Waiving the Restriction of Annual Limits in Private Health Insurance 
Released: 2011-06-15T00:00:00

Introduction

Considerable congressional attention has been placed on the treatment of consumers within the private health insurance marketplace. Among the many concerns, particular attention has been paid to the value of coverage in terms of out-of-pocket (OOP) costs relative to premiums. One method that lowers the value of coverage is the use of annual limits on the dollar amount of coverage. Private health insurers use annual limits to require the consumer to assume 100% of the cost of coverage after a certain amount of spending for the year has been reached. The spending can be for the total health benefits covered or targeted to specific services, such as hospitalizations. Policyholders and plan members that exceed these coverage caps end up with very high OOP costs. However, market demand for low-premium coverage has led to the proliferation of limited benefit plans ("mini-med plans") that rely on annual limits to keep premiums down. According to the Department of Health and Human Services (HHS) approximately 18 million Americans are subject to annual limits in their health coverage.

The Patient Protection and Affordable Care Act ( P.L. 111-148 , PPACA) was enacted on March 23, 2010, and amended by the Health Care and Education Reconciliation Act ( P.L. 111-152 , HCERA), enacted on March 30, 2010 (hereafter collectively referred to as PPACA). PPACA, among other provisions, reorganizes and amends title XXVII of the Public Health Service Act (PHSA) to reform the private health insurance marketplace. The "immediate" reforms in sections 2711 through 2719 of the PHSA become effective for plan years beginning on or after September 23, 2010. The plan year refers to the 12-month period during which a policy or plan benefit is effective. Among the immediate reforms are consumer protections from high OOP costs by placing restrictions on and eventually prohibiting the use of annual limits.

This report provides an overview of the waiver available for the restriction on annual limits and will be periodically updated to reflect any legislative or regulatory changes.

Restriction on Annual Limits

For plan years beginning on or after six months after enactment, group health plans, grandfathered group health plans, and health insurance issuers offering group or individual plans are restricted, as determined by the Secretary of HHS (hereafter the Secretary), from establishing annual limits on the dollar value of essential health benefits for any participant or beneficiary. Essential health benefits may be further defined by the Secretary, but they must include at least the following types of care: ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitative services and devices, laboratory services, and preventive and wellness and chronic disease management and pediatric services, including oral and vision care. Annual limits are permissible for health care expenses that are not considered part of the essential health benefits. PPACA also requires the Secretary to ensure that there is access to needed services with a minimal impact on premiums in the context of defining the restriction on annual limits. This provision is the basis for the Secretary's waiver authority.

On June 28, 2010, the Secretary promulgated regulations, with the Secretaries of Labor and the Treasury, defining the restrictions on annual limits. In order to limit the magnitude of the likely premium increases for coverage that previously used annual limits, the regulations have a three-year phase-in period allowing insurers to implement annual limits of $750,000 in the first year culminating in a $2 million allowable annual limit in the final year, as illustrated in Figure 1 . On January 1, 2014, annual limits will be prohibited altogether.

Impact on Limited Benefit ("Mini-Med") Plans

There is substantial variability in the marketplace due to different consumer demands, but generally, a limited benefit plan offers coverage with restrictive annual limits on total benefits and/or on specific service categories (e.g., surgeries). Table 1 illustrates an example of grandfathered limited benefits plan called Fundamental Care. In this example, Fundamental Care has a annual deductible of $500 and a policy year maximum or annual limit of $100,000 and service specific benefit maximums. The plan has a drug benefit with a $100 deductible and a $1,000 annual limit. Premiums vary by covered group, but the employer is required to make at least a 50% contribution to the cost of the coverage.

HHS estimates that about 17.9 million persons have plans or policies that are subject to annual limits, primarily in the individual (65% of total) and small group (31% of total) markets. Industry groups have argued that limited benefit plans are necessary because more comprehensive coverage would be too costly without the federal subsidies for qualified health plans in the exchanges that are not available until 2014. They say that without the option of limited benefit plans, these workers would likely become uninsured. This assertion has been the basis for requesting and granting waivers from the restriction on annual limits. On the other hand, some consumer groups have argued that limited benefit plans are not deserving of any regulatory leniency. They assert that many consumers enroll in these plans without understanding how little protection they provide against large health expenses, resulting in a lack of access to care and substantive medical debt when they experience a major illness or accident. These concerns prompted a December 1, 2010, hearing by the Senate Commerce Committee.

Temporary Waivers

Limited benefit plans do not have a categorical exemption from the reforms of PPACA. However, regulators have found the industry argument for waivers compelling while acknowledging the potential risks to consumers. In the interim final regulations on restricted annual limits, the Secretaries of HHS, Labor, and the Treasury announced that HHS would establish a waiver process for limited benefit plans in order to preserve coverage at similar premiums. In other words, it was assumed that applying the restriction on annual limits to limited benefit plans would result in substantive increases in the premiums charged for those insurance products. HHS, however, expressed concern that consumers might be confused about the value of their coverage in relation to the restriction on annual limits. Accordingly, HHS is requiring plans that are approved for the waiver to prominently display in their materials a "black box type" warning in 14-point bold font explaining that their plan does not meet the standards of the law with respect to annual limits.

Organizations may apply for a waiver on an annual basis until January 1, 2014, when annual limits are prohibited. The standards of the waiver apply equally to all applicants, as there are no differential or preferred paths to a waiver by the category of the applicant, such as unions or small businesses. The operational process for applying for a waiver was published as a memorandum on September 3, 2010. The memorandum, and subsequent guidance, establishes the following reporting requirements:

the terms of the plan or policy for which a waiver is sought; the number of individuals enrolled in the plan or covered by the policy; the annual limit(s) and rates applicable to the plan or policy; and a brief description of why compliance with the restriction on annual limits standard would result in a significant decrease in access to benefits or a significant increase in premiums paid.

As of April 1, 2011, 1,168 waivers have been approved, representing slightly more that 2.9 million enrollees and policyholders. This means the enrollees and policyholders of the accepted waiver applicants represent around 1.5% of the approximately 194.5 million individuals with private health insurance in the United States. HHS did not provide any data on denied waiver applicants, but has reported that 94% of the applicants were granted waivers. As illustrated by Figure 2 , most (94.3%) of the waivers were approved for either self-insured employers (40.6%), health reimbursement arrangements (HRAs, 28.9%), or multiemployer union plans (24.7%). As illustrated by Figure 3 , most (92.5%) of enrollment for the approved waivers was for either health insurance issuers (29.7%), multiemployer union plans (29.4%), non-Taft Hartley union plans (19.1%), or self-insured employers (14.3%).

Legislative Activity in the 112th Congress

The Health Care Waiver Transparency Act (H.R. 1184/S. 650)

On March 17, 2011, the Health Care Waiver Transparency Act was introduced by Representative Darrell Issa ( H.R. 1184 ) and Senator John Ensign ( S. 650 ). H.R. 1184 / S. 650 would require the Secretary of HHS to publish, on the HHS website, detailed criteria used to determine approval of an application submitted for a waiver, adjustment, or other compliance relief provided for under the authority of PPACA or title I or subtitle B of title II of the Health Care and Education Reconciliation Act ( P.L. 111-152 ). The Secretary of HHS would be further required to publish each application for a waiver, the determination of the Secretary of HHS whether to approve or reject the application, and the reason for such approval or rejection. H.R. 1184 / S. 650 would also expressly prohibit preferential treatment being given to any waiver applicant based on political contributions or association with a labor union, a health plan provided for under a collective bargaining agreement, or another organized labor group.

Department of Defense and Full-Year Continuing Appropriations Act, 2011 (P.L. 112-10)

Section 1856(b) of P.L. 112-10 requires the Government Accountability Office (GAO) to submit to Congress a report that includes the results of an audit of requests for waiver of the restricted annual limit not later than June 14, 2011. The report must include an analysis of the number of approvals and denials of such requests and the reasons for such approval or denial.

Oversight

Concern regarding the favoritism toward unions in granting waivers, the frequency of the waivers, and the transparency of the waiver process has prompted oversight and legislative activity. On January 20, 2011, the House Energy and Commerce Committee sent a letter to the director of the Center for Consumer Information and Insurance Oversight (CCIIO) asking for, among other things, documents and information regarding the submission and approval of the waivers for restricted annual limits. Similar letters requesting additional details on the waivers and waiver applicants have been sent by Senator Hatch and by Senator Ensign. On March 22, 2011, the House Committee on Small Business sent a letter to the Secretary of HHS asking a series of questions and for documentation concerning the specific impact of the waivers on small businesses. The waivers have also been a topic of discussion in several hearings on PPACA.

For context, it is relevant to note that Congress has not consistently specified the manner in which information concerning health care waivers is to be released to the public. Indeed, the annual limits provision of PPACA does not even have a specific public reporting requirement. As a result of different legal standards, or in some cases the absence of a congressional directive, no standardized practice for releasing information about health care waivers has ever been developed. As illustrated in Table 2 , there is substantial variation in the release of information between different health care waiver types.

No obvious bias could be found in the publicly available application materials for the annual limits waivers. The available evidence suggests no favoritism for any particular applicant groups (e.g., unions). The Hill obtained records of waiver denials and reported that as of mid-February, CMS had denied 79 requests for waivers and that unions accounted for roughly 60% of those denials. Moreover, in completing the work required by P.L. 112-10 , the GAO found that CMS granted waivers when an application projected a significant increase in premiums or significant reduction in access to health care benefits rather than organizational factors (e.g., union membership, geographical location, number of employees).