Employer Plans Beware: Alternative Funding Programs May Be Riskier Than They Appear
Two key pillars of the Affordable Care Act (ACA) are its creation of essential health benefits (EHBs) and its imposition of annual limits on cost sharing. The ACA’s annual limits on cost sharing were designed to reduce health-related debt by establishing the maximum amount of out-of-pocket expenses individuals would be required to pay during a plan year. Meanwhile, the 10 categories of EHBs are items or services that all ACA-regulated plans must cover. Prescription drugs are one of the 10 EHBs. A designation as an EHB is important because all cost-sharing payments for an EHB must count toward a consumer’s annual limits on cost sharing. This requirement applies to all non-grandfathered health plans, including Employee Retirement Income Security Act of 1974 (ERISA) plans that voluntarily choose to cover EHBs. This provision ensures consumers are not required to exceed their annual limits for certain items and services that are considered core components of health insurance.
For patients with complex, rare, and chronic conditions, these annual limits on cost sharing have been indispensable. Treatment and care for patients with chronic conditions can be expensive, with one 2020 study finding that patients with chronic diseases spend five times as much on health care costs compared with patients without such conditions. As such, the cumulative costs incurred in managing a chronic condition can pose significant affordability challenges for many individuals, and this has been particularly true for patients using specialty medications. Specialty medications are more complex than most prescription drugs and are used to treat patients with serious and often life-threatening conditions including cancer, hepatitis C, and cystic fibrosis.
The often-high costs of specialty treatments have led some consumers to rely on third-party programs to help access their treatments. Third-party programs can include both patient assistance programs (PAPs), which are typically run by manufacturers or charitable entities and provide free medications directly to consumers; and copayment assistance programs, which help cover an individual’s cost-sharing requirements at the pharmacy counter. While patients are focusing on how to access and afford their treatments, employers are simultaneously trying to lower their health care spending for these specialty drugs. For employers, specialty drug spending can consume up to 50 percent of their prescription drug spend, despite less than five percent of the population requiring these treatments. As such, employers have turned to a variety of arrangements in attempts to lower their health care costs. One of the most recent trends for employers is adopting an alternative funding program (AFP).
What Are AFPs?
AFPs are third-party companies that work with employer-sponsored health plans to identify alternative sources for the plan participants’ specialty drugs. These alternative sources typically include PAPs, international importation, and copay assistance programs. AFPs allege specialty drugs are non-essential health benefits (non-EHBs) not subject to the ACA’s EHB coverage requirements and protections. This approach permits the alternative funding program to tell consumers to work with the AFP or be responsible for a 100 percent coinsurance that will not count toward their deductible and annual out-of-pocket limit due to the drug’s non-EHB designation. Thus, with no genuine option, consumers agree to work with the AFP to access their medication.
Under an AFP, a patient will be automatically denied coverage, through a drug exclusion or prior authorization, for their medication to appear “underinsured” for purposes of the PAP application, as most PAPs require an individual to be either underinsured or uninsured. The AFP will then reach out to the patient and ask for personal information, such as income, household size, and health status, to determine if they are eligible for a PAP. While the AFP is determining if the consumer is eligible for PAP assistance, some programs will also attempt to enroll the consumer in a drug manufacturer’s copay assistance program. This dual application is contradictory because, under the PAP application, the AFP is stating that the consumer is uninsured while simultaneously telling the copay assistance program that the consumer does have commercial insurance coverage for the drug.
If the consumer is eligible for the PAP, they will be required to receive their medication from the PAP for the entirety of the plan year. If a consumer is not eligible for the PAP, the AFP will then determine if the medication can be imported from outside the United States. If, after applying to a PAP and looking for an international source, the medication is not available, then some program materials state, “If financial assistance is not available for a specialty drug, [the] matter will be submitted for an automatic appeal and, if approved, [the] copayment will default to that of the drug category it falls under (e.g., preferred brand medication).” Once the medication is covered like a typical pharmacy benefit, the AFP will then apply to the manufacturer’s copay assistance program. This back and forth can be confusing for consumers and yield additional delays between when a consumer is denied financial assistance and when the needed medication is processed back through the plan.
Moreover, not every AFP operates exactly the same. For instance, in some cases, if no alternative source is available, the plan will not offer to cover the drug as a typical pharmacy benefit, resulting in enrollees being left without access to their medication. Ultimately, for consumers whose health plan has partnered with an AFP, these programs can cause significant delays in accessing treatments by complicating an already complex drug fulfillment process.
For employers, these programs are pitched as substantial cost-saving measures. Under a “successful” AFP, a plan beneficiary receives their medication at no cost to the plan; the plan’s only cost is what it must pay to the AFP for its services—which may be a flat rate fee per participant or up to 25 percent of the plan’s savings from not having to pay for the drug. However, as Lisa M. Gomez, assistant secretary of labor for the Employee Benefits Security Administration, said at a June 27, 2024, hearing in front of the House Committee on Education and the Workforce, subcommittee on Health, Employment, Labor, and Pensions, “These alternative funding programs are service providers who are going to employers and telling them that they will be able to save money on these high-cost specialty prescription drugs,” but “employers find that these programs are not what are being sold to them, and more importantly participants find that.”
Compliance Issues
While AFPs may appear as beneficial savings programs, in reality, these programs place employers at risk for a variety of compliance concerns.
Discrimination Against All Patients With Chronic Conditions Is Still Discrimination
While the ACA’s anti-discrimination provisions do not apply to employer-sponsored health plans governed by the ERISA, there are other laws applicable to ERISA plans that prohibit the same type of discriminatory behaviors.
For instance, employer-sponsored health plans using AFPs could be liable for discrimination under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Although HIPAA is a federal law that was originally intended to create national standards to protect sensitive patient health information from being disclosed without the consumer’s knowledge or consent, HIPAA also includes a lesser-known and less-used anti-discrimination provision that applies to a variety of entities, including employer-sponsored health plans. Under the HIPAA anti-discrimination provision, health plans are prohibited from discriminating based on health status, medical condition, claims experience, medical history, and disability.
HIPAA prohibits plans from limiting coverage for a specific disease or individual unless the limited coverage is applied uniformly across the entire plan to all similarly situated individuals. Similarly situated individuals are not individuals with the same conditions, but rather individuals with the same type of employment-based classification. The Department of Labor (DOL) has stated that groups of “similarly situated individuals” who can receive benefits that differ from other groups of similarly situated individuals include full-time versus part-time employees; dependents of a plan’s primary beneficiary versus the primary beneficiary; or employees in different geographic locations.
When the HIPAA anti-discrimination standard is applied to plans that work with AFPs, these schemes appear to be discriminatory based on a health factor because these programs only target specialty drugs, which are medications used to treat complex, chronic conditions. Thus, when plans work with AFPs to only target specialty drugs, they create a different set of benefits for employees with chronic conditions. Creating one set of benefits for employees with chronic conditions, a health factor under HIPAA, and another set of benefits for employees without chronic conditions could constitute a discriminatory benefit design based on a health factor. While plans might allege, they are not implementing a discriminatory plan design because they are requiring all similarly situated employees with chronic conditions to work with the AFP, this argument would likely fail because—as explained above—the DOL has explicitly stated an individual is not similarly situated because they have the same health factor as another employee; rather, they are similarly situated if they have the same employment status.
Even if an employee did not bring a private action against their employer for this benefit design, the Department of Health and Human Services Office of Civil Rights (OCR) could nonetheless take action against the employer. The OCR has authority to conduct investigations of alleged violations of HIPAA; impose corrective action and resolution agreements for plans found in violation of HIPAA; and impose civil penalties of up to $50,000 per violation if a plan refuses to make the appropriate changes. While the OCR has not yet found any plan working with an AFP liable for violating HIPAA’s non-discrimination requirements, it may only be a matter of time before an employee raises this issue in either a public or private forum.
The Failing Fiduciary
While ERISA imposes many obligations and responsibilities on plan sponsors, its key provisions relate to fiduciary responsibilities and disclosure of plan information. Violations of ERISA can result in civil penalties of up to $500,000 and criminal penalties under certain circumstances. ERISA has historically been recognized as a crucial compliance law for health plans to closely follow when administering plan benefits. As such, health plans should be conducting careful assessments of whether they can continue to comply with ERISA while using an AFP.
Under ERISA Section 404(a)(1), plans owe a fiduciary duty to plan beneficiaries to “discharge [their] duties ... solely in the interest of the participants and beneficiaries and for the exclusive purpose of … providing benefits to participants and their beneficiaries.” Providing benefits for the exclusive interest of beneficiaries requires that the payment of plan benefits be reasonable and prohibits plan sponsors from engaging in transactions on behalf of the plan that benefit the plan sponsor rather than the beneficiary. The US Supreme Court also clarified in Varity Corp. v. Howe that “[t]o participate knowingly and significantly in deceiving a plan’s beneficiaries in order to save the employer money at the beneficiaries’ expense is not to act ‘solely in the interest of the participants and beneficiaries.’”
When reviewing how AFPs partner with ERISA plans, there are several bases upon which this partnership may violate the “exclusive benefit” obligations. Health plans using AFPs typically allege that prescription drugs, including specialty drugs, are accessible through the plan’s coverage. However, when a plan beneficiary attempts to fill a prescription for a specialty medication, the medication is often deemed excluded from coverage unless the beneficiary works with the AFP. This scenario appears to be the exact type of intentional deceit for the benefit of employer cost savings that the US Supreme Court held in Varity Corp. that was a violation of the exclusive benefit requirement. Moreover, by coercing plan members to enroll in an AFP, health plan sponsors engage in a transaction for the benefit of the health plan and not the exclusive benefit of plan beneficiaries. Therefore, if challenged, a court could find plans that partner with an AFP violate ERISA’s fiduciary duty obligations.
Is There Such A Thing As Too Much Plan Savings?
Large group plans are required to spend 85 percent of premiums and rebates on health care claims, clinical care, and quality improvement measures. Only the remaining 15 percent can go toward administrative costs, marketing expenses, and profits. Plans that partner with AFPs are still subject to these “medical loss ratio” requirements and may unintentionally violate them due to the fees associated with AFPs.
As explained above, AFPs that successfully enroll a beneficiary in a PAP or copay assistance program typically charge plans either a flat fee or 25 percent of what the plan would have spent had the plan covered the medication. Thus, the question raised is whether fees and payments to AFPs result in plans exceeding their 85/15 percent thresholds.
The work of an AFP would not qualify as any clinical care or quality improvement measures, as clinical care refers to the actual treatment of a patient’s condition. Meanwhile, quality improvement measures include quality reporting, effective case management, care coordination, chronic disease management, and medication and care compliance initiatives. AFPs must be considered part of the plan’s administrative costs because these programs merely gather information from the consumer and submit this data to PAPs, copay assistance programs, and international pharmacies.
Submitting these applications on behalf of individuals is not akin to a case management, care coordination, or a medication compliance program. Case management programs are designed to assist individuals with chronic conditions by developing a comprehensive care plan that includes an individual’s health problems, goals, providers, medications, community services, and other information relevant to managing an individual’s condition. Unlike the holistic patient care approach provided by case management programs, an AFP solely focuses on sourcing the consumer’s medication and is not concerned with whether the patient actually remains treatment-compliant once they receive their medication. The lack of focus on patient treatment compliance is further demonstrated by some AFPs reportedly requiring patients to take a different medication when they are not eligible for one manufacturer’s PAP but may be eligible for another manufacturer’s PAP (see AbbVie v. Payer Matrix complaint). As such, when health plans partner with AFPs, the funds paid to these programs are administrative fees subject to the plan’s administrative spending limit.
Thus, all of a health plan’s payments to an AFP are part of the plan’s administrative spending and could push the plan’s spending above the 15 percent administrative-marketing-profit threshold, which again, could violate the 85/15 percent spending requirements.
Next Stop For Consumer Protection Reform: AFPs
With increasing federal and media scrutiny on pharmacy benefit managers and their lack of transparency, AFPs may also swiftly reach the Federal Trade Commission’s (FTC’s) radar. AFPs could reach the FTC through its ongoing investigation into pharmacy benefit managers or through AFPs being deemed unfair trade practices under the FTC Act. The FTC Act allows the FTC to define a practice as unfair if it causes or is likely to cause a substantial injury to consumers that is not reasonably avoidable and is not outweighed by countervailing benefits to consumers or competition. AFPs appear to satisfy each of these elements.
For instance, AFPs deprive consumers of the benefit of their premiums by requiring consumers to pay a premium that includes prescription drug coverage, yet the plan then refuses to provide prescription drug coverage when the consumer needs it. AFPs also harm consumers by causing delays in access to medication due to the duration of the AFP sourcing process. Lastly, the harms caused by AFPs are also unavoidable due to how AFPs require plans to define specialty drugs as non-EHB and subject consumers to 100 percent coinsurance if they try to avoid working with the AFP. Thus, because these programs have such a negative impact on consumers’ health care and costs, it seems completely feasible for AFPs to soon attract the FTC’s attention.
Ultimately, while employers search for ways to lower health plan spending on prescription drugs, they should consider the risk of working with AFPs and whether the short-term savings are worth the potential for long-term liability. Furthermore, if the legal and compliance risks alone were unpersuasive, the negative impacts these programs can have on employees should be sufficient to convince employers to steer clear of partnering with AFPs.
Author’s Note
Ashira Vantrees is Counsel at Aimed Alliance. The Alliance’s members include a diverse range of health care stakeholders, including patient advocacy organizations, industry, employer groups, and charitable foundations.
