Health Benefit Exchange Contracting – Providers could be Left Holding the Bag for Two Months of Claims on Subsidized Exchange Patients
By Brett Johnson, JD, MPH, MS, Center for Medical and Regulatory Policy, California Medical Association, Sacramento, CA
In 2014, many providers of healthcare services may not only discover that they are now contracted for health benefit exchange products under existing contracts, but that they may also be holding risk under one or more of those contracts. This is because federal law1 will allow exchange plan (officially known as “qualified health plan” (“QHP”)) issuers to pend claims submitted by providers in the last two months of a federally subsidized patient’s three-month grace period for premium payment delinquency. If the patient is terminated from the QHP at the end of the three months for an unpaid premium balance, then the plan issuer can deny all claims submitted on that patient in those last two months. Questions abound, however, as to the extent this federal provision preempts state laws on matters such as prompt payment and rescissions. Lawyers should be prepared to counsel clients engaged in healthcare service delivery on this potentially significant liability related to exchange products.
Background on Health Benefit Exchange Implementation
Beginning January 1, 2014, the nation’s health insurance landscape will look dramatically different due to the launch of the American Health Benefit Exchanges and the Small Business Health Options Program (“SHOP”) (collectively “exchanges”). These exchanges, recently rebranded by the federal government as “marketplaces,” are a central component of the Patient Protection and Affordable Care Act (“PPACA”).2 To most consumers, the exchanges primarily will be known as the websites where one must go to get insurance qualifying for federal tax credits and subsidies.
The impact of these exchanges on America’s healthcare delivery system will likely be significant and immediately apparent in many parts of the country. PPACA’s “individual mandate”3 and the marketplaces’ monopoly on coverage qualifying for the federal advance premium tax credits4 will all but guarantee a shift of states’ individual covered lives into the marketplaces in addition to those who will be newly insured.5 The Congressional Budget Office estimates that about seven million individuals will enroll in exchanges by 2014, increasing to about 24 million by 2022.6 The actual enrollment numbers, however, could be significantly higher if outreach, education, and marketing efforts are a success. All of these covered lives will require a great many providers to render care, and exchange-participating health insurers across the country are (or at least should be) completing the provider networks that will care for these patients in 2014 and beyond.
Current State of Provider Contracting for Exchange Products
In much of the country, any offers to contract and contractual amendments to providers for exchange products have come in waves, which started in late 2012. Anecdotal evidence has thus far suggested such contracting efforts have not gone as smoothly as some insurers would have hoped, as many providers balked at requests for rate discounts to serve exchange patients. Even where rates remain unchanged, however, many questions linger as to the administrative burdens and financial unknowns related to exchange products. Yet, if California’s experience is indicative of what may be occurring more broadly, few, if any, offers to contract, contractual amendments, or accompanying materials to providers expressly state that the new or revised agreement involves an exchange product.
Of the questions remaining about how exchange contracts will impact providers, the biggest may be to what extent insurers will put the risk of covering exchange patients on the providers via the federal grace period.
Federal Law on the Three-Month Grace Period
PPACA mandates that exchange plan enrollees that have both paid at least one month’s premium and receive advance premium tax credits be permitted to have an unpaid premium balance for three months before they may be terminated for delinquency.7 This grace period is three times longer than what is allowed generally in most states.8
In the final rule issued last year on establishing exchanges and exchange plans, the United States Department of Health and Human Services (“HHS”) made the decision to treat the first month of the grace period normally, as if the enrollee had paid, but any claims submitted by providers in the final two months may be pended and ultimately denied by the exchange plan issuer upon enrollee termination. 9 If the premium balance is paid prior to the termination of the enrollee for delinquency, then any pended claims must be paid by the plan at that time.10 (See Table 1) The final rule further stated that exchange plan issuers “may still decide to pay claims for services rendered during [the final two months of the grace period] in accordance with company policy or State laws, but the option to pend claims exists.”11 It is important to note that the timing of a claim is based on the date the service was rendered, not the date of claim submission.12
Table 1. The Exchanges’ Three-Month Grace Period for Non-payment of Premiums by Subsidized Enrollees
The Exchanges’ Three-Month Grace Period for
Non-payment of Premiums by Subsidized Enrollees
First month of delinquency
Second and Third months of delinquency
Terminated after three months of delinquency
- Normal payment of claims.
- Plan effectively treats this month as paid even if enrollee is eventually terminated for non-payment.
- No provider notification of the patient’s delinquency.
- Plan has the option to pend claims for services performed until the enrollee pays the outstanding premium balance.
- Providers submitting claims during these two months are notified of the potential for a denied claim.
- If enrollee pays off the premium balance, providers’ claims are paid at that time.
- Plan has the option to deny all claims for services performed in the second and third months of delinquency.
- Providers may seek payment for denied claims from the patient.
- Patient may then enroll in a different exchange plan during the next open enrollment period regardless of whether they pay off premium balances with previous insurers.
The rule explained that HHS was placing the last two months of risk on the providers for two primary reasons. First, PPACA requires that issuers offer a plan outside of the exchange which is essentially identical to the plan inside of the exchange at the same premium rate.13 The assumed risk that must be factored into the premium rate for a three-month grace period is significantly greater than that for a one-month grace period, which is typical in most states. According to HHS, this means that issuers would either need to be able to charge a higher premium inside the exchange or enrollees outside of the exchange would be subsidizing those inside of the exchange. By keeping the assumed risk to the issuer at one month both inside and outside of the exchange, premium rates can be the same both inside and outside of the exchange without unduly burdening those outside of the exchange.14 Second, by allowing issuers to retain only the first month’s advance premium tax credit payment from the federal government and treat that month as paid, the enrollee’s tax liability is mitigated. Otherwise, the enrollee could be subject to “excessive” financial exposure upon filing for that tax year due to being ineligible for three months of paid advance premium tax credits.15 (HHS does not discuss the potential financial exposure for patients as a result of providers collecting from patients on unpaid claims.)
In a later rule, HHS explained that this monthly breakdown also applied to the cost-sharing reductions granted to enrollees below 250 percent of the federal poverty level.16 This provision, however, likely will only mean that the provider must continue collecting only the reduced cost-sharing amount from the enrollee at the point of service during the second and third months of the grace period and should not generally lead to any recoupment aimed at the provider.
Finally, acknowledging that “pended claims increase uncertainty for providers and increase the burden of uncompensated care,” HHS added the requirement that exchange plan issuers notify providers who render services in the second and third months of the grace period that claims are being pended and will be denied in the event of the patient’s termination for non-payment of premiums.17 HHS unfortunately provided no further details on the parameters of this notice, leaving critical questions of timing and content to the states and insurers.
Most state exchanges appear content to let insurers develop their own notification standards, including post-service notice, though some states appear to be taking the initiative. California, for instance, requires in its contracts between the exchange and participating issuers that issuers give written or telephonic notice within 15 calendar days of a subsidized enrollee entering the second month of the grace period.18 This notice must only go to the enrollee’s assigned primary care provider and any network providers who have submitted claims on the enrollee in the past two months.19
The Centers for Medicare and Medicaid Services (“CMS”) has set a higher bar for grace period notifications in the federally-facilitated exchanges, which currently amount to 34 states.20 CMS states, “[i]ssuers should notify all potentially affected providers as soon as is practicable when an enrollee enters the grace period, since the risk and burden are greatest on the provider.”21 CMS also expects a number of items to be covered in the notice itself, including: (1) purpose of the notice; (2) a notice-unique identification number; (3) the name of the particular plan and affiliated issuer; (4) names of all individuals affected under the policy and possibly under the care of this provider; (5) a grace period explanation with applicable dates, including whether the enrollee is in the second or third month of the grace period, consequences of grace period exhaustion for the enrollee and provider, and options for the provider; and (6) any customer service telephone number specifically for use by providers.22 Many in the provider community are holding out hope that HHS will require notice of a patient’s grace period status be granted electronically at the point of eligibility verification across all exchanges, but HHS and the states have thus far not required such point-of-service notification.23
Preemption of State Laws Impacting the Federal Grace Period
The preemption standard contained in the regulatory language of the aforementioned final rule states that nothing in its provisions shall be “construed to preempt any State law that does not prevent the application of the [provisions of title I of PPACA, which contains all PPACA provisions discussed in this article].”24 Thus, a central question here might be whether a state law “prevents” an exchange plan issuer from maintaining equal premium rates for a product both inside and outside of the exchange.25
Further written guidance from HHS on the preemptive effect of its grace period provisions could avoid some costly conflicts down the road. In the absence of further federal guidance or respective states’ express recognition of federal preemption here, insurers should be expected to clearly delineate in writing whether or to what extent state laws apply when the insurer exercises the federal pend and deny option discussed above.
Prompt payment is one area of regulation ripe for conflict over the federal grace period. States currently require health insurers to pay clean claims within anywhere from 15 to 45 days, depending on the means of submission (e.g., electronic or paper), and impose penalty interest where insurers fail to pay within the prescribed time period.26 Such payment requirements would certainly inhibit an issuer’s ability to pend claims over a two-month period. Virginia is one state that has interpreted federal grace period provisions as preempting state prompt payment laws,27 and Maryland avoided questions of interpretation by expressly exempting the federal grace period from the reach of its state prompt payment laws.28
On the other hand, officials at California’s Department of Managed Health Care have informally communicated to both the state’s exchange and health plan trade association that it interprets state prompt payment laws, among others, as largely precluding the option to pend and deny claims by exchange plan issuers.
Rescission restrictions may also pose a number of interesting preemption questions. For instance, rigorous state notification requirements on insurers of an intended rescission to enrollees would not prevent the operation of federal grace period provisions.29 State contestability periods, on the other hand, generally prohibit the rescission of an enrollee’s policy two years from issuance except in cases of fraud30 and could be construed as preventing the application of PPACA provisions.
While the Obama Administration has been relatively less preemptive of state laws than predecessors,31 HHS appears to have already made a strong argument in the final rule discussed above that requiring issuers to take on risk for the final two months of the grace period would prevent issuer compliance with PPACA’s requirement that a product’s premiums inside the exchange equal those outside.32 That being said, the most recent piece of federal policy guidance addressing grace period preemption states, “[i]f coverage is terminated for non-payment of premiums, the last day of coverage may be as soon as the last day of the first month of the grace period; thus, coverage may be terminated retroactively, if permitted by state law.”33 Further federal guidance should reconcile this statement with the preamble to the final rule on the grace period.34
Potential Impact of the Federal Grace Period Provisions on Providers
The federal grace period provisions present one of the largest financial risks for providers who are considering whether or not to contract with a plan in the exchange. For instance, the viability of many physician practices, particularly those of specialists, could be threatened by the prospect of absorbing losses for sixty days of services provided to even a small percentage of patients over the course of a year. For instance, an oncology practice generally purchases the drugs to be used in a course of chemotherapy up front — which can run into the tens of thousands of dollars — and is then reimbursed by the payor as part of the medical service. Costs such as these are on top of the costs of displacing other patients with coverage.
Despite the potentially significant risks, many providers appear to be unaware of the terms under which they will care for exchange patients. A recent survey conducted by a physician staffing agency found that more than 56 percent of physicians were “not at all familiar” with how exchange products will affect their business.35 The survey further found that approximately two-thirds of physicians were “not at all familiar” with both the contracted rates for exchange products and the coverage terms for exchange patients, including the grace period terms.36 Though a number of provider trade associations have been working hard to address such knowledge deficiencies,37 providers’ counsel should help to ensure that the terms of exchange participation, especially those related to the pending and denial of claims, do not come as a surprise to clients next year.
Fee-for-service provider contracts are the most susceptible to pend and deny practices, though capitated risk contracts with significant fee-for-service carve-outs will also require heightened attention going forward. At this time, it appears that a number of major insurers will attempt to incorporate the pend and deny option by reference to a policy or other administrative manual despite arguments to the contrary that contend such a provision is sufficiently material to require its express inclusion in the contract. Providers and their counsel would be well advised to closely investigate any notices of revision to an insurer’s administrative or policy manuals received within the past six months and going forward. Many exchange plan contracts, however, may require the cancellation of the underlying contract, as opposed to opting out of the exchange product only, which may be impractical to many providers.
If not already doing so, a provider should endeavor to understand the current patient mix (e.g., percentage self-pay revenue) and consider exposure to bad debt and extended accounts receivables going forward. Grace period-related denials have the potential to become a significant portion of many providers’ bad debt, depending on how exchange enrollee premium compliance pans out, and, to the extent possible, a provider should be prepared to factor in such additional risk to the requested payment rates from payors. A contingent of exchange plan enrollees, such as those whose only prior coverage was under Medicaid, may have no experience with paying premiums. The more nefarious insureds may take advantage of HHS-acknowledged opportunities to game the grace period and get 12 months of coverage for the price of nine before simply enrolling in a new plan under PPACA’s guaranteed issue requirements.38 Burdensome means of payment may also hinder premium compliance among exchange enrollees (e.g., prepaid debit cards and Western Union), despite currently proposed federal regulations requiring that issuers “[offer] method of payment options that do not discriminate against individuals without bank accounts or credit cards.”39
Collecting full billed charges up-front for those in the pend and deny period will not be a viable option for providers. Federal regulations prohibit exchange-contracted providers from collecting more cost-sharing at the point of service than is required of the exchange plan enrollee under the applicable plan’s benefit design.40 Furthermore, depending on the extent to which providers receive advance notice, providers may be unaware of the patient’s grace period status at the point of service. Under the electronic eligibility verification standards currently in place, a patient will show up as “1-active” during the first month of the grace period and as “5 – active pending investigation” during months two and three of the grace period.41 This latter eligibility code generally would still have the provider treat the patient as if under full coverage.42 It is important to note that, for liability reasons, the extent of which may vary by state, a provider should not allow a patient’s grace period status to terminate or significantly interfere with an ongoing treatment plan.43
Providers have a few measures they can take to reduce the potential for bad debt as a result of the two-month pend and deny period. First, providers should have a clear understanding of the extent to which they will receive notice of a patient’s grace period status from the exchange plans with which they are contracted. Second, they should develop a strategy to improving premium compliance for their exchange patients in the grace period. This might include staff reaching out to such patients to ensure they are aware of their delinquency status and to assess whether financial circumstances have changed such that public coverage options (e.g., Medicaid) may be available. Third, providers should ensure any personal guarantees of payment required of patients at the point-of-service are up-to-date and are being properly collected from patients by staff. The balance billing of patients upon their termination for non-payment at the end of the three-month grace period is prohibited by the federal rule, so providers should have the patient’s assumption of such charges in writing with the proper signature.44 Finally, providers should maintain and regularly review records of the financial impact of any exchange products on the practice. If a certain exchange product is hurting the business and the issuer of that product allows the provider to opt out of that product without terminating the underlying contract, the decision should be easy. If the issuer requires that the entire underlying commercial product be terminated, then the provider must look at the value of the issuer’s business as a whole and investigate alternative sources of patients and revenue before making any decision.
For those providers anticipating significant exchange-related business paid on a fee-for-service basis, the potential for two months of pended and denied claims could noticeably harm the bottom line. Lawyers advising such providers should ensure that they head into 2014 with a firm awareness of the potential liabilities that await them. In the meantime, further clarity is welcome from federal regulators on the extent to which state laws, such as prompt pay and rescission statutes, survive preemption within the context of the federal grace period.
|1||45 C.F.R. § 156.270(d) (2013).|
|2||The Patient Protection and Affordable Care Act of 2010 (“PPACA”), Pub.L. No. 111-148, 124 Stat. 119.|
|3||PPACA § 1501; I.R.C. § 5000A.|
|4||PPACA §§ 1401 and 10105.|
|5||Congressional Budget Office, CBO’s May 2013 Estimate of the Effects of the Affordable Care Act on Health Insurance Coverage (2013), available at this link (projecting exchange enrollment to surpass the total non-exchange individual coverage enrollment, including Medicare, in 2017); Paul H. Keckley, Sheryl Coughlin, Leslie Korenda, & Ellen Rice, Deloitte Issue Brief, The Impact of Health Reform on the Individual Market: A Strategic Assessment (2011), available at this link (projecting various coverage scenarios, all of which have exchange individual and small group enrollment surpassing non-exchange enrollment by 2020).|
|6||Congressional Budget Office, Effects on Health Insurance and the Federal Budget for the Insurance Coverage Provisions in the Affordable Care Act—May 2013 Baseline (Washington, D.C.: May 14, 2013).|
|7||PPACA § 1412(c)(2)(B)(iv)(II).|
|8||77 Fed. Reg. 18310 at 18427 (Mar. 27, 2012).|
|9||Id. at 18426-18429, 18469.|
|10||Id. at 18427-18429.|
|11||Id. at 18427.|
|13||PPACA § 1301(a)(1)(C)(iii).|
|14||77 Fed. Reg. at 18427.|
|16||78 Fed. Reg. 15410 at 15490 (Mar. 11, 2013) (codified at 45 C.F.R. § 156.430(f)).|
|17||Id. (codified at 45 C.F.R. § 156.270(d)(3)).|
|18||Covered California Qualified Health Plan Contract for 2014, § 3.25 (May 21, 2013), available at this link.|
|20||U.S. Gov’t Accountability Office, GAO-13-601, PPACA: Status of CMS Efforts to Establish Federally Facilitated Health Insurance Exchanges (June 2013).|
|21||CMS, Affordable Exchanges Guidance: Letter to Issuers on Federally-facilitated and State Partnership Exchanges at pg. 42 (April 5, 2013), available at http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/2014_letter_to_issuers_04052013.pdf.|
|23||The reluctance of HHS comes despite stating, “We believe that there are technology-based approaches to provide this notification.” (77 Fed. Reg. 18427).|
|24||45 C.F.R. § 155.120(b) (2013).|
|25||The preemption analysis here could warrant its own article, so this article will look only at the preemption standard most directly applicable to the grace period provisions, as opposed to some of the more overarching consumer-protective comparative analyses and standards of Executive Order 13132 (August 4, 1999).|
|26||Neda M. Ryan, A Survey of Prompt Pay Laws (Fall 2012 – Winter 2013), available at http://www.anesthesiallc.com/component/content/article/548 and http://www.anesthesiallc.com/component/content/article/578 .|
|27||Virginia Bureau of Insurance, Health Insurance - Rate and Form Filing Information for Implementation of the Patient Protection and Affordable Care Act Provisions FAQs, pg. 8 (June 6, 2013), available at http://www.scc.virginia.gov/boi/faq/aca_hi.pdf .|
|28||Maryland House Bill 361, pg. 13 (May 2, 2013) (amending Insurance Code section 15-1005 to include an exception related to the federal grace period), available at http://openstates.org/md/bills/2013/HB361/documents/MDD00052916/.|
|29||In California, to rescind coverage, an insurer must send a certified mail notice to the insured or enrollee at least 30 days in advance stating the reason for the intended rescission and the right to appeal to the Insurance Commissioner. (Insurance Code § 10384.17(b) and Health & Safety Code § 1389.21(b) (2010)).|
|30||Peter Harbage, Hilary Haycock, and Meredith King Ledford, Post Claims Underwriting and Rescission Practices (2009), available at http://www.rwjf.org/content/dam/web-assets/2009/01/post-claims-underwriting-and-rescission-practices.|
|31||Gillian E. Metzger, Federalism under Obama, 53 Wm. & Mary L. Rev. 567, 594-597 (2011).|
|32||77 Fed. Reg. at 18427.|
|33||CMS, Affordable Exchanges Guidance: Letter to Issuers on Federally-facilitated and State Partnership Exchanges at pg. 42 (April 5, 2013), available at http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/2014_letter_to_issuers_04052013.pdf (emphasis added).|
|34||77 Fed. Reg. at 18427.|
|35||Dan Mangan, Even doctors are clueless on Obamacare, poll finds, CNBC News (July 22, 2013), available at this link (LocumTenens.com polled 479 independent physicians for the survey, which had a margin of error of plus or minus 4.3 percent, with a 95 percent confidence level).|
|37||For instance, the California Medical Association disseminates a newsletter on exchanges from the physician perspective, entitled Reform Essentials, available at http://www.cmanet.org/cma-reform-essentials/.|
|38||77 Fed. Reg. at 18428 (After discussing the potential for gaming of the grace period, HHS does state that it “will continue to explore options for incentivizing appropriate use of the grace period, either through future rulemaking or in the context of general insurance market reforms.”)|
|39||78 Fed. Reg. 37032, 37066, 37095 (proposing 45 C.F.R. § 156.1240(a)(2) after receiving reports that up to one-third of likely exchange enrollees lacked a bank account, while many insurers in the individual health insurance market only accepted electronic funds transfers from bank accounts as a means of avoiding card-related transaction fees).|
|40||78 Fed. Reg. 15410 at 15481 (March 11, 2013) (codifying 45 C.F.R. 156.410(a)).|
|41||CMS, Standard Companion Guide Transaction Information Companion Guide Version Number: 1.0 (January 31, 2013). Available at: http://cciio.cms.gov/resources/files/companion-guide-for-ffe-enrollment-transaction-v1.pdf.|
|43||For instance, states may have laws prohibiting the abandonment of current patients except under specific conditions, and the provider’s contract with a payor or professional liability insurer may impose penalties for such behavior, as well. In California, sufficient notice must be given to a patient before a provider withdraws from the care relationship. See Scripps Clinic v. Superior Court, 108 Cal.App.4th 917, 134 Cal.Rptr.2d 101 (2003) (allowing a jury to consider whether a two-week period in which a managed care patient had no access to non-emergency care constituted a breach of the physician group's duty not to abandon the patient).|
|44||77 Fed. Reg. at 18427-18429.|
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