The impact of the new final Section 1557 non-discrimination rules on the health insurance industry: FAQs

On Friday April 26, 2024, two agencies under the US Department of Health and Human Services (HHS) – the Office for Civil Rights (OCR) and the Centers for Medicare & Medicaid Services (CMS) – jointly released a Final Rule updating the non-discrimination regulations (45 CFR Part 92) regarding Section 1557 (42 U.S.C. § 18116) of the Patient Protection and Affordable Care Act (PPACA), as well as certain other regulations applicable to Medicaid managed care plans, Programs for All-inclusive Care for the Elderly serving Medicare and Medicaid beneficiaries (PACE), and health insurance issuers.

While the changes will have a significant impact on a broad range of companies operating in the health care industry, they will require the health insurance industry to conduct a complete reassessment of who is subject to Section 1557’s non-discrimination rules, and whether they are compliant with those rules.

The requirements of the Section 1557 regulations are extensive, and those who are subject to the requirements are advised to carefully assess and apply them. Our alert provides FAQs that focus primarily on the new analysis required of the health insurance industry to determine who is now subject to Section 1557 but that also cover some other nondiscrimination rules included in the Final Rule.

How do the Section 1557 non-discrimination regulations currently apply to the health insurance industry?

In general, Section 1557 prohibits discrimination in certain “health programs or activities.” Though not defined by the statute, OCR’s current rules interpret “health program or activity” to encompass all of the operations of entities “principally engaged” in the business of providing healthcare that receive federal financial assistance (FFA), such as credits, subsidies, or contracts of insurance from HHS. For any entity that is not so principally engaged, OCR interpreted the application of Section 1557 to apply only “to the extent of” the entity’s healthcare operations that received FFA.

The current regulations make clear that any entity “principally or otherwise” engaged in the business of providing health insurance is not considered to be principally engaged in the business of providing healthcare when providing health insurance. However, because Section 1557 defines FFA to include “contracts of insurance,” certain insurers are subject to the rule due to either their contract with HHS or their status as a qualified health plan (QHP) administrated under Title I of PPACA and receiving FFA (eg, advance payments of premium tax credits).

What are examples of health insurers who are currently subject to the Section 1557 regulations?

Currently, Section 1557 regulations only apply to insurers that fall within the parameters stated above. These insurers include QHPs, as well as Medicare Advantage plans, Medicare Part D prescription drug plans, Medicaid managed care organizations, PACE organizations, and certain similar payers.

Are third party administrators (TPAs) and pharmacy benefit managers (PBMs) currently subject to the Section 1557 regulations?

Under OCR's current interpretation of Section 1557, TPAs, PBMs, and other subcontractors only fall under the Section 1557 regulations to the extent that their operations support covered insurance products. They would not, for example, be subject to the regulations for other lines of business that do not involve the receipt of FFA, such as when administering self-funded group health plans or other non-covered insurers (eg, the Federal Employees Health Benefits Program or excepted benefits and short-term limited duration health insurance (STLDHI) that does not receive FFA).

How is OCR expanding the applicability of Section 1557 to the health industry?

Under the Final Rule, OCR has expanded its interpretation of a “health program or activity” to include not only “healthcare” but also the provision of “health insurance coverage and other health-related coverage.”

The amended regulations will apply to every health care program or activity that (1) any part of which receives FFA, directly or indirectly, from HHS, (2) is administered by HHS, or (3) is administered by a PPACA Title I entity (ie, a health insurance exchange (Exchange)). In other words, there is no longer a separate “principally engaged” standard for health insurance that limits the applicability of Section 1557 to only those operations receiving FFA.

A new express exception has been included providing that the Section 1557 regulations do not apply to any employer or other plan sponsor of a group health plan, including a board of trustees (or similar body), association or other group, with regard to its employment practices. This exception extends to the provision of “employee health benefits” by such excepted employers and plan sponsors.

What does this change mean for health insurers?

In the Final Rule, OCR applies a broad and far-reaching interpretation of who is covered by Section 1557. With respect to health insurance coverage and other health-related coverage, additional entities will be brought under the scope of Section 1557, including issuers of STLDHI and excepted benefits if FFA is received.

By way of an example, as amended by OCR, an issuer offering QHPs through an Exchange and receiving FFA would be subject to the Section 1557 regulations with respect not only to those QHPs, but also any off-Exchange plans, including large group market plans, excepted benefits and STLDHI. Further, if that issuer administers self-insured group health plans, that line of business would also be subject to the Section 1557 regulations (although the employer would be covered by the exception described above and not liable for violations of Section 1557).

What does this change mean for TPAs and PBMs?

The Final Rule would bring all of the operations and lines of business of TPAs and PBMs under the Section 1557 regulations if any portion of their business is subject to Section 1557 due to the direct or indirect receipt of FFA. Such vendors could be found to be subject to Section 1557 if, for example, they are operated by an insurer subject to Section 1557 or if it is a subrecipient of FFA. For those TPAs and PBMs that are not subject to Section 1557, the insurer would be liable for their actions as the insurer’s subcontractor. Therefore, even those TPAs and PBMs may find themselves indirectly subject to Section 1557 via contractual obligations.

How will OCR allocate liability between insurers and their TPAs and PBMs?

Not only could TPAs and PBMs cause an insurer to incur liability if they violate Section 1557, but the insurer might cause TPAs and PBMs to incur liability by, for example, requiring them to administer a non-compliant benefit design. OCR intends to apply a fact-specific assessment on a case-by-case basis to determine liability. OCR will look to see who is responsible for the non-compliant activities. For example, if a plan sponsor requests a non-compliant benefit design, the sponsor might alone be responsible. However, if a TPA designs and recommends a specific benefit design, the TPA might be the one held responsible. Likewise, even if a TPA or PBM carries out some non-compliant administrative action, it might not be liable if it was merely relaying information under the terms of a plan that the TPA or PBM had no role in developing.

Given that many insurers, TPAs, and PBMs are part of complex corporate structures, including being a part of insurance holding company systems, when will such corporate structures cause TPAs and PBMs to be subject to Section 1557? What about other affiliates?

An affiliate of a Section 1557 covered entity may be brought under Section 1557 simply due to its affiliation. OCR intends to apply a fact-specific analysis that relies “on principles developed in longstanding civil rights case law.” In other words, being a legally separate entity may be insufficient for OCR to conclude that an affiliate is not subject to Section 1557. OCR will examine whether the affiliate is “truly independent” by considering factors such as the degree of interrelatedness between or among entities, the degree of common ownership, and control between or among entities. It will likewise examine whether the legal separation is to avoid liability, or to avoid the application of civil rights law requirements.

What does this change mean for insurance producers?

Whether an insurance producer (ie, agent or broker) is subject to Section 1557 is a fact-specific analysis. A producer might be subject to Section 1557 if paid by a covered entity (eg, an Exchange or insurer) with FFA. In that case, it would be a subrecipient of those funds and directly subject to Section 1557. OCR emphasizes that all producers under contract with an Exchange are subject to Section 1557. Where the producer is assisting the public in purchasing health insurance without any contractual arrangements with an Exchange or other covered entity, and is not otherwise receiving FFA, the producer would not be subject to Section 1557.

Can an insurer subject to Section 1557 be liable for its network health care providers’ non-compliance?

Possibly. Commenters specifically asked OCR to confirm that an insurer is not responsible for the discriminatory actions of a provider or facility. While OCR did not explicitly respond to this request, it emphasized that a primary recipient of FFA (eg, an insurer) is responsible for its subrecipients that carry out all or part of the primary recipient’s health program or activity. In that case, both the recipient and the subrecipient could be held liable for the subrecipient’s non-compliance. OCR emphasizes that Section 1557 obligations cannot be contracted away. OCR, however, evades providing a direct answer, meaning that it will likely apply a fact-specific and case-by-case assessment to determine if an insurer is liable for discriminatory activities by network providers, as it would for any other subcontractor.

Since excepted benefits will now be subject to Section 1557, what does this mean for Medicare Supplement Insurance (ie, Medigap)?

The Final Rule potentially creates significant uncertainty with respect to Medigap coverage. As an excepted benefit, Medigap is now subject to Section 1557. Medigap policies are standardized across all states (with some states standardizing these policies differently). Nevertheless, OCR is willing to consider complaints that a Medigap policy is discriminatory, noting that Section 1557 would preempt a state law Medigap requirement (and any other excepted benefit requirement, for that matter). While time will tell, Section 1557 might cause states to look for ways to adjust Medigap policies as a result of any OCR enforcement actions or other litigation.

How do these new rules impact Employer Group Waiver Plans (EGWPs) and Retiree Prescription Drug Plans (RDS plans)?

The exception for employers with respect to employment practices, including employee health benefits, introduces complexities in understanding compliance responsibilities, as well as liabilities, in connection with EGWPs and RDS plans. While a description of EGWPs and RDS plans are beyond the scope of these FAQs, employers will not be liable under Section 1557 even if they directly receive FFA due to the aforementioned employer exception. This is true even where the employer has a direct EGWP contract with CMS, or where the employer contracts with a Medicare Advantage organization or Part D plan sponsor for an “800 series” EGWP. A Medicare Advantage organization or Part D plan sponsor would be subject to Section 1557 in these scenarios (including if administering the direct EGWP contract on behalf of an employer).

Could Section 1557 prohibit self-insured employers from utilizing stop loss insurance?

Unlikely. The continued use of stop loss insurance appears to be safe from any enforcement action under Section 1557. One commenter suggested that stop loss insurance could discriminate on the basis of disability if it uses techniques that target group members with high medical needs, and, thereby, financially penalizes the employer when a covered individual needs an intensive treatment for a disabling condition. OCR unambiguously disagreed with the commenter, concluding that stop loss insurance provides protection against catastrophic or unpredictable losses, and does not provide coverage for individuals. In that case, it does not discriminate against individuals or implicate Section 1557.

When is the Final Rule effective?

Each set of regulations is subject to specific effective dates, and OCR has included a chart outlining those dates directly in subsection (b) of newly amended 45 C.F.R. § 92.1. Special effective dates have been included with respect to health insurance coverage or other health-related coverage to allow for a delayed effective date for certain requirements to allow insurers time to implement the changes in their next plan year. Anyone subject to, or impacted by, the Final Rule are encouraged to ensure that they apply the correct effective dates and are fully compliant (as applicable) at that time.

What else should I know about the Final Rule?

The official publication of the Final Rule is scheduled for May 6, 2024. The unofficial version is almost 600 pages long, most of which are commentary interpreting and explaining the Final Rule. Therefore, there are many nuances not captured in this brief set of FAQs, as well as many rule changes and topics that are likewise not covered here (including the actual substantive, non-discrimination rules). Steps taken to begin assessing and implementing the Final Rule would need to take into account the full scope of the Final Rule.

Along those lines, in the case of health insurance, the Final Rule focuses quite a bit on discriminatory benefit designs, utilization management techniques, and provider networks. Insurers, TPAs, and PBMs are advised to closely assess their business models in light of the Final Rule. These companies, as well as insurance producers, should consider assessing whether their marketing practices are consistent with the OCR commentary on discriminatory marketing.

While these FAQs focus on OCR’s amendments to the Section 1557 regulations, the Final Rule was jointly issued with CMS because it also amends programs administered by CMS. Those amendments add non-discrimination obligations, including for the Medicaid managed care organizations, PACE organizations, and issuers participating in the Exchanges.

How do you anticipate OCR will go about enforcing Section 1557?

While OCR provided extensive and lengthy commentary on the regulatory changes, it repeatedly fell back on its position that it will apply a fact-specific and case-by-case assessment to determine who is subject to Section 1557 and whether a particular activity violates Section 1557. Covered entities and anyone indirectly subject to Section 1557 via affiliations or contractual obligations may anticipate that OCR will not accept generalized representations of applicability or compliance.

Rather, as part of any investigation or enforcement action, OCR will pursue detailed document requests and inquiries to assess – as it repeatedly asserts, based on the facts and on a case-by-case basis – whether the target of the investigation or action is subject to and/or compliant with Section 1557.

Do you anticipate any legal challenges or litigation arising in connection with this Final Rule?

Given the litigation history (including ongoing litigation) surrounding Section 1557, and OCR’s ambitious changes in this Final Rule, expectations of more litigation are high. Previous iterations of the Section 1557 regulations (issued in 2016 and 2020) have already resulted in litigation. The Final Rule itself references some specific instances of that litigation and hints at OCR’s expectation of more litigation, including noting where commenters suggested that OCR did not provide adequate notice and opportunity to comment on certain topics.

For any questions regarding these FAQs, please contact David Kopans.