On October 12, 2017, the Administration released an Executive Order entitled "Promoting Healthcare Choice and Competition Across the United States" (the Order). The Administration's stated policy objectives are to facilitate the purchase of insurance across state lines and increase the affordability of health care. The Order directs the Departments of Labor (DOL), Health and Human Services (HHS), and Treasury (collectively, the Departments) to consider revising the regulatory and other published guidance in three distinct areas: association health plans; short-term, limited-duration insurance; and health reimbursement arrangements.

Background

The Order does not establish any new health care rules; for the time being, all of the Affordable Care Act (ACA) rules continue to apply. Although the current and prior Administrations have at times used interim final regulations to implement certain ACA rules more quickly, the Order contemplates a standard Administrative Procedure Act process and directs the agencies to issue proposed guidance that would take into consideration the related public comments.

The Order was issued in the midst of other health care activity. On the same day that the Administration issued the Order, it announced that it would stop reimbursing health insurers for cost-sharing reductions (CSR) they are required to make on behalf of low-income enrollees. In addition, the Chair and Ranking Member of the Senate Health, Education, Labor and Pensions (HELP) Committee announced on October 18 a bipartisan agreement on proposed legislation that would retain the CSR payments, permit the broader availability of catastrophic health plans and provide states with greater flexibility.

Whatever comes of the HELP Committee's legislative initiative or the Administration's additional executive actions, we believe that the Departments will continue to diligently work to issue the guidance mandated by the recent Order. This guidance will be of interest to employers and health insurers. Employers that currently maintain or are considering adopting a health reimbursement arrangement for the benefit of their employees will be interested in the possible expanded uses of HRAs to assist employees to cover their health care coverage costs. Employers, insurers and other stakeholders will be interested in the possibilities of expanded coverage through association health plans and short-term, limited-duration insurance and the impact that coverage offered through these arrangements may have on the market.

Health reimbursement arrangements

The Order directs the Departments to consider proposing regulations or revising guidance, within 120 days of the date of the Order, to increase the circumstances in which health reimbursement arrangements (HRAs) may be used, to expand employers' abilities to offer HRAs to employees, and to allow HRAs to be used in conjunction with non-group (individual market) coverage.

HRAs are unfunded arrangements maintained by an employer to reimburse eligible employees' medical expenses, including health care premiums. Under IRS administrative guidance, HRA balances may be carried over from year to year. An HRA is funded exclusively by the employer; it may not use employee salary reduction contributions.

Following the enactment of the ACA, Treasury and the IRS issued guidance providing that "stand-alone" HRAs, which are considered group health plans, fail to satisfy the market reform rules. (Parallel guidance was issued by DOL and HHS; see Tax Alert 2013-1788.) The guidance specifically provides that a stand-alone HRA fails to comply with the ACA rule prohibiting a group health plan from imposing any annual or lifetime dollar limits on any of the essential health benefits (EHBs) and the requirement that certain preventative services must be provided at no cost to the participant. Failure to comply with these market reforms rules may result in an excise tax under Section 4980D equal to $100 per day per affected participant. The guidance provides that an HRA complies with the ACA market reform rules if it is integrated with other compliant group health plan coverage. However, an HRA is not treated as integrated with individual market coverage for purposes of complying with the ACA market reform rules.

The Order directs the Departments to consider permitting HRAs to be used in conjunction with individual coverage. In accordance with the Order, the Departments likely will consider issuing guidance that reverses the policy prohibiting the integration of HRAs with individual coverage. The integration methods have been expanded in other ways since the policy was announced; further expanding the integration methods to allow access to individual coverage could be framed as a logical incremental step that does not contradict the interpretation that a stand-alone HRA violates the ACA market reform rules.

The Departments may consider other alternatives to expand access to defined contribution arrangements for employer health care. For example, the Departments have authority to craft new limited-scope-excepted benefits. An excepted benefit does not provide minimum essential coverage; as a result, the offering of an excepted benefit has the drawback that it will not satisfy either the employer's or the employee's shared responsibility requirements. In 2015, the Departments did establish a pilot program for a "wraparound" excepted benefit that may be offered until December 31, 2018, for up to three years. The Departments could expand the availability of this excepted benefit or, alternatively, exercise the same authority to craft a new excepted benefit.

Another opportunity for expanding access to HRAs could be the qualified small employer health reimbursement arrangement (QSEHRA), which is a statutory HRA available only to small employers (those with fewer than 50 employees). Without action from Congress expanding access to this type of HRA, however, the Departments have no authority to make QSEHRAs available to more employers. Nevertheless, the Departments could provide guidance on the existing statutory rules to facilitate the offering of QSEHRAs by eligible employers.

Association health plans

The Order directs the DOL to consider proposing regulations or revising guidance, within 60 days, to expand association health plans. (AHPs). The DOL is directed to consider expanding the conditions that satisfy the AHP commonality-of-interest requirement under current DOL advisory opinions interpreting the definition of "employer" under Section 3(5) of the Employee Retirement Income Security Act (ERISA) and also to consider rules promoting the formation of AHPs on the basis of common geography or industry.

An AHP generally is a group of individuals or small businesses that pool together to purchase health coverage for their employees. AHP coverage or association coverage is not a distinct category of health insurance coverage under the ACA, ERISA, the Code or the Public Health Service Act (PHSA). Neither the ACA nor any other statute specifies whether AHP coverage is treated as an individual, small group or large group health plan.

A group health plan sponsored by an "employer" is an "employee welfare benefit plan" under ERISA. As such, the plan is subject to various ERISA rules but is also exempt from state regulation. This is because ERISA exempts employee benefit plans from state regulation, other than state insurance regulation. Accordingly, a self-insured employee welfare benefit plan is protected from state regulation. AHPs, however, are "multiple employer welfare arrangements" (MEWAs), defined as arrangements that provide benefits to employees of two or more employers. As a result, AHPs generally are subject to regulation under both ERISA and state law.

ERISA defines "employer" to mean any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan, and includes a group or association of employers acting for an employer in this capacity. The DOL has taken the view that a "bona fide" group or association of employers acting as the "employer" may be treated as establishing a single "employee welfare benefit plan."

Whether an AHP is treated as combining a bona fide group or association of employers to establish a single employee welfare benefit plan is based on all of the facts and circumstances. To date, the DOL advisory opinions have required the association of employers to be tied by a common economic or representation interest (the commonality-of-interest test) unrelated to the provision of benefits, and for the employer members to have the right to exercise control, either directly or indirectly, both in form and in substance over the plan (the control test).

AHPs are considered employer-sponsored group health plans and, as such, are subject to ACA market reform protections. Small group health plans (plans with 50 or fewer participants) and individual market policies must comply with the most protective ACA requirements, including coverage of the 10 EHBs and rules limiting the factors that can be considered in setting premiums for the plans. Small group health plans must also comply with the ACA market reform requirements that apply to large group plans, including the prohibitions on preexisting condition exclusions, and annual or lifetime limits for any EHB offered under the plan, and the requirement to provide no-cost preventive care coverage. Although large group plans are subject to the ACA market reform requirements, they have greater flexibility in determining what coverage is provided and are not required to cover all of the EHBs; an applicable large employer offering coverage that does not meet the minimum value standard (determined by reference to certain EHBs) may become liable, however, for an excise tax under the employer shared responsibility requirement.

The Order seems to propose that the DOL should broaden its guidance related to AHPs to permit groups or associations of employers to be treated as establishing a single employee welfare benefit plan. In this case, the number of employees employed by the employers participating in the AHP could result in the AHP's being treated as a large group plan and subject to the large group market rules. AHPs nevertheless should still be treated as a collection of multiple employers and, therefore, would be MEWAs that are subject to state regulation. The DOL could, however, exercise regulatory authority to preempt state rules limiting the activity of self-insured MEWAs in certain circumstances. If the proposed guidance broadened the meaning of bona fide employer group or association, allowing more AHPs to be treated as establishing a single employee welfare benefit plan and preempted state rules for self-insured MEWAs, the AHPs would be permitted to offer health coverage with fewer restrictions.

Short-term, limited-duration insurance

The Order directs the Departments to consider proposing regulations or revising guidance, within 60 days, to expand the availability of short-term, limited-duration insurance (STLDI) policies for longer periods and on a renewable basis.

The PHSA excludes STLDI from its definition of "individual health insurance coverage." This exclusion effectively exempts STLDI from a number of consumer protections, including: guaranteed issue and guaranteed renewal rules; prohibitions of annual and lifetime limits, and preexisting condition exclusions; and the requirement to provide EHBs. As a result, STLDI may be less comprehensive and less expensive than other coverage offered in the individual market. In addition, STLDI coverage is not considered minimum essential coverage and, therefore, an individual with only STLDI coverage would not have the type of coverage necessary to satisfy the individual shared responsibility requirement of Section 5000A.

Before 2016, regulations under the PHSA had defined STLDI to include a contract that expires less than 12 months after its original effective date. In 2016, expressing concerns that this exception was being used in situations beyond the supporting policy reasons (generally, providing short-term solutions for gaps in coverage) and that these policy reasons were less salient in the age of guaranteed issue, HHS amended the rule, effective for policy years beginning on or after January 1, 2017, to limit STLDI to contracts that last less than three months, including renewals. As noted in the preamble to the final rule, limiting the coverage to less than three months also aligns STLDI with the short coverage gap exemption from the individual shared responsibility provision of Section 5000A. Under the amended rule, the application materials for such a contract must provide notice that the coverage does not provide minimum essential coverage.

In accordance with the Order's directive, the Departments likely will propose rules expanding the period of coverage for a policy to be considered a STLDI. Under the current rules, STLDI is not considered minimum essential coverage that satisfies the individual mandate. Therefore, an individual purchasing this type of coverage may owe the individual mandate excise tax. Because of this result, the Treasury Department and IRS may revisit the rules that exclude STLDI policies as minimum essential coverage.

Implications

The Order does not make any immediate change to the rules implementing the ACA, but rather states the Administration's policy objectives and directs the Departments to consider modifying existing rules. Nevertheless, the execution of the Order could have significant implications for employers and health insurers.

Depending on how the rules expanding the use of HRAs are drafted, large and small employers may be able to re-design their health plans to provide employees with a defined amount that may be used to purchase coverage on the individual market. These changes could allow employers to satisfy the employer mandate requirements while managing costs in a defined contribution arrangement. This use of HRAs will raise new questions concerning how affordability should be measured and how such coverage should be valued.

If the DOL is able to reach interpretations that significantly widen the availability of AHPs, these changes could affect the diversity of the risk pool in the individual and small group markets. Unlike large employers that form populations based on the needs of the organization rather than the quality of the risk pool, AHPs are likely to concentrate only on the quality of their risk pool. As a result, unconstrained by guaranteed issue or renewal, AHPs could focus their energies on forming a risk pool of less costly individuals. In this situation, the individual and small group markets and health insurers that offer coverage in those markets may see a reduction in the percentage of less costly participants in their risk pools, increasing the average participant cost and, as a result, the premiums, for such coverage.

If the definition of STLDI is expanded, certain individuals eligible for other coverage, including employer coverage, student health coverage or individual market coverage, may opt to purchase less expensive STLDI. Because healthier individuals are likely to make this choice, the risk pools that these individuals leave will become less diverse and more costly. Unless the current rules are revised, however, STLDI does not provide minimum essential coverage, so individuals purchasing STLDI will not be treated as satisfying the individual mandate and may owe an excise tax.

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