COBRA, TPAs, MEWAs, ASO Contracts, Coordination of Benefits and the ACA

Employer health coverage does not always come from an insurer, and it does not always end when a job does. A Michigan health producer has to recognize how each of the arrangements below works, and whether federal or Michigan law governs it.

COBRA Continuation Coverage

Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985 (Pub. L. 99-272) lets people who would lose group health coverage keep it for a time at their own expense. It added continuation rules for private employer plans under ERISA (29 USC 1161(a)) and for state and local government plans under the Public Health Service Act (42 USC 300bb-1(a)). The rule does not apply to a plan for a year if all employers maintaining it normally employed fewer than 20 employees on a typical business day during the preceding calendar year (29 USC 1161(b)).

Who Qualifies and When

A qualifying event is one of six events that would otherwise end coverage (29 USC 1163):

• The covered employee’s death
• Termination of employment, other than for gross misconduct, or a reduction of hours
• Divorce or legal separation from the employee
• The employee becoming entitled to Medicare
• A dependent child ceasing to be a dependent under the plan
• An employer’s bankruptcy proceeding, for a covered retiree

A qualified beneficiary is a spouse or dependent child covered on the day before the event, and the employee too when the event is termination or reduced hours (29 USC 1167(3)(A), (B)). Coverage must be identical to what similarly situated active participants have, and it cannot be conditioned on evidence of insurability (29 USC 1162(1), (4)).

Duration and Cost

Event	General maximum
Termination or reduced hours	18 months
Termination or reduced hours, disabled under Social Security during the first 60 days of continuation, with timely notice	29 months
A second qualifying event during the 18 months	36 months from the first event
Death, divorce, Medicare entitlement, or loss of dependent status	36 months

See 29 USC 1162(2)(A)(i), (ii), (iv), and (viii). Coverage can end sooner if the employer stops offering any group health plan to any employee, if premium is not paid on time, or if, after electing, the person becomes entitled to Medicare or covered under another group health plan that has no exclusion or limitation for a preexisting condition of that person, other than one that does not apply to the person, or is satisfied by the person, under federal law (29 USC 1162(2)(B) to (D)).

The plan may charge up to 102 percent of the applicable premium, and up to 150 percent during the months after the 18th in a disability extension (29 USC 1162(3)). The applicable premium is the plan’s full cost, whether the employer or the employee paid it (29 USC 1164(1)). A payment is timely within 30 days after the due date, and no premium can be required until 45 days after the election (29 USC 1162(2)(C), (3)).

Notice and Election

The employer notifies the plan administrator within 30 days of a death, termination, reduced hours, Medicare entitlement, or bankruptcy. The employee or beneficiary notifies the administrator within 60 days of a divorce, legal separation, or loss of dependent status (29 USC 1166(a)(2), (3)). The administrator then notifies qualified beneficiaries within 14 days (29 USC 1166(c)). The election period lasts at least 60 days and ends no earlier than 60 days after the later of the loss of coverage or that notice (29 USC 1165(a)(1)).

Third-Party Administrators

A third-party administrator (TPA) is a person that “directly or indirectly processes claims under a service contract” and may provide other administrative services. The term includes a pharmacy benefit manager. It does not include a carrier or an employer sponsoring a plan (MCL 550.902(t)).

Michigan regulates TPAs under the Third Party Administrator Act, 1984 PA 218:

• A TPA needs a certificate of authority (MCL 550.910(1)).
• It may provide administrative services only under a written service contract (MCL 550.930(1)).
• It is a fiduciary when collecting, expending, and maintaining money for claims (MCL 550.930(2)).
• It must keep covered people’s personal data confidential (MCL 550.934(1)) and process claims on a timely basis (MCL 550.944(5)).

The service contract must require written notice to covered individuals stating that they are not insured or are only partially insured, that the TPA merely processes claims, and, if the plan is not insured, that they may be liable for eligible expenses the plan or sponsor does not pay (MCL 550.932(1)). The notice goes out within 60 days after a person becomes covered and at least every 5 years (MCL 550.932(2)).

A TPA may not take on a plan covering less than 500 individuals unless it arranges excess loss insurance, or the sponsor is liable for the plan’s liabilities and sponsors plans covering 500 or more in the aggregate (MCL 550.932(3), (4)).

Multiple Employer Welfare Arrangements

A multiple employer welfare arrangement (MEWA) is a plan or other arrangement that provides welfare benefits to the employees of two or more employers, including self-employed individuals. Plans under collective bargaining agreements and certain rural cooperatives are excluded (29 USC 1002(40)(A)). Federal law lets states regulate a MEWA that is not fully insured, to the extent not inconsistent with ERISA (29 USC 1144(b)(6)(A)(ii)).

Chapter 70 of the Insurance Code does so. A MEWA connected to Michigan through an employer member or a solicited employer must hold a certificate of authority, though a fully insured one is outside the chapter (MCL 500.7001(h); MCL 500.7004). To qualify, the employers must be in the same trade, industry, or type of service, must do substantial activity together besides sponsoring the plan, and must have existed as a group for at least 2 years (MCL 500.7011(a)). The MEWA needs applications from at least 2 employers, similar benefits for at least 200 participating employees, and excess loss insurance (MCL 500.7011(b), (c)). It must keep cash reserves of at least the greater of 25% of current-year contributions or 35% of prior-year claims paid (MCL 500.7040(1)(c)).

Each covered individual must be told in writing that they are only partially insured and may be liable for eligible expenses the plan does not pay (MCL 500.7044). Chapters 12, 20, 22, 34, 44, and 81 apply to a MEWA, as applicable, in the same manner as to an authorized insurer (MCL 500.7060), and a security fund pays covered claims against insolvent authorized MEWAs (MCL 500.7080(1)).

Sidenote

Check the certificate

A low-priced multi-employer plan may be an unauthorized MEWA. Before recommending one, confirm it holds a Michigan certificate of authority or is fully insured (MCL 500.7004).

Administrative Services Only Contracts

An administrative services only (ASO) contract is a service contract under which an insurer or other administrator handles a health benefit plan’s administration for a fee, while the employer or other plan sponsor remains responsible for paying benefits. Michigan law uses the term without one general definition. The act governing health care corporations ties ASO arrangements to a “noninsured benefit plan,” meaning one without coverage by a health care corporation, health maintenance organization, or insurer, and refers to fees for them (MCL 550.1211(1), (2), (9)). Its characteristics:

• The benefits are self-funded. Michigan’s life and health guaranty association does not cover the self-funded or uninsured portion of a plan, including benefits payable by an employer, association, or other person under an ASO contract (MCL 500.7704(5)(d)(iv)).
• The plan is not regulated as an insurer. A plan subject to ERISA is not deemed an insurance company for purposes of state laws regulating insurers (29 USC 1144(b)(2)(B)).
• The administrator does not insure. When a TPA provides the services, the contract is a service contract, and its notice must say that the TPA merely processes claims (MCL 550.902(s); MCL 550.932(1)(e)). An insurer acting as the administrator is a carrier, not a TPA (MCL 550.902(t)).
• Employees should know the difference. A card carrying a familiar company’s name may stand for the employer’s own money, not that company’s.

Coordination of Benefits

Coordination of benefits (COB) establishes the order in which insurers pay claims and permits secondary plans to reduce benefits so combined payments do not exceed 100% of total allowable expenses (MCL 550.252(1)(d)). An insurer may include a COB provision in a group or nongroup disability insurance policy. An insurer that does not include one “shall coordinate benefits under the policy in the manner prescribed in the coordination of benefits act” (MCL 500.3402b(1); 1984 PA 64).

Fixed indemnity, accident-only, disability income, specified disease, Medicare supplement, and Medicaid are not “plans” under the act (MCL 550.252(2)). The primary plan pays as if no secondary plan exists (MCL 550.253(1)(a)). When an individual is covered by 2 or more plans, and subject to a closed panel rule, “a plan that does not contain order of benefit determination provisions that are consistent with this act is always the primary plan unless the provisions of both plans, regardless of this subdivision, state that the complying plan is primary” (MCL 550.253(1)(c), (d)). MCL 500.3402b(1) speaks to an insurer whose policy has no COB provision, and MCL 550.253(1)(c) to a plan without consistent order rules. Neither is a rule about which controls for an insured policy with no COB provision.

The first rule that applies decides the order (MCL 550.253(2)):

1. Nondependent or dependent. The plan covering the person other than as a dependent pays first, with a Medicare exception.
2. Dependent child. For parents married or living together, the plan of the parent whose birthday falls earlier in the calendar year pays first; with the same birthday, the plan covering the parent longest. For parents who are divorced, separated, or not living together, a court order assigning responsibility controls. Without one, the order is the custodial parent, that parent’s spouse, the noncustodial parent, then that parent’s spouse.
3. Active, retired, or laid-off. The plan covering an active employee pays before one covering a laid-off or retired employee.
4. Continuation coverage. The plan covering the person as an employee, member, or retiree, or their dependent, pays before continuation coverage such as COBRA.
5. Longer or shorter coverage. The plan that has covered the person longer pays first.

If insurers cannot agree within 30 calendar days after receiving all needed information, they pay in equal shares and settle up afterward (MCL 550.253(4)).

Suppose Priya was born in March and her husband Theo in November. Their son’s claim goes first to Priya’s plan.

The Affordable Care Act

The Patient Protection and Affordable Care Act (Pub. L. 111-148), as amended by the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152), set national rules for health coverage.

Key market rules, which do not apply in full to excepted benefits or grandfathered coverage (coverage in which someone was enrolled on March 23, 2010, under 45 CFR 147.140(a)(1)(i); 42 USC 300gg-91(c)):

• Guaranteed availability. An issuer must accept every employer and individual that applies, and may limit enrollment to open or special enrollment periods (42 USC 300gg-1(a), (b)(1)).
• No preexisting condition exclusions or dollar limits on essential benefits (42 USC 300gg-3(a); 42 USC 300gg-11).
• No rescission once a person is covered, except for fraud or intentional misrepresentation of material fact (42 USC 300gg-12).
• Dependent coverage, where a plan offers it, until a child turns 26 (42 USC 300gg-14(a)).
• Waiting periods of no more than 90 days for group coverage (42 USC 300gg-7).
• Medical loss ratio. Issuers rebate premium if they spend less than 85 percent in the large group market, or 80 percent in small group and individual markets, on care and quality, unless a higher percentage applies (42 USC 300gg-18(b)(1)(A)).

Individual and small group coverage must include the essential health benefits and generally meet a metal level, meaning benefits actuarially equivalent to a set percent of the full actuarial value of the benefits provided under the plan: bronze (60 percent), silver (70), gold (80), or platinum (90) (42 USC 300gg-6(a); 42 USC 18022(a), (d)). A small employer is generally one that employed an average of at least 1 but not more than 50 employees on business days during the preceding calendar year, and that employs at least 1 employee on the first day of the plan year (42 USC 18024(b)(2)).

An Exchange facilitates the purchase of qualified health plans, and a SHOP Exchange serves small employers (42 USC 18031(b)(1)). Eligible people who buy through an Exchange may receive a premium tax credit (26 USC 36B(a)).

An applicable large employer, meaning one with an average of at least 50 full-time employees, counting full-time equivalents, may owe a payment if it does not offer qualifying coverage; a full-time employee averages at least 30 hours of service a week (26 USC 4980H(a), (c)(2)(A), (c)(2)(E), (c)(4)(A)). The individual coverage requirement remains in the code, but the penalty amount is $0 (26 USC 5000A(a), (c)(3)(A)).

Lesson summary

• COBRA applies to plans of employers with 20 or more employees and generally runs 18 months for termination or reduced hours and 36 months for most other events, at up to 102 percent of the premium (29 USC 1161(b); 29 USC 1162).
• Elections last at least 60 days, and notices run 30 days for employers, 14 days for administrators, and 60 days for beneficiaries (29 USC 1165; 29 USC 1166).
• A Michigan TPA processes claims under a written service contract, needs a certificate of authority, is a fiduciary for claim money, and does not insure (MCL 550.902(t); MCL 550.910; MCL 550.930).
• A self-funded MEWA needs a Michigan certificate of authority, and its covered people must be told they are only partially insured (MCL 500.7004; MCL 500.7044).
• Under an ASO contract, the administrator supplies services for a fee, the employer or other sponsor remains responsible for benefits, and the guaranty association does not cover them (MCL 550.1211; MCL 500.7704(5)(d)(iv)).
• COB orders payment by the first rule that applies, and combined benefits cannot exceed 100% of allowable expenses (MCL 550.252; MCL 550.253).
• Under the birthday rule, the parent whose birthday falls earlier in the calendar year has the primary plan.
• The ACA guarantees availability, bars preexisting condition exclusions and dollar limits on essential benefits, and sets 50 full-time employees as the employer responsibility line.