My company is reviewing health coverage and plan design options to manage costs. One employee with hemophilia has high claims and requires ongoing expensive treatment. Our reinsurance carrier has imposed a $500,000 laser for this employee, creating a significant financial burden. Can we offer this high-cost claimant cash to purchase an individual policy through the Exchange to avoid covering them under our plan? Alternatively, can we design a plan that excludes treatment for hemophilia?
Individuals with serious, chronic illnesses often face significant health care expenses. For many employers, absorbing these costs—including any substantial stop-loss lasers—can be challenging. Naturally, many look to adjust their health plan designs to better manage expenses. While self-insured employers generally have more flexibility than fully insured ones, options for controlling costs related to chronic illnesses may still be limited.
Disease and data management programs can help, but employers are increasingly exploring ways to exclude high-cost claimants from their plans—whether by offering cash incentives or other approaches. However, several legal and compliance challenges may limit or prohibit these strategies. Key regulations to consider include the Americans with Disabilities Act (ADA), the Health Insurance Portability and Accountability Act (HIPAA), and the Affordable Care Act’s (ACA) market reform provisions, including its ban on employer payment plans.
Understanding the ADA and benefit design
The Americans with Disabilities Act (ADA), enforced by the Equal Employment Opportunity Commission (EEOC), prohibits discrimination against qualified individuals with disabilities. It applies to private, nonprofit, and government employers with 15 or more employees and covers all employment practices—including benefits, hiring, promotions, and compensation.¹
According to the ADA, “disability” includes physical or mental impairments that substantially limit major life activities, a record of such impairments, or being regarded as having one. Conditions like hemophilia may qualify as disabilities, meaning excluding related treatments or shifting costs (e.g., raising copayments or limiting provider access) could be viewed as discriminatory.
According to the EEOC Enforcement Manual, employers may be able to justify disability-based distinctions in benefit plans if they can demonstrate that such distinctions are:
- Bona fide — meaning the plan exists, pays benefits, and its terms are clearly communicated; and
- Not a subterfuge — meaning the distinction is supported by legitimate actuarial data or necessary to maintain plan solvency, and not intended to evade ADA protections.²
To support a disability-based distinction, employers may:
- Show the exclusion is based on a preexisting condition classification.
- Provide actuarial data demonstrating comparable treatment of similar conditions.
- Prove the distinction is necessary to keep the plan financially sound.
- Demonstrate that alternatives to the distinction would cause unacceptable cost increases or adverse selection.
- Use scientific data to show excluded treatments provide no medical benefit, provided similar treatments for other conditions are treated the same.²
It is important to understand that the ADA prohibits discrimination in benefits regardless of intent to discriminate in other employment areas. Employers should consult legal counsel before implementing any plan design that excludes or limits treatment for specific conditions.
HIPAA’s role in benefit exclusions
HIPAA’s nondiscrimination rules prevent group health plans and insurers from using health factors—such as health status, medical history, or disability—to discriminate in eligibility, premiums, or coverage.³ This means benefit exclusions cannot target individual participants based on their health.
There is a safe harbor if an exclusion applies uniformly to all similarly situated participants and takes effect no earlier than the start of the next plan year. However, targeting a single individual—even with a delayed effective date—is not permitted.
While HIPAA permits “benign discrimination” (treating individuals with adverse health status more favorably), offering opt-out incentives primarily to high-cost individuals is not allowed.³
ACA restrictions on employer payment plans
The ACA prohibits employers from paying high-risk employees to opt out of group coverage or reimbursing employees for individual health insurance premiums.⁴ Employer payment plans that reimburse individual premiums violate ACA market reforms and can trigger significant penalties.
Offering cash incentives to high-claimant employees to opt out is considered discriminatory and increases their costs to participate in the employer plan, which is prohibited.⁴ While the ACA allows some favorable eligibility or premium rules based on health factors, paying sick employees to opt out is not permitted.
ERISA and fiduciary responsibilities
The Employee Retirement Income Security Act (ERISA) sets standards for employee benefit plans, including fiduciary duties for plan sponsors. Recent regulations have increased scrutiny on plan management and compliance.
One key duty is the Duty of Prudence, which requires acting with care and diligence, including overseeing compliance with laws like the ADA, HIPAA, and ACA. Documenting decisions and rationale is critical when considering strategies related to high-cost claimants.
Conclusion
Managing the costs of chronic illnesses is a growing challenge for self-insured employers. While creative cost-containment strategies are emerging, legal risks and enforcement actions are increasing. Any plan design changes—especially those excluding or limiting treatment for specific conditions—should be carefully evaluated against ADA, HIPAA, ACA, and ERISA requirements.
Consulting with legal and benefits experts before implementing such strategies is essential to avoid potential penalties and litigation.
References
¹ADA Overview, U.S. Equal Employment Opportunity Commission
²EEOC Enforcement Manual, Section 902: Definition of Disability (1995), and EEOC Benefits Guidance
³HIPAA Nondiscrimination Rules, U.S. Department of Labor FAQs
⁴ACA Employer Payment Plan FAQs, U.S. Department of Labor
