New Mental Health Parity Regulations May Drive Sponsors to Distraction

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1 To view this as a web page, go here. February 3, 2010 New Mental Health Parity Regulations May Drive Sponsors to Distraction Federal agencies issued late last week interim final regulations implementing the 2008 amendments to the Mental Health Parity Act. Those amendments, enacted in the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act, prohibit insurers and self-funded health plans from providing less generous benefits for mental and nervous and substance abuse treatment when compared to medical/surgical benefits. To effectuate true parity in benefits, the regulations require health plans offering mental health and/or substance abuse benefits to make a series of calculations to ensure that financial conditions and other limitations that apply to such benefits are no more restrictive than similar conditions and limits on medical/surgical benefits. The regulations were issued jointly by the U.S. Departments of Labor (DOL), Treasury (IRS) and Health and Human Services (HHS). The new regulations apply to ERISA plans as well as to non-erisa plans such as governmental and church plans. However, as under prior law, self-funded governmental plans may still choose to opt-out of the parity requirements, and the parity rules do not apply to employers with 50 or fewer employees. The original Mental Health Parity law (we'll call it "MHP I") prohibited health plans from providing annual or lifetime dollar limits on mental health benefits that were less generous than those that applied to medical/surgical benefits. However, plans could impose limits on the number of days of inpatient mental health care, and the number of outpatient visits. There were no parity requirements that applied to substance abuse benefits. The 2008 mental health parity law (we'll call it "MHP II") imposed more generous parity requirements for plan years beginning after October 3, However, because the federal regulatory agencies have only now issued guidance on MHP II, the new interim final regulations will apply for plan years beginning on or after

2 July 1, 2010 (e.g., January 1, 2011 for calendar year plans). Prior to that date, plans must make a good faith effort to comply with MHP II. A delayed effective date may apply to collectively bargained plans. For collective bargaining agreements ratified on or before October 3, 2008, the new regulations won't apply until the later of plan years beginning after July 1, 2010, or the date the bargaining agreement ends. Background Federal law - even after MHP II - does not require health plans to provide coverage for treatment of mental health or substance abuse conditions. However, if a plan provides these benefits, it must that provide coverage for mental health and/or substance abuse treatment that are on par with medical/surgical benefits. This means that health plans may not apply, to mental health and substance abuse treatment, limits or financial terms that don't also apply to medical/surgical benefits. Because the parity requirements apply only to plans that provide both (i) mental health or substance abuse benefits and (ii) medical/surgical benefits, some commentators suggested employers could skirt the rules by carving out mental health/substance abuse benefits into a separate "plan." Not surprisingly, the preamble to the regulations notes that an employer cannot create a separate plan for mental health and substance abuse benefits in order to avoid the parity requirements. Parity for Financial and Treatment Limits The regulations require parity with respect to financial conditions and treatment limitations. Financial conditions include deductibles, copayments and out-of-pocket maximums. Treatment limits include annual, episode and lifetime day and visit limits. The regulations impose a multi-step process for determining parity. Specifically, a plan cannot apply any financial condition or treatment limitation to mental health and substance abuse benefits that are more restrictive than the predominant financial condition or treatment limit that applies to substantially all medical/surgical benefits. This test is applied to each of six classifications of benefits noted below. Inpatient, in-network Inpatient, out-of-network Outpatient, in-network Outpatient, out-of-network Emergency care Prescription drugs A financial condition or treatment limitation applies to "substantially all" medical/surgical benefits in a classification if it applies to at least two-thirds of the medical/surgical benefits in the class. The "predominant" financial condition or treatment limit is the condition or limit that applies to more than half the medical/surgical benefits (in the classification) that are subject to the same sort of condition or limit. Some examples below help make sense of this requirement. The regulations require that plan sponsors "spreadsheet" the financial conditions and treatment limits that apply to each of the six classifications of benefits (as applicable) to determine if the "substantially all" and "predominant" tests are satisfied for plan benefits. Assume, for example, that a health plan has five different levels of coinsurance for inpatient, out-of-network

3 medical/surgical benefits (see the chart below). First, the plan calculates how much it expects to pay (in benefits) for covered services subject to each separate coinsurance rate. Note that the rules allow the plan to use any reasonable method to determine the dollar amount the plan expects to pay in each column. Coinsurance Rates 0% 10% 15% 20% 30% Total Plan's projected payments at the coinsurance rate % of total plan costs paid at the coinsurance rate Percentage of total plan costs that are subject to coinsurance $200,000 $100,000 $450,000 $100,000 $150,000 $1 million 20% 10% 45% 10% 15% N/A no coinsurance 12.5% % 12.5% 18.75% 1 $100,000/$800,000 = 12.5% In the example, 80% of all expected inpatient, out-of-network medical/surgical payments under the plan are subject to some level of coinsurance; 20% are not subject to coinsurance. Thus, a coinsurance requirement is said to apply to "substantially all" inpatient, out-of-network medical/surgical benefits, because coinsurance applies to at least two-thirds of all expected plan benefits for inpatient, out-of-network care. The "predominant" level of coinsurance for inpatient, out-of-network medical/surgical care is 15%. That's because, of all the inpatient, out-of-network benefits the plan expects to pay and that are subject to coinsurance, more than one-half (i.e., 56.25%) of those benefits are for care that is subject to the 15% coinsurance level. Consequently, the plan may not impose more than 15% coinsurance with respect to inpatient, out-of-network mental health or substance use disorder benefits. Special Rules The regulations impose several special and significant rules for purposes of applying these tests: Parity Applies Across Classifications and by Coverage Tier If a plan provides mental health or substance abuse benefits in any of the six classifications, it must provide mental health and substance abuse benefits in any classification in which medical/surgical benefits are provided, including out-of-network care. In addition, the parity requirements apply separately to each tier of coverage (e.g., single versus family coverage). Combining levels of coverage or benefits If there is no "predominant" financial condition or treatment limit that applies to a classification (because no single condition or limit applies to more than half the benefits the plan expects to pay in that classification), the plan can combine financial condition or treatment limit levels to determine the predominant level. However - and this is key - the plan cannot apply a financial condition or treatment limit that is more restrictive than the least restrictive condition or limit in the combination. For example, assume a plan imposes five different copayment levels on inpatient, out-of-network medical/surgical care, and expects to make benefit payments in the following amounts under each copayment

4 level: Copayment Rate $0 $10 $15 $20 $50 Total Plan's projected payments at the copayment rate % of total plan costs paid at the copayment rate Percentage of total plan costs that are subject to copayment $200,000 $200,000 $200,000 $300,000 $100,000 $1 million 20% 20% 20% 30% 10% N/A no copay 25% 2 25% 37.5% 12.5% 2 $200,000/$800,000 = 25% It's clear that a copayment requirement applies to "substantially all" inpatient, out-of-network medical/surgical benefits under the plan, because a copayment requirement applies to more than two-thirds (in fact, it applies to 80%) of all inpatient, out-of-network medical/surgical benefits the plan expects to pay. But there's no single "predominant" level of copayment for inpatient, out-of-network medical/surgical care because no copayment rate applies to more than 50% of all the benefits that are subject to a copayment and that the plan expects to pay for inpatient, out-of-network medical/surgical care. The plan could combine the $50 and $20 copayment levels, but those two levels still account for only 50% (not more than 50%) of all the medical/surgical benefits subject to a copayment that the plan expects to pay. By adding in the $15 copayment rate we finally exceed the 50% threshold. Thus, we can say that the "predominant" copayment rate that applies to inpatient, out-of-network medical/surgical benefits is a combination of the $50, $20 and $15 copayment rates. But under the regulations, in setting the maximum copayment rate for inpatient, out-of-network mental health/substance abuse benefits, the plan must take the least of three copayment rates in the combination. Thus, the plan may not impose more than a $15 copayment requirement for inpatient, out-of-network mental health/substance abuse care. Special rule applies to multi-tiered prescription drug benefits Prescription drug programs that base financial conditions (e.g., copayment or coinsurance rates) on reasonable factors such as brand name versus generic, "preferred" brand name versus "non-preferred" brand name, mail order versus pharmacy pick-up, etc., and make no distinction between drugs that are generally prescribed for medical/surgical conditions and those generally prescribed for mental health conditions or substance use disorders, are deemed to satisfy the parity requirement for financial conditions and treatment limits. But the drug programs must still satisfy the "procedural" parity requirements discussed below. Other Requirements No "Separate But Equal" Deductible for Mental Health and Substance Abuse Benefits A separate deductible for mental health and substance abuse benefits is not allowed, even if the deductible is equivalent to the deductible that applies to medical/surgical benefits. In other words, plans must have a combined deductible that applies to medical/surgical and mental health and substance abuse benefits.

5 Mental Health Providers are Comparable to PCPs The regulations do not allow health plans to consider mental health or substance use disorder providers as "specialists" in determining the plan's treatment or financial limitations. In other words, a mental health or substance use disorder provider must be considered the equivalent of a primary care physician when determining parity. This appears to be the case for all mental health and substance use disorder providers, including psychiatrists. Procedural Parity Required The regulations require "nonquantitative treatment limits" for mental health and substance abuse benefits to be comparable to medical/surgical benefits. The regulations list examples that include medical management standards, reimbursement rates for providers, and exclusions based on failure to complete a course of treatment. With respect to prescription drug programs, formulary design and step-therapy protocols must be comparable to the requirements that apply to drugs for medical/surgical conditions. Some prescription drug programs may have problems satisfying these vague standards. We expect the agencies will receive comments on this issue, and we hope they clarify or simplify the rule. Employee assistance plans (EAPs) are allowed under the regulations, but an EAP cannot be used as a gatekeeper for an enrollee to access comprehensive mental health or substance abuse benefits unless the plan has a comparable requirement for medical/surgical benefits. Opt out for Increased Costs Plans that can demonstrate a cost increase of at least one percent (two percent for the first year this new rule applies to the plan) may apply for an exemption from the law's requirements. If granted, the exemption applies prospectively, for one year at a time. The agencies have reserved guidance on this issue. This cost-based exemption was also available under MHP I, but few plans attempted to satisfy the exemption requirements. What about Autism and Other High Cost Treatments? Mental health and substance abuse benefits provided under the plan must be "consistent with generally recognized independent standards of medical practice." The new regulations prohibit treatment limitations that don't apply to medical/surgical benefits, but the definition of "treatment limitations" indicates that a permanent exclusion for all benefits for a particular condition or disorder is not a "treatment limitation." Consequently, it appears a plan may continue to include broad exclusions for treatment of autism, eating disorders, substance abuse, etc. 3 However, insured and non-erisa plans may be subject to state regulation on these matters. For example, many states have required that insured plans provide coverage for the diagnosis and treatment of autism. Notice Requirements Upon request, plans will be required to disclose their criteria for making medical necessity determinations for mental health and substance abuse treatment. Claim denials for mental health and substance abuse benefits

6 must be communicated in accordance with ERISA's claims procedures. 3 However, exclusions for certain mental health conditions may raise issues under the ADA. EEOC has yet to issue guidance on this issue. -- Mark Holloway, JD Compliance Services Lockton Benefit Group Compliance Services Ed Fensholt, JD Mark Holloway, JD Sara Roy, RP Not Legal Advice Nothing in this Alert should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton's compliance services group are not privileged under the attorney-client privilege. Circular 230 Disclosure To comply with regulations issued by the IRS concerning the provision of written advice regarding issues that concern or relate to federal tax liability, we are required to provide to you the following disclosure: Unless otherwise expressly reflected herein, any advice contained in this document (or any attachment to this document) that concerns federal tax issues is not written, offered or intended to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the IRS. Securities offered through Lockton Financial Advisors, LLC a registered broker-dealer and member FINRA, SIPC. Investment advisory services offered through Lockton Investment Advisors, LLC, a SEC registered investment advisor. For California, Lockton Financial Advisors, LLC, d.b.a. Lockton Insurance Services, LLC, license number 0G This was sent by: Lockton Companies, LLC 444 W. 47th Street, Suite 900 Kansas City, MO United States We respect your right to privacy - view our policy