Department of Health and Human Services
August 27, 2010

Page 5

know?”); the second example considers a mistake made not by the covered individual,
but by the plan (presumably, by one of the plan’s fiduciaries). Treas. Reg. §54.9815-
2712T(a)(3).

Practical Suggestions

| appreciate the Agencies’ efforts at interpreting the Rescission Rule and
providing plans, plan sponsors and health insurance issuers with guidance in the form
of the June 28" Interim Rules. | nonetheless submit that additional guidance is needed
— preferably in the form of additional regulations — to make the Rescission Rule clearer
and more predictable. Here are some suggestions and recommendations:

1. Clarify the Scope of the “Representative” Rule In Treas. Reg. §54.9815-
2712T(a)(1). As noted above, the June 28" Interim Rules permit a plan, or an issuer,
to rescind coverage with respect to an individual if the individual (or a person seeking

coverage on behalf of the individual) performs an act, practice or omission that
constitutes fraud, as permitted by the terms of the plan or coverage.

| read the term “person” in the parenthesis broadly, to include any individual or
entity authorized to seek coverage on behalf of the individual whose coverage
potentially could be rescinded. Thus, for example, this provision could be triggered by
a fraud committed by an employer acting for and on behalf of its employees and their
dependents, just as it could be triggered by a fraud committed by an enrolled parent
acting for a dependent child or a dependent spouse. For unexplained reasons, the
parenthesis does not appear in the second prong of the exception, which permits
rescission for intentional misrepresentations of material fact, even though the same
objectives are being served and even though the Preamble does not distinguish
between the two types of conduct. See Preamble at Part Il.C (Overview; 75 Fed. Reg.
37192) (“Under the new standard for rescissions set forth in PHSA Section 2712 and
these interim final regulations, plans and issuers cannot rescind coverage unless an
individual was involved in fraud or made an intentional misrepresentation of material
fact. This standard applies to all rescissions . . .”).

To avoid forcing plan sponsors and fiduciaries, and issuers, to discern whether
a fraud or an intentional misrepresentation has been committed for purposes of
determining whose coverage can be rescinded (which could have substantial
implications if administered incorrectly), | strongly suggest that the parenthesis appear
in both clauses. It also would help to clarify that an employer that seeks coverage on
behalf of an entire group from an issuer will qualify as a “person” for purposes of
applying this provision.


Department of Health and Human Services
August 27, 2010
Page 10

There also is a need to indicate how the 30-day advance notice, required to be
given to comply with the Rescission Rule, is supposed to coordinate with the new
claims and appeals rules (PHSA §2719) to which most plans and coverages (other than
grandfathered plans and coverages) are subject. Our present expectation is that, for
group health plans subject to both provisions, the 30-day advance written notice
needed to satisfy Treas. Reg. §54.9815-2712T(a)(1) could double as the adverse
benefit determination notice required by Treas. Reg. §54.9815-2719T(a)(2)(i)) (so long
as modified appropriately to comply with the information requirements imposed by the
new claims and appeals rules"); that would permit the two periods to run concurrently.
However, it would be beneficial for the Agencies to provide some form of guidance
which indicates how those rules operate under different circumstances (e.g., where no
claims are pending, in an urgent care setting, when claims are being subjected to
external review, etc.)

Conclusion

The June 28" Interim Rules provide important and helpful guidance regarding
the ability of plans and health insurance issuers to rescind coverage. However, given
the importance of the issue to those affected by it — not only those individuals who find
that their coverage has been rescinded, but also the plans and plan fiduciaries, and
health insurance issuers, who feel compelled to take such an extraordinary step to
prevent the unscrupulous and unethical from benefiting at everyone else’s expense — it
is extremely important for all to have clear and easy-to-follow rules. Accordingly, | hope
the Agencies will take into account the above concerns, suggestions and
recommendations, and provide additional clarity.

| appreciate the opportunity to provide these comments; in the event any of the
Agencies involved have any questions regarding them, | invite those inquires and would
be pleased to respond.

Respectfully submitted,

John’J. McGowan, Jr.

4

103516079.1, Comments.

2 Naturally, plans and coverages subject to both provisions would have to provide the sort of

explanations, and appeals rights, specified in Treas. Reg. §54.9815-2719T.


Department of Health and Human Services
August 27, 2010

Page 7

What matters is that the covered individual (or the party responsible for securing
the individual's coverage, such as a child's parent or an employee’s employer) be
clearly and unequivocally notified that coverage has ended, even if it takes time to
update and revise the relevant electronic and other records. As such, | strongly
recommend that the Interim Rules be clarified to provide that a cancellation or
discontinuance of coverage will not be considered to have “retroactive effect”
(emphasis mine) if the covered individual (or the person or individual responsible for
securing the coverage) is notified of the cancellation or discontinuance of the coverage
prospectively and in writing - no matter when the actual records and other
arrangements are updated to reflect the change. Since the June 28" Interim Rules
contain both a definition of rescission (Treas. Reg. §54.9815-2712T(a)(2)), anda
description of what does not constitute a rescission (Treas. Reg. §54.9815-
2712T(a)(2)(i)), the clarification could be added to either provision.

Notably, this clarification would not require Example 2, found at Treas. Reg.
§54.9815-2712T(a)(3), to be recast, since in that circumstance the covered individual is
unaware of the loss of eligibility due to plan mistake.

5. Clarify the “Failure to Timely Pay” Exception in the Context of Grace
Periods and Representative Payments. (Treas. Reg. §54.9815-2712T(a)(2)(ii)) In an
era where virtually all coverage (and all plan participation) is contributory, the “failure to
timely pay” exception is perhaps the most important exception found in the June 28"
Interim Rules. It therefore is vital that this exception be well understood and capable of
being followed. There are two practical circumstances where the exception comes into
play, where the June 28" Interim Rules need to clearly spell out how the exception
applies: first, when a grace period permits contributions or premiums to be paid late
(which avoids having to cancel, and then possibly reinstate, the coverage); and second,
when a “person acting on behalf of the covered individual’ fails to timely make a
required payment — and places that individual's coverage in a position to be cancelled.

Grace Periods

Grace periods are not uncommon. There are countless instances where a
covered individual (or, a person acting on behalf of the covered individual) can fail to
make a required contribution or premium payment by its due date without causing that
coverage to be immediately cut off; most persons and individuals who pay late are
provided with a short period of time in which to cure the non-payment problem. Several
group health plan-related statutes, such as the “COBRA” continuation coverage
statutes, have such a grace period. The use of a grace period also is not uncommon in
group accident and sickness insurance policy situations, where delayed payment of
group premium by small and medium-sized employers is not an infrequent occurrence.


Department of Health and Human Services
August 27, 2010

Page 6

2. Specify By Example the Type of Language Needed to Satisfy the “As
Prohibited By The Terms of the Plan or Coverage” Condition. (Treas. Reg. §54.9815-
2712T

(a)(1)) Both the statute and the June 28" Interim Rules make plain that a
rescission is only possible if the plan (or where relevant, the coverage) clearly prohibit
the conduct (i.e., the fraud or the material misrepresentation). It is important for all to
know whether a general statement, or detailed language which describes specific acts,
must be used in the plan to permit a plan (or an issuer) to rescind coverage. Leaving
the issue to chance will only produce inconsistent results; this would undermine one of
the salutary purposes of having the rule: to eliminate the problems caused by having
varying standards (which the Interim Rules recognize as a current problem). See
Preamble at Part IV.4.a (Economic Impact; 75 Fed. Reg. 37208 (“According to the
Committee, the current regulatory framework governing the individual insurance market
in this area is a haphazard collection of inconsistent State and Federal laws.”).

3. Establish by Definition Standards for “Fraud” and “Intentional
Misrepresentation of Material Fact.” (Treas. Reg. §54.9815-2712T(a)(1)) Neither the

statute nor the June 28" Interim Rules spell out what type(s) of conduct will rise to the
level of “fraud” or “intentional misrepresentation” for purposes of applying the rule. This
is problematic, since there are several different types of fraud (e.g., fraud in the
inducement, fraud in fact, constructive fraud, etc.) and the elements for each type of
fraud can differ. Similar concerns plague the concept of “intentional misrepresentation
as to a material fact” (e.g., how to distinguish between intentional conduct and mere
“knowing” conduct, what constitutes a material fact, etc.). The lack of common, clearly-
understood standards not only increases the likelihood of uneven results, but it also
increases the risk that plans, issuers, and courts will adopt state law-based standards —
which also can produce uneven results depending on where one lives or where a plan
is being administered. | strongly encourage the Agencies to define those terms so a
single set of national standards is established.

4. Clarify What “Retroactive Effect” Means in Practical Terms. (Treas. Reg.
§54.9815-2712T(a)(2)) The phrase “retroactive effect’ is potentially elusive — although

not in extreme circumstances, such as eliminating coverage retroactive to the date
individual or plan-based coverage initially was extended to a covered individual.
Rather, “retroactive effect” creates problems where logistics or the need for proper
documentation gives rise to a delay, such as a termination of coverage upon a
termination of employment where the process used to alert the plan’s administrator or
health insurance issuer and effect the coverage cut-off takes place days (or even
weeks) after the date the actual termination of coverage occurs. This problem is
particularly vexatious in employer plan and group coverage situations, where a health
insurance issuer may not immediately be informed that an individual has lost or
relinquished coverage due to an employment termination or some other event (e.g.,
divorce, death of the covered employee, etc.).


Department of Health and Human Services
August 27, 2010

Page 9

Only by doing so will the Interim Rules place the responsibility for non-payment
(or lack of timely payment) where it properly belongs: on the party that failed to make
timely payments. In those comparatively rare instances where unscrupulous or
dishonest plan sponsors collect contributions from covered individuals yet fail to make
timely premium payments, the courts already have demonstrated the ability and
willingness to hold errant plan sponsors appropriately accountable."

6. Clarify the 30-Day Notice Rule; Coordinate the Rule with the New

“Adverse Benefit Determination” Claims and Appeals Rule. (Treas. Reg. §54.9815-
2712T(a)(1) and Treas. Reg. §54.9815-2719T(a)(2)(i)) PHSA §2712 by its terms

requires an “enrollee” to receive prior notice of any cancellation of plan or coverage
which amounts to a rescission. The June 28" Interim Regulations use a different term
to describe this requirement: they require a plan or issuer to provide at least thirty (30)
days advance written notice to each “participant” who would be affected by the plan or
coverage rescission — which may or may not be the same as an “enrollee.”"’ Treas.
Reg. §54.9815-2712T(a)(1). Nor does the Preamble bring clarity to this notice
requirement, it indicates that the 30-day advance notice period is intended to provide
individuals and plan sponsors with an opportunity to explore their right to contest the
decision or seek alternative coverage (as appropriate). See Preamble at Part I.C
(Overview; 75 Fed. Reg. 37193).

Since the advance notice requirement serves as an important condition
precedent to any rescission of coverage, the notice process should be clear and easy
to follow. As such the June 28" Interim Rules should be revised to spell out exactly
which individuals — or, what persons (a term which would then include the plan
sponsor, if group coverage were being rescinded) — are to receive the advance notice.

© E.g., Cook v. Jones & Jordan Eng’g, 2009 U.S. Dist. LEXIS 835 (SD WV; 1.7.09) (sponsor,
fiduciaries held liable to plan-covered individual for collecting contributions but not paying
premiums, resulting in cancellation of group coverage); also, Munsey v. Tactical Armor Prods.,
Inc., 2008 U.S. Dist. LEXIS 73881 (ED TN; 9.25.08) (permitting plaintiff to amend complaint,
make ERISA-based claims in factual circumstances similar to Cook).

"" The term “participant” is of course a defined term in ERISA, which is defined to include any
employee or former employee who is or may become eligible to receive a benefit from a plan.
See ERISA §3(7) (29 U.S.C. §1002(7)). Of course, not all plans or coverages covered by the
Rescission Rule constitute (or, are part of) an employee benefit plan subject to ERISA.


Baker Hostetler

BakeraHostetler LLP

PNC Center

1900 East 8th Street, Suite 3200
Cleveland, OH 44114-3482

T 216.621.0200

August 27, 2010 F 216.696.0740

www.bakerlaw.com

John J. McGowan, Jr.
direct dial; 216.861.7475
VIA ELECTRONIC FILING ‘MeGowan@bakerlaw.com

http://www.requlations.gov
E-OHPSCA715.EBSA@dol.gov

Office of Consumer Information

and Insurance Oversight,
Department of Health and Human Services
Attention: OCIIO-9994-IFC

United States Department of Labor
Employee Benefits Security Administration
RIN 1210-AB43

Internal Revenue Service
REG-120399-10

Re: The Interim Final Regulations Published June 28, 2010, Interpreting
Selected Patient Protection and Affordable Care Act (‘PPACA”)
Provisions; Commenting on the Rescission Provisions

Dear Rulemakers:

| am providing these comments to the interim final regulations published June
28, 2010 (75 Fed. Reg. 37188, ef seq.) (the “June 28" Interim Rules” ) which interpret a
series of changes made to the Public Health Service Act (“PHSA”), as added by
PPACA §1001. While the June 28" Interim Rules are set to take effect August 27,
2010, for plan years commencing on or after September 23, 2010, the agencies
involved — the Department of Health and Human Services (“DHHS”), the Employee
Benefits Security Administration of the U.S. Department of Labor (“EBSA”) and the
Internal Revenue Service of the U.S. Treasury Department (“IRS”; jointly with the
others, the “Agencies”) — have invited the public to comment on them.

My comments are directed at the interpretation given by the June 28" Interim
Rules to new PHSA §2712 (the “Rescission Rule”), which appears in identical form in

Chicago Cincinnati Cleveland Columbus Costa Mesa
Denver Houston Los Angeles New York Orlando Washington, DC


Department of Health and Human Services
August 27, 2010

Page 8

The June 28" Interim Rules should spell out how the “timely pay” exception
applies when a grace period is available, preferably by making plain that (1) the phrase
“attributable to a failure to timely pay required premiums or contributions” includes any
grace period that customarily is provided, and (2) coverage can be cut off as of the
original due date, if the person responsible for making the payment still has not paid by
the time the grace period expires.”

Representative Situations

While grace periods are not uncommon, representative situations are virtually
commonplace. Two types of representative situations predominate: where a covered
employee (alternatively known as either the “enrollee” or as the “participant”; see
Comment 6, below) is paying premiums or making contributions on behalf of one or
more dependents; and where a plan sponsor is paying premiums on behalf of an entire
group of individuals (comprised of both covered employees and covered dependents)
to a health insurance issuer to keep a group policy in force. The June 28" Interim
Rules need to address directly how the “timely pay” exception applies in both
circumstances — optimally, by providing practical examples. As between the two
situations, the two-tiered payment situation (i.e., where covered individuals are required
to contribute towards the cost of coverage under a plan (tier 1) and the plan sponsor
pays monthly premiums to a health insurance issuer under a group accident and
sickness policy to keep it in force (tier.2)) is the situation where it is most important to
provide practical guidance.

The June 28" Interim Rules should make plain that the “timely pay” exception
applies at both levels (tier 1 and tier 2), in part for practical reasons. Subject to a few
isolated exceptions,® a health insurance issuer knows only whether the plan sponsor (in
the context of the Interim Rules, the “person acting on behalf of [every] covered
individual”) has timely paid the group premium, while a plan sponsor is in the unique
position of knowing not only if the group premium has been timely paid but also
whether each covered individual has timely made the necessary contributions.°

In the absence of clear guidance, it is possible to interpret the “timely pay” exception in a
number of ways. For instance, it is quite common for plans (and insurers) to treat a late
payment that has been made within a “grace period” as though it has been made “timely.” As
such, it is possible to read the exception to only permit a plan or issuer to prospectively
terminate coverage after the grace period has expired. Such an interpretation (if widely
embraced) would only lead to the elimination of many grace periods (to the extent plans and
insurers could otherwise do so under other relevant law).
® There are, of course, instances where individuals covered by or through a group policy will
pay the health insurance issuer directly. The most typical circumstances involve federal and
state coverage continuation laws (e.g., COBRA, COBRA-like state laws, etc.), where an issuer
either has state-based insurance responsibilities or has agreed by contract to handle the
COBRA administrative responsibilities normally borne by the “plan administrator” of an
employer's underlying group health plan.

° There also will be representative situations occurring at the covered employee level, where
individual employees not only are making contributions for their own benefit but also as a
“person acting on behalf of’ the various eligible dependents they have elected to cover.


Department of Health and Human Services
August 27, 2010

Page 4

Treas. Reg. §§54.9815-2712T(a)(2)(i), (ii).* It goes without saying that it will be
critically important for plans and issuers to understand and apply these two exceptions
accurately and properly because they do not require a plan or issuer to follow any of
the procedural and substantive protections that must be observed in order for an actual
rescission of coverage to occur, such as (1) the need to provide proper notice, see
PHSA §2712; also, Treas. Reg. §54.9815-2712T(a) (providing for thirty (30) days
advance notice, independent of any contestability period that otherwise might apply
under relevant state law), and (2) for non-grandfathered plans and coverages, the need
to also undergo an entire cycle of claims and appeals where the rescission can be
administratively contested.°

It is equally vital that the “fraud” and “misrepresentation” exceptions found in the
statute, which actually permit coverage to be rescinded, be clearly understood and be
capable of being practically applied both by plans and by issuers, because once an
individual's coverage has become effective, that coverage can be rescinded only after
first providing notice to the enrollee and observing whatever other rules might apply
under relevant state law.° The June 28" Interim Rules incorporate these important
exceptions in the following fashion:

¢ Where the individual (or a person seeking coverage on behalf of the individual)
performs an act, practice or omission that constitutes fraud, as permitted by the
terms of the plan or coverage; or

¢ Where the individual makes an intentional misrepresentation of material fact, as
permitted by the terms of the plan or coverage.

Treas. Reg. §54.9815-2712T(a)(1).

Finally, the June 28" Interim Rules offer two examples to help illustrate how the
Rescission Rule is intended to function, but neither example provides the sort of
guidance that plan fiduciaries and sponsors and issuers need to have when they
encounter individuals and employer groups that seem intent upon taking unfair
advantage. The first example describes a remote (and medically unconnected) failure
to disclose, made in response to an oblique question (“Anything else [ ] we should

* | particularly welcome the decision to recognize that a coverage cancellation due to a
nonpayment of premium exception falls outside the scope of a “rescission.” Indeed, had the
June 28" Interim Rules characterized as a “rescission” any cancellation of coverage that results
from a failure to timely pay premium (or, make a required contribution), it would only have
prompted plans and health insurance issuers to eliminate grace periods altogether (to the extent
permitted by relevant and applicable state law) and more rigorously police (and cancel) existing
coverage(s).

5 See PHSA §2719, as interpreted by Treas. Reg. §§54.9815-2719T(a)(2)(i) and (b)(2)(ii)(A);
29 C.F.R. §§2590.715-2719(a)(2)(i) and (b)(2)(ii)(A); and 45 C.F.R. §§147.136(a)(2)(i) and
(b)(2)(Hi)(A).

© At least in some circumstances (e.g., self-insured group health plans subject to ERISA, etc.)
state law would be pre-empted, leaving only the federal rule.


Department of Health and Human Services
August 27, 2010

Page 3

PHSA §2712: Initial
Guidance & Shortcomings

The Statute

New PHSA §2712, merely two sentences long, has important implications for
both the sponsors and fiduciaries of group health plans, as well as for any health
insurance issuer that issues a group contract to any such plan:

A group health plan and a health insurance issuer offering group or
individual health insurance coverage shall not rescind such plan or coverage
with respect to an enrollee once the enrollee is covered under such plan or
coverage involved, except that this section shall not apply to a covered individual
who has performed an act or practice that constitutes fraud or makes an
intentional misrepresentation of material fact as prohibited by the terms of the
plan or coverage. Such plan or coverage may not be cancelled except with prior
notice to the enrollee, and only as permitted under section 2702(c) or 2742(b).

PHSA §2712 (42 U.S.C. §300gg-11).

§2712’s statutory language is comparatively straightforward. It generally
prohibits a plan or an insurer from rescinding either the “plan” or the “coverage” “with
respect to an enrollee once the enrollee is covered” under “such plan” or “[such]
coverage.” However, “a covered individual who has performed an act or practice that
constitutes fraud or makes an intentional misrepresentation of material fact as
prohibited by the terms of the plan or coverage” is explicitly excepted from that general
proscription.

The June 28" Interim Rules

The June 28" Interim Rules interpret §2712's rescission rule to apply to any
“cancellation or discontinuance of coverage that has retroactive effect.” Treas. Reg.
§54.9815-2712T(a)(2). However, the Interim Rules do not provide practical guidance
(such as an example) as to what is meant by a coverage termination which “has a
‘retroactive effect.”

The June 28" Interim Rules also recognize that the scope of §2712 is not
unlimited, and that not every coverage cancellation constitutes a rescission; they do so
by providing that a “rescission” does not occur in the following circumstances:

(i) where the cancellation or discontinuance of coverage has only a
prospective effect; or

(ii) where the cancellation or discontinuance of coverage is effective
retroactively to the extent it is attributable to a failure to timely pay required
premiums or contributions towards the cost of coverage.


Department of Health and Human Services
August 27, 2010

Page 2

three separate regulations.’ My objective is to bring to your attention a number of
practical issues which need to be addressed — either by modifying the Rescission Rule,
or by issuing additional related guidance — in order to make the Rescission Rule
workable for all of the affected stakeholders.

Perspective

As an employee benefits attorney with more than 25 years of experience, | have
worked with both public sector and private sector employers to facilitate the delivery of
health, accident and sickness benefits to employees, former and retired employees,
and their respective eligible dependents, under employment-based plans. | have found
that the methods and means those employers use to provide such benefits varies
widely, and is heavily influenced by the size of the employer's employee population and
by the regulatory environment within which the employer (and its employment-based
plan) functions.

It is axiomatic that small employers purchase insured group coverage (in one
form or another) to deliver the benefits promised under their employment-based plans,
that large employers invariably self-insure (subject to engaging in some form of risk-
sharing arrangement with, e.g., a duly-licensed property and casualty or surplus lines
insurer), and that those employers in-between choose between insurance and self-
insurance (or, a variation) based on market conditions and relevant facts and
circumstances (e.g., demographics, location of operations, finances, etc.). It likewise is
plain that public sector employers’ plan arrangements are subject to (and dictated by)
relevant state and local law, but that most private sector employers’ plan arrangements
are subject to the procedural and remedial (and for welfare benefit plans, the
increasingly substantive) provisions of the Employee Retirement Income Security Act of
1974, as amended (“ERISA’).?

Despite the differing regulatory constructs, virtually all employer-sponsored
plans have some common features. For example, virtually all employment-based
coverages are now contributory (at least on some level), and virtually all employers rely
on multiple parties to handle the day-to-day administrative chores (e.g., third party
administrators, payroll vendors such as ADP, health insurance issuers, etc.). Among
the Agencies involved, EBSA likely is the one most acutely aware of the problems this
traditional reliance on multiple parties can potentially cause.°

' Treas. Reg. §54.9815-2712T; 29 C.F.R. §2590.715-2712; and 45 C.F.R. 147.128. For
simplicity's sake, | will only refer to the IRS regulations (Treas. Reg. §54.9815-2712T, et seq.).
2 As the Agencies doubtless are aware, there are private sector outliers, such as “employment-
based” plans which cover only partners in partnership or sole proprietors, or employees covered
by non-electing “church plans,” where state law (rather than ERISA) controls.

° E.g., Solis v. Eanes, Civ. No. 10-cv-0090 (N.D. IIL; filed 1.13.10) (suit to recover employee
contributions withheld after insurer had cancelled group policy for non-payment of premium).