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NQDC Complications and Best Practices

A nonqualified deferred compensation (NQDC) plan is a powerful employee benefits tool. However, NQDC plans can create complications for plan administrators and participants. In this PLANADVISER article, Brian Tiemann and Lisa Loesel highlight several potential NQDC plan pitfalls and offer strategies to mitigate these hazards.

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Group Medical Captives, Level Funding and US Healthcare Policy

In a recent article in Managed Healthcare Executive, Peter Wehrwein examines the trend of self-funding of group health benefits by smaller employers who used to depend mainly or entirely on fully insured programs.

The shift to self-funding, the article explains, is grounded in the Employee Retirement Income Security (ERISA), which exempts self-funded plans from state health insurance mandates, and in the Affordable Care Act, which strictly regulates small group and individual health insurance policies. Wehrwein presents the issues from the perspective of state and federal policymakers and regulators, which the article characterizes as “worrisome.” But what of the perspective of small employers?

Healthcare costs are rising at rates that are well in excess of the growth of real gross domestic product. This appears unsustainable, but these costs nevertheless keep climbing inexorably. For employers, the pressure to do something is compelling.

The article claims that self-funding is more expensive than fully insured coverage. But compared to what fully insured coverage, exactly? By definition, many small employers can only purchase coverage in the small-group market. This is, however, the very market these same employers are fleeing, and they are doing so precisely because it is too expensive. Indeed, the prohibitive cost of small-group market coverage is why individual coverage Health Reimbursement Arrangements have failed to gain widespread acceptance, particularly in large urban environments.

Wehrwein correctly identifies two options for self-funding: group medical captives and level funding, both of which he views as problematic. Small employers appear to disagree, however, based on their actions. In their view, these options instead represent viable options in their quest to provide competitive group health coverage to their employees. The two options for self-funding identified in the article are fundamentally different solutions that are appropriate for different cohorts of small employers.

Group Medical Captives (50 – 200 Covered Lives)

The term “captive” insurer traditionally referred to a “single parent” captive, which is a subsidiary of an operating company/parent that insures the risks of the operating company/parent and in some instances its affiliates. Historically, single-parent captives insured property and casualty risks and workers’ compensation, but they have more recently been pressed into service to cover employee welfare plan risks.

A group captive allows a group of unrelated employers to form a collective insurance company to manage some portions of their risks. Where, as is the case here, the risk is most often medical stop-loss coverage, the arrangement is referred to colloquially as a “medical stop-loss group captive.” For an extended discussion of medical stop-loss group captive funding arrangements and their accompanying legal and regulatory issues, please see our Special Report.

There is some debate over what size employer might most benefit from participation in a medical stop-loss group captive. While the conventional wisdom is that 200 covered lives is the sweet spot, credible estimates go as low as 50 covered lives. Whatever the appropriate number, medical stop-loss captives can in the right circumstances offer substantial savings when compared to fully insured coverage. [...]

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Lessons from Ryan S. v. UnitedHealth Group for the 2023 MHPAEA Proposed Rule

A recently decided US Court of Appeals for the Ninth Circuit case, Ryan S. v. UnitedHealth Group, Inc., offers some useful insights on the enforcement by private litigants of the Mental Health Parity and Addiction Equity Act (MHPAEA). Like other similar cases, the case invites questions about the impact of potential changes under the proposed regulations issued under MHPAEA last year. Despite that the issues at this stage are procedural, the case nevertheless offers some useful insights, which this post explores.

Our previous MHPAEA content is available here.

According to the complaint, the group health plan under which Ryan S. was covered was administered by UnitedHealthcare. The plan covered outpatient, out-of-network mental health and substance use disorder (MH/SUD) benefits at 70% of covered charges and at 100% once the out-of-pocket maximum was met.

Ryan S. completed two different outpatient, out-of-network substance use disorder programs, coverage for which was denied on multiple occasion and for disparate reasons. As the complaint explains, the denials resulted from UnitedHealthcare’s use of an algorithm that assessed patients’ progress and referred cases for additional review. This additional layer of review was not applied to outpatient, out-of-network medical/surgical (M/S) claims. Ryan S. alleges that UnitedHealthcare applied a more stringent review process to benefits claims for outpatient, out-of-network MH/SUD treatment than to otherwise comparable M/S treatment. The complaint states this disparity in applicable review standards violates:

  • The Employee Retirement Income Security Act (ERISA) fiduciary rules
  • The failure to follow the terms of the plan as required by ERISA

The Disposition of the Plaintiffs’ Claims

The district court had dismissed all the claims. The Ninth Circuit reversed on MHPAEA and ERISA fiduciary claims but let stand the district court’s dismissal of the claim related to plan terms.

MHPAEA requires that any limitations on “mental health or substance use disorder benefits” in an ERISA plan be “no more restrictive than the predominant treatment limitations applied to substantially all [covered] medical and surgical benefits.” Thus, said the court, to succeed, a plaintiff must show an ERISA plan that offers both M/S and MH/SUD benefits imposed a more restrictive limitation on MH/SUD treatment than limitations on treatment for M/S issues. The court then identified three situations in which such a violation might occur:

  • Facial exclusion cases: A plaintiff can allege that a plan contains an exclusion that is discriminatory on its face.
  • “As-applied” cases: A plaintiff can allege that a plan contains a facially neutral term that is discriminatorily applied to MH/SUD treatment.
  • Internal process cases: A plaintiff can allege that a plan administrator applies an improper internal process that results in the exclusion of an MH/SUD treatment.

In the court’s view, the complaint raises internal process claims. As such, violations cannot be discerned with reference to the plan document. The court therefore saw no reason to disturb the district court’s dismissal of the claim relating to plan terms.

With respect to the MHPAEA and ERISA fiduciary claims, [...]

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Decisive Victory: ERISA Class Action Dismissed with Prejudice

In 2016, Inland Fresh Seafood Corporation of America established an employee stock ownership plan (ESOP), a type of defined contribution employee benefit plan. The ESOP then purchased 100% of Inland Fresh stock from Inland Fresh’s former shareholders.

Since the ESOP was founded, it has provided substantial benefits to Inland Fresh’s employee participants.

In November 2022, four former Inland Fresh employees filed an Employment Retirement Income Security Act of 1974 (ERISA) class action complaint against Inland Fresh, a number of its executives, its outside counsel, the ESOP Committee and the ESOP’s independent trustee.

The complaint alleged that the defendants breached their ERISA fiduciary duties, engaged in transactions prohibited by ERISA and ultimately caused the ESOP to pay more than fair market value for Inland Fresh stock during the initial transaction.

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McDermott Submits Amicus Brief to the US Supreme Court in United Behavioral Health

On January 2, 2024, McDermott filed an amicus curiae brief on behalf of the ERISA Industry Committee (ERIC) and the United States Chamber of Commerce (Chamber) in United Behavioral Health v. David K., No. 23-586, in the US Supreme Court. The case presents two questions of broad public importance concerning the requirements under the Employee Retirement Income Security Act (ERISA) for denials of health benefits. But underlying the two questions is an even more fundamental Administrative Procedure Act (APA) issue: May a court, at the invitation of an agency in an amicus brief, effectively amend regulations by judicial fiat, providing the agency with an end run around the APA’s notice-and-comment rulemaking procedures?

The answer to that question should be an obvious no. But that is precisely what happened in the court of appeals in this case. After the plaintiffs filed their response brief, the US Department of Labor (DOL) filed an amicus brief urging a radically new interpretation of regulations the agency had promulgated to implement ERISA’s procedural protections. In essence, the DOL argued that its disability- and health-benefit regulations should be read to contain the same procedural requirements, despite clear regulatory language specifying that some requirements only apply in one context and not the other. The US Court of Appeals for the Tenth Circuit adopted the DOL’s position, decreeing a new regulatory requirement for health-benefit denials that the DOL, in dual 2015 and 2016 rulemakings, expressly considered and chose to adopt only for disability-benefit denials and not for health-benefit denials.

If not corrected by the Supreme Court, the decision will stand as an invitation to agencies to file amicus briefs in the courts of appeals, advocating for substantial changes to their regulations without the bother (or transparency) of APA rulemaking. When so much lawmaking today is undertaken by unaccountable federal bureaucrats, that is a deeply troubling prospect. ERIC and the Chamber supported the petition, explaining the legal and practical issues with the approach the DOL and Tenth Circuit mutually took. Agency interpretations that defy clear regulatory text are entitled to no deference because they are invalid (especially after the Court’s decision in Kisor v. Wilkie). Ignoring this basic proposition of administrative law undercuts the core values served by the APA, including transparency and accountability. Most directly, however, an agency’s decision to seek backdoor revisions to its rules through interpretations announced in litigation deprive the agency of the benefit of public comment that can provide critical data and analysis to inform the agency’s policymaking. Had the DOL engaged in notice and comment, as it should have done, commenters would have presented key distinctions between the disability- and health-benefit contexts; without that information, the DOL’s decision was not fully informed.

ERIC and the Chamber are frequent amici in cases concerning ERISA and the APA’s interpretation and requirements. While the Supreme Court grants only a tiny fraction of the petitions it receives each term, the amici are hopeful that this brief will help focus the Court’s attention on this [...]

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Parsing MHPAEA Claims Under the Proposed Rule: E.W. v. Health Net Life Insurance Company

In a series of recent posts, we have examined a sampling of comments submitted in response to proposed regulations under the Mental Health Parity and Addiction Equity Act (MHPAEA). The proposed regulations were issued earlier this year by the US Departments of Labor, Health and Human Services and the Treasury (the Departments). Our previous MHPAEA content is available here.

This post considers a MHPAEA-related case decided by the US Court of Appeals for the Tenth Circuit, E.W. v. Health Net Life Insurance Company (available here). The case is notable because it represents the first US court of appeals to establish the elements required to state a claim under the current 2013 MHPAEA final regulations; it also provides us with an opportunity to consider how things might differ if the proposed regulation is adopted as a final rule.

Health Net involved a claim against Health Net Insurance Company and Health Net of Arizona, Inc. (collectively, Health Net) by the parents of a minor (I.W.). I.W. was admitted to a subacute care facility (an adolescent mental health residential treatment center), but her stay was cut short because it was determined that her treatment was no longer medically necessary. The determination of medical necessity was based on the application of the McKesson InterQual Behavioral Health 2016.3 Child and Adolescent Psychiatry Criteria (the InterQual Criteria).

At trial, the plaintiffs claimed that Health Net violated the MHPAEA by imposing medical necessity criteria for mental health benefits that were more stringent than those for medical/surgical benefits. The district court did not agree. On appeal, the Tenth Circuit reversed the MHPAEA claim based on the 2013 MHPAEA final regulations. (There was also an Employee Retirement Income Security Act-related claim, the dismissal of which by the district court was affirmed by the Tenth Circuit.) The Tenth Circuit held the medical necessity criteria applied by the plan to medical/surgical benefits in a subacute setting was less stringent than analogous, intermediate-level metal health benefits. In its holding, the court fashioned the following test under which, to state a claim under the MHPAEA, a plaintiff must:

  1. Plausibly allege that the relevant group health plan is subject to the MHPAEA;
  2. Identify a specific treatment limitation on mental health or substance use disorder benefits covered by the plan;
  3. Identify medical or surgical care covered by the plan that is analogous to the mental health or substance use disorder care for which the plaintiffs seek benefits; and
  4. Plausibly allege a disparity between the treatment limitation on mental health or substance use disorder benefits as compared to the limitations that defendants would apply to the medical or surgical analog.

Item (1) was not in dispute; the relevant group health plan was clearly subject to the MHPAEA. The court instead focused on, and dealt exhaustively with, each of the other three items:

  • Identify a specific treatment limitation on mental health or substance use disorder benefits covered by the plan.

The plaintiffs alleged [...]

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New York Proposes Regulations Expanding State’s Ability to Regulate PBMs

The New York State Department of Financial Services recently announced the publication of proposed regulations that would increase the state’s oversight of pharmacy benefit managers (PBMs). If enacted, the proposed regulations would create significant requirements for PBMs and would require prompt compliance by January 1, 2024. Comments on the proposed regulations are due October 16, 2023.

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Takeaways from a Recent COBRA Notice Class Action Settlement

There has been a flurry of class action lawsuits and settlements relating to the deficiency of required election notices under the Consolidated Omnibus Budget Reconciliation Act (COBRA). The notices provide employees and their beneficiaries who participate in an employer’s group health plan with the option to elect to continue their coverage following a COBRA qualifying event. A recent class action lawsuit illustrates the stakes and provides some valuable lessons.

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Tenth Circuit Reaffirms Preemption of State Pharmacy Network Regulations

The US Court of Appeals for the Tenth Circuit recently held in Pharmaceutical Care Management Association v. Mulready (PCMA) that the Employee Retirement Income Security Act (ERISA) and Medicare Part D preempted several provisions of Oklahoma law regulating pharmacy benefit managers and pharmacy networks. Left unchallenged, these provisions threaten the ability of employers and Medicare Advantage organizations to design uniform nationwide health plans. The Tenth Circuit’s decision in favor of PCMA overturned a lower court decision that caused great concern about the ability of states to indirectly dictate the design of plans governed by ERISA and Medicare Part D.

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Better Than a Snow Day: The PBGC Provides One-Time Section 4010 Reporting Waiver

In an acknowledgment of uncommon market conditions and their corresponding effect on defined benefit pension plan funding, the Pension Benefit Guaranty Corporation (the PBGC) provided a welcome one-time waiver for some underfunded pension plans under Section 4010 of the Employee Retirement Income Security Act (ERISA). However, to qualify for the waiver, pension plan sponsors still need to timely notify the PBGC.

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