Appeals Court Rejects Argument That Embedded Cost-Sharing Regulation Applies Retroactively

In a dispute over an insurer’s interpretation of a health plan provision incentivizing use of generic drugs, a federal appeals court has held that the regulation establishing an “embedded” individual cost-sharing limit under the Affordable Care Act (ACA) does not apply before January 1, 2016. The regulation, which was published in February 2015, effective for plan or policy years beginning in or after 2016, provides that the ACA’s individual cost-sharing limit applies to each covered individual, whether the individual has self-only or family coverage (see our Checkpoint article). The beneficiary argued, among other things, that the embedded limit applied to claims she incurred before January 1, 2016. The trial court rejected this argument and determined that the beneficiary was required to satisfy the plan’s family cost-sharing limit for claims arising before the embedded cost-sharing regulation took effect. The beneficiary appealed.

Agreeing with the trial court, the Second Circuit affirmed that the embedded cost-sharing regulation did not apply to claims before its effective date in 2016. Concluding that the ACA is silent on the question of which cost-sharing limit—individual or family—applies to an individual covered under family coverage, the court determined that the regulation clearly applies only in 2016 and onward. The court also explained that the regulation is a legislative rule (i.e., a rule creating new rights and obligations)—rather than an interpretive rule (i.e., a rule clarifying the meaning of an ambiguous law)—and should only be enforced prospectively, a position taken by the agencies themselves. Noting that before the regulation took effect, no federal agency or court had read the ACA to require embedded cost-sharing, the court held that the cost-sharing limit for claims incurred before 2016 should be governed by the terms of the plan, which did not include an embedded cost-sharing limit.

EBIA Comment: Although somewhat controversial at the time it was issued, the agencies’ interpretation of the ACA annual cost-sharing limit—which effectively embeds an individual cost-sharing limit in all family group health plans—is now settled law. As a result, the self-only annual cost-sharing limit applies to each covered individual under all non-grandfathered group health plans (including self-insured, large group, and high-deductible plans), but only for plan or policy years beginning in 2016 or later. For more information see EBIA’s Health Care Reform manual at Section IX.B.3 (“Dollar Amount of Overall Cost-Sharing Limits”). See also EBIA’s Self-Insured Health Plans manual at Section XV.D (“Designing Cost-Sharing Features”). And don’t miss next week’s webinar, “Surprise Billing Protections Under the No Surprises Act: What Group Health Plans Should Know” (live on 5/11/2022).

Contributing Editors: EBIA Staff.