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Healthcare Reform Regulatory Environment Continues to Evolve

03.23.2011

Recent state actions concerning the Affordable Care Act (“ACA”) highlight the tension between state and federal authority inherent in ACA’s regulatory structure and bring into sharp relief the complex regulatory environment ACA has created for health insurers.

ACA gives the states a key role in implementing and enforcing its reforms, but states are free to opt out of this role if they so choose.  Recently, uncertainty over ACA’s constitutionality, along with concerns in some states about the goals and effects of reform, have cast doubt on just how much of a role the states will assume.

On February 1, 2011, the Florida Office of Insurance Regulation announced it would suspend implementation of ACA following a decision by the U.S. District Court for the Northern District of Florida striking down the law as unconstitutional.  Officials in two other states have suggested they too may suspend implementation of ACA.  The Florida lawsuit, brought by 26 states, and three similar lawsuits are now on a fast track to appeal.  

On February 7, 2011, twenty-one Republican governors sent a letter to Health and Human Services (“HHS”) Secretary Kathleen Sebelius stating they believe ACA “is seriously flawed.”  ACA, the governors stated, “threatens to destroy our budgets and perpetuate and magnify the most costly aspects of our healthcare system.”  For these reasons, the governors said, “we do not wish to be the federal government’s agents in this policy in its present form.”  The governors stated that unless the Secretary would endorse a number of fundamental changes to ACA, they would not implement the state-based health benefit exchanges that are a key component of the law.

The rift between state and federal authorities over ACA illustrates the fragmented regulatory structure ACA embraces and highlights the potential for conflict among the various authorities tasked with implementing the law.  Under ACA, health insurers have at least four regulators:  state insurance departments, state and federal exchanges, HHS and the Internal Revenue Service (“IRS”).

State Insurance Departments      

Under ACA, state insurance departments retain their traditional authority over regulation of market conduct and solvency.  States may enforce their own market reforms so long as they do not prevent the application of ACA requirements.  In addition, subject to limited exceptions, the states are given primary authority to enforce ACA’s insurance market reforms.  Generally speaking, HHS may enforce ACA in a state only if the state notifies HHS it is not enforcing the law’s requirements or if HHS makes an independent determination that the state is not substantially enforcing the law.  This is the same structure that has been in place for years under the market reforms enacted by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and similar federal legislation such as the Mental Health Parity Act of 1996.

Although the Republican governors’ letter to Secretary Sebelius focused on state exchanges, the strong objections to ACA expressed by the governors extend to many of ACA’s fundamental reforms.  Given these deep reservations, it is conceivable that some states may elect to not enforce substantial aspects of ACA, preferring instead to leave enforcement to HHS.  Indeed, this has happened before.  After HIPAA was enacted, several states failed to enact legislation to enforce its provisions, causing HHS to assume direct responsibility for enforcing the law in those states.  It also is possible that differences in interpretation of ACA’s requirements between state and federal regulators could cause HHS to find that a state is not substantially enforcing the law and seek to take control of enforcement in that state.

At this point, it is not clear whether the notice given to HHS by the Florida Office of Insurance Regulation that it was suspending implementation of ACA constitutes the type of notice necessary for HHS to take on direct authority for enforcing ACA in Florida.  

State and Federal Exchanges

The health benefit exchanges contemplated by ACA, whether state-based or federal, will play a critical role in implementing ACA which calls on states to implement exchanges for their residents no later than January 1, 2014.  If a state elects not to establish an exchange, or if HHS determines that the state will not have an exchange operational by 2014 or has failed to take the actions necessary to implement ACA’s requirements with respect to exchanges or market reform, HHS is directed to provide an exchange for residents of that state.

The exchanges have a number of important functions.  In general, they are intended to assist individual and small employers in obtaining health coverage.   Eventually, they can be opened to large employers as well.  States may establish exchanges as a governmental entity or as a nonprofit entity.

Only “qualified health plans” and “qualified dental plans” certified by an exchange may participate in the exchange.  Significantly, the federal premium subsidies available under ACA will be provided only to persons enrolled in a qualified plan.  Thus, insurers have a strong incentive to participate in the exchanges.

Exchanges will be required to certify qualified plans in accordance with regulations developed by HHS.  Among other things, exchanges must require health plans seeking to maintain certification to justify any premium increase.  If an exchange deems an increase unjustified, it may, at least in theory, deny certification.  It is unclear how the exchanges’ authority to review rates will interact with existing rate regulation by state insurance departments.  Rate review by state exchanges and state insurance regulators may or may not be well coordinated, depending on the state.  In states that provide no exchange, there is a clear potential for conflict between state regulators and the federal exchange operating in that state.

Another point of uncertainty is just how much control HHS will seek to exercise over state exchanges.  State exchanges could operate relatively independently if HHS limits itself to establishing broad guidelines for them.  On the other hand, it is possible HHS will take a more active approach toward the exchanges — for example, by establishing prescriptive criteria for certifying qualified plans.

The Department of Health and Human Services

HHS plays a central role in implementing ACA.  It is the agency charged with developing regulations and guidance to implement ACA’s insurance market reforms and, as discussed above, oversight of state exchanges.  HHS also will operate a federal exchange in states that fail to implement a state-based exchange.  In coordination with the Department of Labor and the IRS, HHS already has engaged in nine rulemakings to implement ACA.  As noted above, if a state does not substantially enforce ACA’s provisions, HHS will enforce ACA under the guidance provided in these interim rules.

The Internal Revenue Service

ACA establishes several new provisions applicable to health insurers that will be enforced by the Department of the Treasury through the IRS.

Among other things, the IRS is charged with collecting two new assessments intended to help fund healthcare reform: (1) a health insurance provider fee that applies to any entity engaged in the business of providing health insurance (with some important exceptions) and (2) a “fee” that will be imposed on each specified health insurance policy.  The issuer of the policy is responsible for the payment of the fee.  A specified health insurance policy is defined as any accident or health insurance policy (including a policy under a group health plan) issued with respect to individuals residing in the United States, but excluding any insurance if substantially all of its coverage is of excepted benefits.

The IRS will be under pressure to maximize revenue and might be under pressure to minimize the impact of the new assessments on major medical writers by broadening the products and entities affected by the assessments.  If so, it might apply tighter scrutiny to products which have been traditionally regulated as excepted benefits.

Conclusion

The regulatory structure adopted by ACA is complex, including overlapping lines of authority among state insurance regulators, exchanges, HHS and the IRS.  Recent events highlight the potential for conflict among the various regulators, which could spell unwelcome regulatory uncertainty for insurers.

Over the longer term, assuming ACA survives constitutional and legislative challenges, conflicts between state and federal authorities could cause some states to cede authority over implementation of health benefit exchanges and enforcement of ACA’s market reforms to HHS.  This, too, could have unwelcome consequences for insurers as they will continue to be subject to regulation at the state level but will also have to contend with direct regulation by federal authorities.

Chris Petersen is a Partner in the firm’s Insurance and Reinsurance Practice where he concentrates on legal and compliance services relating to the Health Insurance Portability and Accountability Act (HIPAA), privacy, state small group and individual insurance reform regulation and the interaction between state and federal law. Mr. Petersen received his bachelor’s degree from Washington University in St. Louis, Mo. and his law degree from Georgetown University School of Law.

Joseph T. Holahan is Of Counsel in the firm’s Insurance Practice and a member of the firm’s Privacy Practice. Mr. Holahan advises insurers and reinsurers on a variety of legal matters, including all aspects of regulatory compliance. Mr. Holahan received his undergraduate degree from the University of Virginia and his law degree from the Catholic University of America.