HHS Seeks to Delegate Key ''Essential Health Benefits'' Coverage Decision to States

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Contributed by Adam J. Falcone and Susannah Vance, Feldesman Tucker Leifer Fidell LLP

On December 16, 2011, the Center for Consumer Information and Insurance Oversight (CCIIO) within the U.S. Department of Health and Human Services (HHS) issued an informal bulletin in which CCIIO outlined the approach that HHS plans to take in future federal regulations on the scope of the “essential health benefits.” Under the Affordable Care Act (ACA),1 certain “qualified health plans” operating on the state-based health insurance exchanges (Exchanges) will be required to offer a minimum package of benefits—called the “essential health benefits”—effective January 1, 2014.

The ACA tasked the Secretary of HHS with defining the essential health benefits on a nationwide basis, and the healthcare industry has been eagerly anticipating how HHS would decide this question. The scope of the essential health benefits is a politically charged topic. An overly generous benefit package could discourage states from establishing Exchanges, or discourage insurance plans from participating in the Exchanges, and could lead to an escalation in health care spending.

On the other hand, an overly narrow benefit package could undermine the goal in the ACA to offer a meaningful range of primary, preventive, and specialty care services through the Exchanges to individuals who today are uninsured. Striking the right balance—choosing a benefits package that is both cost-effective and comprehensive—was bound to be a challenge for HHS.

In the bulletin, HHS dodged this challenge by explaining that in a future rulemaking, HHS will allow each state to choose a “benchmark” plan to define the scope of the essential health benefits in that state. This was a surprise to many stakeholders, as the ACA appears to mandate a federally uniform benefits package. From the perspective of federal-state relations, this approach may make sense. For health care consumers, providers, and insurers, however, there are many disadvantages to a system in which the scope of the “essential health benefits” differs from state to state.

Regardless of the political dimensions, the delegation of this key coverage decision to states may open HHS up to potential legal challenges, as the language of the ACA ostensibly requires HHS to define essential health benefits on its own. Such legal challenges could delay, or if successful, permanently block implementation of the Exchanges. In addition, HHS may have missed an important opportunity to make one aspect of the health care system more uniform and efficient.


Under the ACA, the Secretary of HHS is required to “define the essential health benefits” provided by plans known as “qualified health plans” (QHPs).2


The requirement to provide essential health benefits applies to a large portion of the health care industry. QHPs, the plans that must provide at least the essential health benefits, include individual and small group market plans operating both within and outside the Exchanges. (However, certain plans may under the ACA obtain “grandfathered” status and avoid the requirements associated with QHP designation.)

There is also a connection between the essential health benefits and coverage under government health programs. Under Medicaid, the federal-state program offering health care for certain low-income persons, states may choose to offer a “benchmark” benefit as Medicaid to certain non-disabled beneficiary groups; states are required to offer Medicaid in the form of benchmark coverage to individuals who are newly eligible for Medicaid as a result of the ACA. Effective in 2014, each Medicaid benchmark package must include, at a minimum, the “essential health benefits.” Similarly, any state Basic Health Program (a program option that states may elect under the ACA, with federal support, to provide coverage to low-income individuals who nonetheless have too much income to qualify for Medicaid) must cover at least the essential health benefits.

Self-insured group health plans and health insurance offered in the large group market are not subject to the essential health benefits requirements.


Effective January 1, 2014, each state is required under the ACA to establish an Exchange. The Exchange is a state governmental agency or nonprofit entity that facilitates the purchase of health insurance by individuals and small businesses. If a state elects not to establish an Exchange or HHS determines that the state will not have the Exchange operational by the required date, then HHS will establish and operate an Exchange in the state. Federal grants are available to states for the initial costs of establishing the Exchanges, but state-operated Exchanges must be self-sustaining as of January 1, 2015.

Except for certain limitations relating to immigration status, residency, and incarceration, anyone may purchase coverage on an Exchange. In addition, subsidies and tax credits are available to cover the costs of premiums and cost-sharing for Exchange enrollees with household income of less than four times the federal poverty level, who can demonstrate that they are not already eligible for “minimum essential coverage” through employer-sponsored insurance or a government program.

The Exchange operating in each state must certify that health plans meet all the requirements for QHPs—including the obligation to offer the essential health benefits—before plans may participate in the Exchange. Under the ACA, if a state wishes to require that QHPs offer benefits in addition to the essential health benefits, then the state must defray the cost of those additional benefits by making payments, either to the individuals enrolled in QHPs, or, on behalf of enrollees, to the QHP itself.

One important consequence of this provision of the ACA is that if state law requires health plans to cover any service that is not part of the essential health benefits, then the state must cover the costs of providing the mandated service on the Exchange. (Two examples of health care services mandated by some states, and not typically covered under many employer plans, are in vitro fertilization and applied behavioral analysis for autistic children.)


The Affordable Care Act directs the Secretary of HHS—not state governments, private health plans or employers—to establish the essential health benefits. HHS must adhere to two limitations in defining the scope of essential health benefits. First, the essential health benefits must include ten “general categories and the items and services covered within the categories.”3 The ten categories are: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance abuse disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.

Second, HHS must ensure that the scope of the essential health benefits is “equal to the scope of benefits provided under a typical employer plan, as determined by [HHS].” Within the ten categories of services that must be included in the benefit package, it is up to HHS to decide on benefits covered within each category, using an HHS-defined typical employer plan as the reference. The essential health benefits defined by HHS can include limits on the duration and scope of coverage. For example, within the category of “rehabilitative and habilitative services,” HHS could provide that essential health benefits will cover no more than a certain number of physical, occupational, or speech therapy visits.


The document that HHS issued on December 16, 2011, entitled Essential Health Benefits Bulletin, is not an official agency regulation, but instead, a press release of sorts describing the approach that HHS plans to take in a future rulemaking process in defining the essential health benefits. HHS proposes that the essential health benefits will vary from state to state, and shall be based on a “benchmark plan” selected by each state. The benchmark plans among which states may choose, under the Bulletin, are the following:

  1. The largest plan by enrollment in any of the three largest small-group insurance products in the state’s small group market;
  2. Any of the largest three state employee health benefit plans by enrollment;
  3. Any of the largest three national Federal Employee Health Benefit Plan (FEHBP) plan options by enrollment; or
  4. The largest insured commercial non-Medicaid health maintenance organization (HMO) operating in the state.

The state-selected benchmark plan would serve as the “typical employer plan” referenced in the ACA. Thus, the scope of and limitations on benefits under each of the ten categories listed in the ACA would be defined by the benchmark plan. States would be required to make their benchmark plan selection by the third quarter of the year two years before the applicable benefit year—i.e., state selections to take effect on January 1, 2014, when the Exchanges are launched, must be made in the third quarter of 2012. States would be required to supplement the benchmark package if the benefit package does not include any coverage in any one of the ten statutory categories of essential health benefits.4 (HHS explained in the Bulletin that it had not yet decided what approach to take for requiring such supplementation.)

In the Bulletin, HHS offered several rationales for allowing states to decide the content of the essential health benefits:

  • An HHS-commissioned report issued by the Institute of Medicine (IOM) of the National Academies in October 2011 recommended that HHS offer states that operate their own Exchanges some flexibility in implementing the federally-defined essential health benefits package.
  • HHS noted that according to IOM’s report, small-group insurance products, state employee benefit plans, FEHBP plans, and commercial HMOs do not actually differ significantly in the range of services they cover; these types of plans differ more in the amount of cost-sharing imposed on enrollees.
  • HHS explained that its benchmark approach was informed by the approach used in the Children’s Health Insurance Program (CHIP) and Medicaid, under which states may select benchmark packages, based on health insurance offerings available in the state, for covering some beneficiary groups.

HHS’s approach in the Bulletin was clearly intended to give states flexibility that would make it easier for them to meet federal mandates and would encourage them to proceed with establishing Exchanges. For example, HHS noted in the Bulletin that if a state chose the first benchmark option listed above—the largest plan by enrollment in any of the three largest small-group insurance products in the state’s small group market—as its benchmark, then the state would not need to incur additional costs to defray the cost of including state-mandated services in the essential health benefits, because small-group products typically already include state-mandated services.


The decision by HHS to delegate the definition of essential health benefits to states suffers from two inherent weaknesses. First, a regulation taking the approach outlined in the Bulletin may be the subject of legal challenges, on the ground that it violates federal law by delegating to states a decision that Congress required HHS to make. Second, on a policy level, the variation in essential health benefits from state to state will cause confusion and inefficiency in the health care system.


Congress intended for HHS to establish the scope of the essential health benefits. Section 1302(b) of the ACA, which establishes the requirement that HHS define the benefits package, refers to no fewer than thirteen specific responsibilities of the Secretary of HHS within this decision-making process. HHS’s responsibilities include not just defining the essential health benefits and determining the “typical employer plan” informing the scope of those benefits, but also considering specific policy factors listed in the statute, periodically reviewing and updating the essential health benefits in years to come, and reporting to Congress on the results of the review.

Federal courts have uniformly invalidated federal regulations or other agency actions that “subdelegate” a federal agency’s statutory responsibilities to an entity outside the agency, absent an express authorization from Congress to do so.5 Federal court decisions have made clear that a statutory grant of decision-making authority to a federal agency does include the power to subdelegate that authority to entities outside the federal government. Courts have held that this principle holds true even where the outside entity to which decisions are “subdelegated” is a sovereign entity, such as a state, rather than a private entity.

HHS’s decision to subdelegate to states the definition of “essential health benefits” goes against the structure of the ACA, which sets forth an entirely federal framework for establishment of the rules governing the essential health benefits as offered by QHPs. The statute makes equally clear that the concept of “essential health benefits” is not state-specific, by providing that if a state wants to require that QHPs offer benefits in addition to the essential health benefits, the state must cover the cost of those extra benefits. This provision would make no sense if Congress had intended for states to have a role in defining the scope of the package of essential health benefits.

Federal courts, in justifying the rule of statutory construction disfavoring “subdelegation” described above, have noted the potentially adverse impact of subdelegation on a coherent federal statutory scheme. The ACA conveys a national vision of making a standard set of health benefits more affordable to low-income individuals nationwide. The proposed subdelegation of authority to the states to decide the content of the essential health benefits will make it difficult for HHS to periodically review, report to Congress on, and update the benefits package, as required by the statute, and hence will diminish HHS’s accountability to Congress for the successful implementation of this critical portion of the law.


The delegation of the definition of essential health benefits to states may have some unintended consequences. First, this subdelegation may magnify the discrepancies in health care options available from state to state. It can be anticipated that states that are already refusing or hesitating to implement other mandates under the ACA will select benchmark plans that offer fewer benefits to QHP enrollees, in order to minimize the burdens on participating plans and the potential exposure of the state. Moreover, for states that refuse to make an election, the Bulletin proposes a default benchmark plan of the first option listed above: “the largest plan by enrollment in the largest product in the State’s small group market.” In most instances, with the exception of state-mandated services covered in small group plans, this default option would represent the least generous benefit package of the four options presented in the Bulletin.

In addition, a system in which the “essential health benefits” differ from state to state may cause ripple effects in other federal health care programs, making the entire system less coherent. The ACA is a complex statutory scheme that seeks to streamline the relationship among various health care coverage options, including Medicaid, the Basic Health Programs, and coverage on the Exchanges. It is true that, as HHS pointed out in the Bulletin, the Medicaid and CHIP programs use a state-selected benchmark approach. (In Medicaid, this approach is limited to certain populations.)6 However, in the cases of Medicaid and CHIP, Congress explicitly required HHS to use this type of “benchmark” model in order to give states significant flexibility; Congress mandated no such state input in the ACA provision on essential health benefits.

In fact, the proposed approach actually undermines certain Medicaid reforms contained in the ACA that seek to create more uniformity from state to state in the benchmark Medicaid coverage by establishing the essential health benefits as a minimum standard for such coverage. “Essential health benefits” is much less effective as a federally-defined “minimum” for Medicaid benchmark coverage when states have the power to adjust the content of the essential health benefits package.7

Finally, myriad provisions of the ACA make clear that Congress contemplated that more uniform and “seamless” coverage would be available post-health reform. This includes uniformity both between forms of coverage and among states. The ACA promoted this goal by ensuring that all low-income Americans qualify either for subsidized coverage on an Exchange or for coverage under Medicaid, a Basic Health Program, or CHIP; by harmonizing the standards and processes used to determine eligibility for these four forms of coverage; and by requiring states to institute coordinated application and enrollment functions for all of these programs.

It is key to this goal for the “essential health benefits” covered for most individuals under all of these programs to comprise a nationwide core of minimum coverage. HHS’s proposal to allow states to define the scope of “essential health benefits” seems fundamentally at odds with the ACA’s goal of standardizing the health benefits coverage available in the United States.

Adam Falcone and Susannah Vance are members of the health law and federal grants law practice groups at Feldesman Tucker Leifer Fidell LLP. They advise community health care organizations and health plans on regulatory, transactional and reimbursement matters. Mr. Falcone and Ms. Vance have represented clients in managed care contracts and negotiations, Medicaid and Medicare disallowances and disputes, and in the evaluation of proposed rules and regulations. For more information, please visit www.ftlf.com.  


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