Federal agencies turn their attention to level-funded plan arrangements and other non-comprehensive medical coverage

In a proposed rule published on July 12, 2023, the Centers for Medicare and Medicaid Services, the Internal Revenue Service (IRS), and the Employee Benefits Security Administration issued a request for information about level-funded plan arrangements (LFPAs) and proposed changes to regulations governing other non-comprehensive medical coverage.  If finalized, many of the changes would go into effect fairly quickly, with limited grace periods allowed to operate under the current rules.

The proposed rule does not include any particular changes for LFPAs.  The discussion, however, suggests that the agencies' commentary accompanying the proposed rule suggests that they are concerned about these arrangements and may seek to limit their availability or otherwise more closely regulate them, including in ways that may also bring them under more stringent and costly state insurance regulation.

Comments on the proposed rule are due by September 11, 2023.

Changes to LFPA rules likely in future rulemaking

As the agencies summarize in the proposed rule, LFPAs are being used by small employers as an alternative to highly regulated and more costly fully insured medical coverage by instead offering less regulated and lower-cost self-funded group health plans under the LFPA structure.  These arrangements generally involve an employer making set periodic (eg, monthly) payments to a third-party service provider. 

Those payments are intended to cover estimated claims costs, administrative costs, and premiums for stop-loss insurance.  The stop-loss insurance may have “low attachment points,” meaning that the stop-loss insurance carrier would take over financial responsibility for costs of the plan at a lower level than a traditional stop-loss insurance arrangement, which that might cover, for example, only large or catastrophic levels of costs.  LFPAs may result in refunds or other credits for the employer if costs remain below the amount paid by the employer (and its employees) during the plan year.  If the costs exceed those payments, employers may be required to pay more in subsequent plan years.

According to the agencies, the use of LFPAs have significantly increased among small employers since 2020 when only 13 percent were reported as offering these arrangements.  In the past couple of years, that number has reportedly increased to around 40 percent.

The agencies’ commentary in the proposed rule focuses on the risks presented by LFPAs, including the lack of state regulation since LFPAs are often treated as self-funded plans exempted by federal law.  The stop-loss insurance component of LFPAs is of particular interest to the agencies, including how low attachment points may be affecting coverage in comparison to the more highly regulated, comprehensive medical plan coverage rules under federal and state law. 

Given that these arrangements may have strong appeal to small employers with healthy employees and, therefore, offer the promise of avoiding the high costs of the fully insured small group market’s premiums, the agencies express concern about adverse selection in that market (ie, only employers with less healthy employees remain, thereby causing premiums to become increasingly less affordable and driving out even more employers).

This is not the first time that the agencies have raised concerns about low attachment points for stop-loss insurance, which is key to the viability and attractiveness of LFPAs.  Even the National Association of Insurance Commissioners has previously referred to the use of low attachment points as a “subterfuge” for a health insurance policy subject to state regulation. 

While the agencies have opted only to solicit comments on LFPAs at this time, the long history of the agencies’ concern with the use of stop-loss insurance by small employers suggests that employers should likely expect the agencies to issue rules at some point that will scale back or otherwise more heavily regulate LFPAs.  Those rules could potentially make LFPAs less financially attractive to small employers in the future.

Other matters addressed in the proposed rule

LFPAs are not the only topic covered in the proposed rule.  The agencies have also proposed changes to, and solicited comments about, the regulation of short-term, limited-duration insurance; fixed indemnity excepted benefits coverage; and specified disease excepted benefits coverage.  In each case, the agencies appear focused on finding ways to draw a clear line between comprehensive medical coverage and these less regulated forms of insurance, which are typically intended to fill in during gaps in coverage or address narrowly tailored needs for coverage. 

The agencies’ proposals and comments suggest that they are determined to ensure that these non-comprehensive coverage types cannot be used as alternatives or competitors to comprehensive medical coverage.

If you have any questions regarding this alert, please contact your DLA Piper relationship attorney, any member of the DLA Piper Healthcare group, or the author of this alert.