Editor’s Note: This is the latest in a series of posts by Timothy Jost on the implementation of the Affordable Care Act.  Earlier posts have analyzed some important guidances, as well as provisions governing state waiver requests, student health plans, premium review (proposed rule and final rule), medical loss ratios, insurance exchanges, coverage for pre-existing conditions, appeals of coverage denials (interim final rule), coverage for preventive services, a patient bill of rights, grandfathered plans, tax-exempt hospitals, the small employer tax credit, the Web portal, reinsurance for early retirees, and young adult coverage.

Section 2719 of the Public Health Services Act, added by section 10101(g) of the Affordable Care Act (ACA), establishes a federal right to appeal health insurance coverage determinations and claims, both internally to a health plan or insurer, and, if an internal appeal fails, to an external reviewer.  The right to appeal is one of the most important consumer protections added by the ACA.  It applies to health insurance claims in the individual, small group, and large group market, and to self-insured as well as insured plans; indeed to all plans covered by the ACA except for grandfathered plans.

The incidence of health insurance claim denials is significant.  A Government Accountability Office (GAO) study this spring found claim or preauthorization denial rates of 11 to 24 percent of total claims in the states studied.  But claim denials are often reversed when the enrollee is allowed to appeal the denial.  The GAO found that between 39 and 59 percent of denials were reversed on internal appeal and an additional 23 to 54 percent were reversed or revised on external appeal.

Rules providing for internal appeals of employee benefit plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) were put in place in 2002, and a number of states have had provisions for internal and external appeals since the 1990s.  But prior to the adoption of the ACA, there was no right to an external appeal with respect to ERISA plans, and a number of states lacked or offered inadequate protection for appeal rights.  The only recourse for denied claims was often a costly lawsuit, which was seldom a realistic alternative.  Section 2719 filled these gaps.

Section 2719 was among those reforms that were effective beginning with the first plan year following the six month anniversary of the enactment of the ACA.  Interim final regulations implementing section 2719, which I described in an earlier blog post, were issued on July 22, 2010. The regulations were followed by guidance issued on August 23, 2010 establishing a federal external review procedure for self-insured plans and for plans in states that did not have an external review process.

The initial rules were quite strong, expanding on the protections offered by the existing ERISA internal review regulations and establishing a binding, impartial, external review process.  Almost from the beginning, however, the three agencies that issued the regulation (the departments of Health and Human Services, Labor, and the Internal Revenue Service) began to waffle in the face of intense lobbying from insurers and employers, delaying enforcement of some of the internal review provisions by a technical guidance issued in September of 2010 and again by another issued in March of 2011, and weakening the federal external review procedure in a September 2010 guidance.

On June 22, 2011, eleven months after the issuance of the initial rules, Treasury, Labor, and HHS released amendments to the interim final rule accompanied by further guidance which together significantly undermine the consumer protections found in the initial rule. Although the amendments do address some real practical difficulties that were encountered in implementing the initial rules, they also represent a movement away from the aggressive consumer protection stance represented by the earlier ACA rules toward a position more accommodating to the needs and desires of insurers and employers.  Consumer advocates lost to industry on virtually every issue addressed by the amendments and guidance, although in some instances changes were softened to address consumer concerns.

Changes In Internal Review Procedures

Extending the deadline for urgent claims. The amended rules and guidance change both the internal and external review procedures.  They make four changes to the internal appeals rules, each of which had been signaled by earlier guidance.  First, they permit plans up to 72 hours to make initial determinations involving urgent claims.  The 2002 ERISA rules had imposed a 72 hour standard, but the July 2010 rules had shortened the period to 24 hours.  The amended rule returns to the 72 hour standard, but also provides that the plan or insurer must defer to the attending provider as to the determination of whether a claim is urgent or not.

Removing the required inclusion of diagnosis and treatment codes. Second, the amended rule removes the requirement imposed in the July 2010 rule that plans and insurers include diagnosis and treatment codes in adverse benefit determinations.  This provision was intended to help beneficiaries understand which claims were being denied and why, but insurers and employers complained that the requirement was burdensome and of little value to consumers.  Some consumer organizations also raised privacy concerns regarding the disclosure of this information, since the notice might reveal confidential treatment information to someone other than the patient (a spouse or parent, for example) who might read the notice.  Plans and insurers must still provide diagnosis and treatment code information (and explanations) on request, and cannot treat a request for information as the initiation of an appeal.

Removing the penalty for certain procedural violations by plans and insurers. Third, the initial rule had provided that if a plan or insurer failed to strictly comply with all the procedural requirements of the rule, the claimant could be considered to have completed the internal review process and could move on to external review or to litigation.  The amended rule provides that if there is only a “de minimis” violation of procedural requirements that did not harm or prejudice the claimant, and that was “for good cause or due to matters beyond the control of the plan or issuer” and took place “in the context of an ongoing, good faith exchange of information,” and was not part of a pattern or practice of procedural violations, the claimant is not excused from completing the internal review process.

Weakening the requirement for notices in languages other than English. Finally, the rule changes the language requirements that apply to plan notices.  Section 2719 provides that notices of the availability of available internal and external appeals processes and of the possibility of consumer assistance must be provided in a “culturally and linguistically appropriate manner.”  The July 2010 rule provided that notices had to be provided if requested in non-English languages if 25 percent or more employees of small employers or 10 percent or more employees of large employers were literate only in the same non-English language.  Once a claimant requested non-English notices, subsequent notices had to be provided in the claimant’s language.

The amended rule drastically limits rights to notices in non-English languages, requiring only that plans and insurers in counties where 10 percent or more of the population is literate in a non-English language must include in notices a tag line in the relevant language saying that oral assistance and a written notice will be available on request in the non-English language.  There are 255 counties in the United States in which 10 percent or more of the population is literate in Spanish (78 or which are in Puerto Rico), but only six counties where 10 percent or more is literate in a language other than Spanish or English (including two in the Aleutian Islands where Tagalog is commonly spoken by Filipinos who work in the fish canneries).  No one else is entitled to any notice under the amended regulation.   It is hard to imagine that these limited rights are what Congress had in mind when it specifically mandated culturally and linguistically appropriate notices.

Changes In External Review Procedures

Section 2719 provides that plans and insurers must comply with state external review procedures that include the protections found in the National Association of Insurance Commissioners’ model external review act.  Self-insured ERISA plans not subject to state regulation or plans and insurers in states without an external review process that meets the NAIC standards must comply with similar procedures established by HHS.

The initial rule identified 16 minimal standards found in the NAIC model act that state external review processes had to include, but also established a grace period through plan years beginning before July 1, 2011 during which plans and insurers could comply with any applicable state external review process.  The August guidance established a federal review process to be used by self-insured ERISA plans (which are not subject to state regulation) and by plans in states that do not have external review procedures.

The amended rule and accompanying guidance effectively establishes four different external review procedures.  First, HHS will determine by July 1, 2011 whether a state’s external review standards meet the 16 minimum standards that characterize the NAIC’s model rule.  In states whose procedural standards meet these standards, the state’s processes will govern insurers located in these states.

Second, the guidance lists 13 minimum standards that characterize “NAIC-similar” consumer protections.  The external review laws of states that meet these standards will govern external review for insurers in those states for a transition period through the end of 2013.  HHS will also determine by July 1, 2011 whether state procedures meet these standards, and state review will only be available in states that meet neither the NAIC or NAIC similar standard through the end of 2011.

Third, insurers located in states that do not have an external review law that complies with either of these standards, as well as self-insured nonfederal governmental plans, must choose one of two federal programs, a external review program offered by the Office of Personnel Management under contract with HHS, or the program established under federal guidance in which which the plan contracts with accredited independent review organizations (IROs).

Fourth, self-insured ERISA plans must provide external review by contracting with IROs.

The 13 “NAIC similar” minimum standards have been drafted to cover states whose external review processes fall short of the NAIC standards in specific respects but still offer some protection to claimants. Thus, for example, external review processes can be found to be “NAIC similar” if they only allow 60 days for an appeal rather than 120, or if they allow 60 days for an external review decision rather than 45.  Some of the provisions are troubling, however.  It is not clear, for example, how the IROs that hear appeals in “NAIC similar” states are to be chosen, other than impartially, or what conflict of interest or quality control rules apply to them.  IROs also apparently need not be accredited.

The federal process under which plans contract with IROs is even more troubling.  Under the original guidance plans needed to contract with three accredited IROs and to assign cases to them randomly.  Plans protested that they could not find enough IROs and guidance was issued allowing plans to use one IRO.  Under the new guidance, plans must contract with at least two IROs by January, 2012 and three by July, 2012.  Plans still get to pick the IROs they contract with, however.  Consumer advocates have found that IROs chosen by plans are more likely to rule in the plans’ favor than IROs assigned to plans by states.  Obviously IROs are likely to take into account future business opportunities in their consideration of cases brought by a plan that has contracted for their business.

The amended federal external review rule also limits the federal external review process on an interim basis (probably until 2014) to plan determinations involving medical judgment and to rescissions.  “Determinations involving medical judgment” is a reasonably broad category, including medical necessity, appropriateness, health care setting, level of care, and effectiveness determinations.  The departments limited appeals to this category because they questioned the ability of IROs to decide non-medical issues and the appropriateness of IROs interpreting contracts. Consumer advocates had feared that the rule would only include appeals based on medical necessity, and this is clearly a broader category.

The limitation is problematic in at least two respects, however.  First, it excludes from appeals 80 to 90 percent of claims denials as classified in the AMA’s latest insurance report card.  Often determinations that do not explicitly involve medical judgment are still not cut and dried contractual decisions.  Second, it will often be difficult to draw the line between determinations involving medical judgment and those that do not.  Fortunately, the rule requires the external reviewer, and not the plan, to make the determination.

Finally, the rule clarifies that the fact that a determination by an IRO is binding does not prohibit a plan from paying for a service even though an IRO determines that it is not obligated to do so, and that a plan must comply with a binding determination even though it intends to seek judicial review of the determination.

What The Amended Rule Says About How The Administration Interprets The 2010 Elections

Although the amended rule and guidance significantly weaken the original rule, it could have been worse for consumers.  External review is still binding and external reviewers do not need to pay any deference to the decision of the plan or insurer.  Other important procedural protections, such as access to underlying records and standards on which a determination is made, remain in place.  A number of the changes were modified to satisfy some consumer concerns.

But it is difficult to read the amended rule without wondering about the politics that underlie it.  We are now in an election campaign. The administration seems to have concluded that health reform advocates have no choice but to support it, but that the business community needs wooing.  The concessions made by this rule may signal further concessions in important rules expected this summer and fall.

What direction the administration takes depends perhaps on how it reads the 2010 election.   The message it apparently has taken is that its agenda had been too radical and alienated important interests.  An alternative reading is that the administration has been too timid, and that those who supported it enthusiastically in 2008 stayed home in 2010.  I can only speak from my own experience.  Barak Obama did not carry every precinct in Harrisonburg, Virginia, in the reddest corner of a purple state, because he had the endorsement of the Chamber of Commerce.  He can only hope that the progressives who put in thousands of hours on the phones and knocking on doors to get him elected here in 2008 will show up again in 2012.  The administration needs to think seriously about this as it continues to implement the ACA.