On-Site Clinics Can Bring Value, Efficiency And a Host of Compliance Issues

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1 September 24, 2015 On-Site Clinics Can Bring Value, Efficiency And a Host of Compliance Issues For employers with several hundred workers at a single location, an on-site clinic can be an effective tool to enhance employee productivity and wellness. On-site clinics can range from an on-site occupational nurse to full-blown clinics staffed with physicians, including specialists, who provide diagnostic tests and dispense drugs through an on-site pharmacy. But on-site clinics can trigger a host of compliance-related issues, and those issues become thornier as the on-site clinic becomes more robust. This update addresses some of the employee benefits compliance issues for clients who are considering an on-site clinic. On-Site Clinics and ERISA If an on-site clinic is a welfare benefit plan subject to ERISA, the plan sponsor must satisfy a number of requirements, including the following: Maintaining the plan under an ERISA-compliant written plan document; Distributing a summary plan description, as well as a summary of material modifications when the plan is amended; Following ERISA s guidelines for claims submission and appeals, as applicable; Filing a Form 5500 (unless an exception applies); Furnishing copies of plan documents to participants when requested; Procuring a fidelity bond for people who handle plan funds, if any; and Offering employees (and dependents, if applicable) the opportunity to extend coverage under COBRA. Penalties can apply if the on-site clinic is an ERISA plan and the employer does not follow these requirements. For example, a penalty of up to $110 per day can apply if the plan does not notify an individual of his or her COBRA rights on a timely basis. Failure to file a Form

2 5500 can result in penalties of up to $50 per day for later filers ($300 per day for non-filers). ERISA applies to benefits programs (unless maintained by a church or government entity) that provide medical, surgical or hospital care or benefits, or benefits in the event of sickness, accident or disability. This broad definition would appear to embrace on-site clinics, but there is an ERISA exception for very modest clinics those that are maintained on the premises of an employer for the treatment of minor injuries or illness or rendering first aid in case of accidents occurring during working hours. Lockton comment: We are not aware of any Department of Labor (DOL) opinion letters that address the parameters of the exception for on-site clinics. With respect to employee assistance programs (EAPs), the DOL has noted that programs that provide even modest counseling benefits are considered ERISA plans. Presumably, the DOL would apply a similarly broad standard for on-site clinics unless the clinic is confined to treating workplace injuries or minor illnesses like headaches, sore throats, etc. Most clients will want to err on the side of caution and assume that ERISA applies to their onsite clinic, particularly where the clinic provides care similar to primary care an individual could receive in a physician s office or where the clinic will treat employees dependents. ERISA applicability is not the end of the world! Even if ERISA applies, the clinic does not have to comply with all of ERISA s rules (for example, breast reconstruction following a mastectomy, mental health parity or 48 hours of inpatient care following childbirth). In addition, one positive aspect of ERISA coverage of an on-site clinic is that participants who sue are limited in their ability to collect damages (and before a person can sue, he or she must exhaust the plan s appeal procedures). Under ERISA, the plaintiff can recover only plan benefits and attorney s fees. Other forms of recovery are not permitted, such as state law actions for punitive, exemplary or consequential damages. This can be a key consideration for employers who are contemplating on-site clinics. If the employer s clinic qualifies as an ERISA plan, the employer can structure the clinic as a separate plan or include it as a component of an existing plan (e.g., as coverage included in a wrap document).the compliance burden is often eased when the clinic is included as a component of an existing plan. Perhaps the most troubling aspect of ERISA coverage is the prospect of offering COBRA coverage and, thus, allowing on-site clinic access to former employees. The COBRA issues are discussed below. COBRA Issues Unless a healthcare plan is maintained by a church, continued coverage under the plan must be offered pursuant to the coverage continuation law known as COBRA. The requirement to offer COBRA applies to individuals who lose eligibility as a result of a qualifying event described in the COBRA statute. The continued coverage can be, and frequently is, offered on a self-pay basis. Qualifying events include the employee s termination of employment or death, or (with respect to dependents) divorce, legal separation or a child ceasing to meet the plan s eligibility rules.

3 Employers are rarely keen on allowing former employees back onto their premises to access an on-site clinic, even though the COBRA rules require that access be granted. Of course, to gain that access, the former employee must first elect COBRA coverage and then pay for it. If the employer treats the on-site clinic as bundled with the major medical plan, then a COBRA offer (and election of coverage) under the major medical plan would allow the former employee access to the on-site clinic. If the employer treats the on-site clinic as a separate healthcare plan, then a separate COBRA notice (and election) would have to be offered with respect to the clinic, in the wake of a COBRA qualifying event. Many employers treat the on-site clinic as part of the major medical plan. The offer of COBRA coverage under that plan thus includes, but doesn t necessarily have to specifically mention, access to the on-site clinic. Frankly, the employer hopes it never occurs to the former employee that if he or she elects COBRA coverage, he or she is also purchasing continued access to the on-site clinic. In fact, it rarely does occur to the former employee. Some employers treat the on-site clinic as a separate plan or allow coverage under the clinic for employees even if they are not enrolled under the major medical plan. In this situation, it s difficult to avoid apprising a former employee of his or her COBRA rights with respect to the clinic after termination of employment and its consequent loss of eligibility. But there might be a way out of that notice obligation. To avoid sending the former employee (or dependent) a COBRA election notice regarding the on-site clinic, the employer might ensure the on-site clinic plan document provides for continued eligibility, without additional (or any) cost, to covered individuals for as long a period after a COBRA qualifying event as the COBRA law would otherwise require. Under the COBRA law, a right to COBRA coverage doesn t arise unless eligibility is lost, due to a qualifying event, before the end of what would have been the covered individual s COBRA coverage period. In short, the on-site clinic effectively meets what would have been its COBRA obligation by continuing eligibility through what would have been the COBRA coverage period. The clinic is just a bit coy about how it communicates that fact. The on-site clinic plan document (seldom read by employees) will provide for continuing eligibility of the former employee, but the employer does not draw the former employee s attention to this fact by sending the former employee a COBRA election notice regarding the clinic. Again, in almost all cases, it never occurs to the former employee that he or she has clinic access after termination of employment. HIPAA Privacy and Security The HIPAA privacy and data security rules apply to group health plans and certain healthcare providers. If a plan or provider is subject to these rules, a number of requirements apply, including the following: Distribution of a privacy notice; Development of policies and procedures to ensure the confidentiality of protected health information (PHI), including electronic PHI; Requirement to have agreements in place with business associates; and

4 Allowing individuals access to their PHI. On-site clinics are exempted from the definition of group health plan for purposes of the privacy and security rules. Arguably, this exception applies even if the on-site clinic is considered an ERISA welfare plan, although the regulatory agencies have not specifically addressed this topic. Although a clinic is exempted from the privacy and security rules in its capacity as a group health plan, it is possible the clinic could be considered a healthcare provider subject to those rules. The HIPAA privacy and security rules apply to any provider that electronically conducts standard transactions (billing, payment, etc.). One way for an on-site clinic to dodge the rules would be for the clinic s staff to avoid any of the standard electronic transactions. If the employer has outsourced the operation of its clinic, the agreement should stipulate that the operator of the clinic will comply with applicable HIPAA requirements and indemnify the employer for the operator s failures. Keep in mind that even if the clinic is exempt from the HIPAA privacy rules, state laws that require the confidentiality of medical information would likely apply. Obviously, it just makes sense that the employer consider its clinic s treatment records highly confidential. Health Reform and On-Site Clinics Among other things, the federal Affordable Care Act (ACA) requires certain group health plans to comply with various insurance market reforms, penalizes individuals who do not maintain minimum essential coverage (MEC), penalizes employers who do not offer at least MEC to their full-time employees (and their children) or who offer MEC that fails to meet certain minimum requirements, and imposes numerous taxes and fees. Market reforms: In general, the ACA market reforms do not apply to on-site clinics. Thus, for example, on-site clinics are not required to provide all preventive care services without cost-sharing. MEC: Coverage under an on-site clinic is not considered MEC for purposes of the individual or employer mandates. Thus, if the only coverage an individual has is coverage for on-site clinic access, the individual will not satisfy the individual mandate. Similarly, if the only coverage the employer offers a full-time employee is on-site clinic access, the employer risks penalties under the ACA. W-2 reporting of health insurance costs: Reporting the cost of on-site clinic coverage is optional unless the clinic provides medical care and a separate COBRA premium is charged. Patient-Centered Outcomes Research Institute (PCORI) Fee: The fee will not apply, provided the clinic is treated as a HIPAA excepted benefit (discussed above). Transitional Reinsurance Fee (TRF): The fee will not apply, provided the clinic is a HIPAA excepted benefit (discussed above). Even if not an excepted benefit, only healthcare plans supplying what the ACA calls minimum value must pay the TRF. It is virtually impossible for an on-site clinic to supply minimum value because that would require the clinic to provide inpatient hospitalization. Cadillac tax: The value of on-site clinics providing more than de minimis medical care is included when calculating the ACA s Cadillac tax, which takes effect in Future

5 regulations will likely address how to determine the clinic s value. Nondiscrimination Issues Nondiscrimination rules apply to self-insured medical plans under Tax Code Section 105(h). The regulations do not contain an exemption for on-site clinics (most likely because few employers had on-site clinics in 1980 when the rules were finalized). Assuming the clinic is available to all or nearly all employees and all eligible employees qualify for the same benefits, the plan should pass the nondiscrimination requirements. Under the Section 105(h) rules, the client needs a written plan. An ERISA-compliant summary plan description (SPD) or plan document would appear to satisfy the requirement. In order to avoid Section 105(h), the regulations require that the insurance risk be shifted to a licensed insurer. Most companies that operate clinics are not licensed insurance companies. Therefore, Section 105(h) will be a relevant consideration in most instances. Note that the ACA calls for similar nondiscrimination rules to apply to insured benefits. Federal authorities have said these rules will not apply until regulations have been issued, so insured clinics will not be subject to nondiscrimination rules until after those regulations are issued. Medicare Part D Creditable Coverage Notices Employers whose group health plans provide prescription drug coverage are required to notify Medicare-eligible employees and dependents about whether the prescription drug coverage is considered creditable (that is, at least as good as Medicare Part D coverage). Centers for Medicare and Medicaid Services (CMS) has developed guidelines on how this determination is made and created model notices that can be used by employers. A group health plan for Medicare Part D purposes is broadly defined as a plan providing medical care to participants and beneficiaries through insurance or otherwise. Consequently, if an on-site clinic includes a pharmacy or the clinic s staff issues prescriptions, it appears the employer may have to distribute Part D notices to Medicare-enrolled participants. If the clinic does not provide prescription drugs, the employer does not need to distribute Medicare Part D notices. Is an On-Site Clinic Disqualifying Coverage for HSA Purposes? Only eligible individuals can contribute to a health savings account (HSA). As a general rule, in order to qualify as an eligible individual, the employee must be covered under a high deductible health plan (HDHP) and cannot have other health coverage that is not high deductible coverage. Existing IRS guidance indicates that coverage through an on-site clinic does not disqualify an otherwise eligible individual if the individual pays for the full fair market value of coverage, or the services provided by the clinic are limited to preventive care and/or insignificant medical care. It is not always clear what constitutes insignificant medical care; however, an example in existing IRS guidance has noted that the following items would qualify as a mix of preventive and insignificant medical care: Physicals and immunizations;

6 Injecting antigens provided by employees (e.g., performing allergy injections); A variety of aspirin and other nonprescription pain relievers; and Treatment of injuries caused by accidents where the clinic is located. Other Business Decisions to Consider Professional Liability Insurance and indemnification: Where the on-site clinic is operated by a third-party vendor or healthcare provider, the vendor or provider should maintain adequate levels of professional liability insurance and agree to indemnify and hold harmless the employer from any negligent acts related to patient care/services. Selection of providers: If a third party operates the clinic, it should maintain the responsibility to select, contract with and manage all healthcare providers and other employees or contractors who provide patient care services. In addition, third party providers should hold the responsibility of ensuring that all persons providing healthcare services are licensed, credentialed and authorized under all applicable laws to provide such services. Corporate practice of medicine: Some states, including California, Illinois, New York and Texas, do not allow corporations to employ doctors to provide outpatient services. The rationale is that the needs of the patient could be compromised if the doctors are corporate employees. States that have these laws usually allow formation of business corporations established as professional service corporations but only if controlled by the physicians. These laws could complicate an employer s attempt to employ physicians directly to staff its on-site clinic. On-Site Clinics Can be Complicated Lockton clients interested in on-site clinics should consider whether to directly contract with providers or use a third-party vendor to operate the clinic. For many employers, contracting with a third-party to handle staffing, liability insurance, etc., will be the easiest approach. Clients contemplating an on-site clinic should discuss the issues with their corporate counsel and one of Lockton s medical directors. Lockton Compliance Services 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 attorneyclient privilege Lockton Companies Lockton Benefit Group 444 West 47th Street Suite 900 Kansas City MO 64112