard, but only a little. A plan’s failure to “strictly comply” with the post-healthcare reform claim rules is excused, but only if the failure:

• Is very minor;
• Does not prejudice the claimant;
• Is due to good cause, or to factors beyond the plan’s control;
• Occurs in the context of an ongoing good faith exchange of information; and
• Does not reflect a pattern or practice of non-compliance.

May I Translate That for You?

The healthcare reform law requires notices from the health plan to be “culturally and linguistically appropriate,” a concept borrowed from the Medicare world. Last year’s interim final regulations adopted the ERISA standard for summary plan descriptions, and required the plan to determine if a certain percentage of the plan’s participants are literate only in the same non-English language. If so, the plan was required to place an offer of translation assistance, in that non-English language, on the plan’s notices. If a participant requested translation, the plan was required to not only provide a translated notice, but also to supply all future notices to that individual in that same foreign language.

The amended regulations released in late June look not to the portion of the plan’s participants who are literate only in the same non-English language. Rather, the offer of translation assistance must be included on notices to a claimant depending on where the claimant resides.

If the claimant resides in a county in which 10 percent or more of the population (according to the most recent census) is literate in the same non-English language, an offer of translation assistance – in that language – must appear in notices to the claimant.1 In addition, the plan must provide “oral language services” such as a telephone hotline the claimant can call to receive claim filing assistance in the relevant foreign language.

Good news: While the plan still has an obligation to furnish a translated notice to a claimant in such a county who asks for a translated notice, the plan is not automatically required to supply all future notices to that individual in that foreign language.

Bad news: These new requirements may force some employers to give up attempts to administer claims in-house, if the plan has covered persons residing in a county in which at least 10 percent of residents are literate only in the same non-English language.

External Reviews

The most complicated aspect of the new claims and appeals rules pertains to external review requirements. As background, many states already have some form of external appeal process in place for fully insured coverage and, in some cases, self-insured non-ERISA plans (such as local government plans). The healthcare reform law imposed an external review requirement, as a matter of federal law, on all group health plans subject to the reform law. The complexity comes from the government’s effort to transition plans, over time, from patchwork state rules to a more uniform standard.


Initially, insured plans operating in a state that has an external review process in place were allowed to simply comply with that existing process, at least for plan years beginning prior to July 1, 2011. After that, if the state process had not conformed to uniform external review standards promulgated by the National Association of Insurance Commissioners (NAIC), the fully insured plan would become subject to a federally administered standard, yet to be completely defined.

Self-insured ERISA plans were subject to a requirement to provide external review by contracting, directly or indirectly, with three “independent review organizations” (IROs), although regulators were willing to allow such plans to contract with fewer than three IROs as long as the claimant was not prejudiced by the process. Self-funded plans also had the option of piggybacking onto state-based external review processes required of fully insured plans, but few self-funded plans were likely to warm to that process.

Much of this changes under the recent amendments to the claim regulations. First, states are given more time to bring their external review statutes up to federal standards. The recent amendments give states until the end of this calendar year to do so. After that, and until 2014, a state whose external review requirements are substantially “similar” to the NAIC’s model rules, even though not consistent in every way with those rules, will be deemed compliant. This means insurers in those states may comply with the state’s NAIC-similar standards and be considered compliant with healthcare reform’s external review requirements, until 2014.

Self-insured governmental plans, and insured plans in states that don’t have external review requirements equal to (or substantially similar to) the NAIC standards must conform to federally administered external review requirements, or comply with the IRO-contracting requirements applicable to self-insured ERISA plans.

IRO Contracting Safe Harbor

Speaking of self-insured plans, the requirement to contract with IROs has been tightened slightly. To gain a safe harbor from enforcement proceedings, these plans should contract (directly or indirectly, as through a third-party administrator, for example) with at least two IROs by the end of this year, and with at least three IROs by July 1, 2012. External appeals should be rotated between the IROs.

Claims Subject to External Review

Here is a little bit of good news. Under last year’s interim final regulations, all appeals of denied healthcare claims were potentiallyeligible for external review, except decisions involving an individual’s eligibility for coverage under the plan. The amended regulations “suspend” that initial rule, and make clear that only two categories of appeals are subject to external review:

• Appeals involving medical judgment (but the external reviewer gets to decide whether the appeal involves medical judgment), and
• Retroactive rescissions of coverage.

Thus, plan decisions involving contractual or legal interpretations, but not medical judgment, would be ineligible for external review unless they involved retroactive rescission of coverage. But a great many plan decisions will involve medical judgment. The following issues involve medical judgment, for example:

• Whether inpatient or outpatient care was the appropriate setting for treatment;
• Whether treatment by a specialist is medically necessary;
• Whether treatment involved “emergency care,” thus affecting co-insurance requirements;
• Issues involving pre-existing conditions;
• The frequency, method, treatment or setting for a required preventive care service;
• Whether the plan is correctly applying the parity requirements of the Mental Health Parity Act with respect to medical management of mental and nervous or substance abuse care; and
• Whether a member has adequately demonstrated medical necessity, to obtain approval for treatments in excess of the plan’s treatment limits (where the plan permits excess treatments in such a case).

The amended regulations also suggest that come 2014, the “suspension” of the original rule will be lifted, which apparently means that external review will again become available for all issues arising under the plan, except prospective eligibility decisions.

Honor Thy IRO Decision (Until a Court Sayeth Otherwise)

The amended regulations make clear that when an IRO rules in favor of the claimant, the plan must promptly pay the benefit as directed by the IRO, even if the plan intends to seek judicial review of the IRO’s decision, unless the court says otherwise.

Model Notices

Federal authorities also re-issued their model claims and appeals notices, amended to conform to the modified regulations. The model notices are available from your Lockton Account Service Team.

Edward Fensholt, JD
Health Reform Advisory Practice

About thebenefitblog

Eric is a Producer at Lockton Insurance Brokers, Inc., the world’s largest privately held commercial broker. Eric has over 23 years of experience in the insurance industry and has spent the last 11 years with Lockton. Eric specializes in Health & Welfare Benefits, Retirement Planning, and Executive Benefits. Eric's clients utilize his expertise in the areas of Plan Due Diligence, Transaction Structure, Fiduciary Oversight, Investment Design, Compliance and Vendor negotiation to improve the operational & financial outcome for each client. The Benefit Blog is a place to share that expertise and industry news.
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