Daily Rules, Proposed Rules, and Notices of the Federal Government
This document contains a notice of proposed exemption that, if granted, would provide exemptive relief from sections 406(a)(1)(A), 406(a)(1)(D), 406(b)(1), and 406(b)(2) of the Act, effective August 1, 2006, for the purchase of health insurance by the Plan from the HMO, a non-profit health maintenance organization wholly owned by the Plan's sponsor, Sharp, through a 100% non-profit membership interest.
Sharp is an integrated health care delivery system located in San Diego County. Sharp was created in 1946 as a non-profit association to raise funds to build a hospital and in 1955, based on a lead donation from Thomas E. Sharp, a hospital was built on 12.5 acres in Kearney Mesa, California. From that hospital, Sharp HealthCare has grown into a countywide system comprised of five hospitals, multiple clinics, and two pharmacies.
In 1992, Sharp established its own licensed HMO through a subsidiary corporation called “Sharp Health Plan.” The HMO is a 501(c)(4) corporation and Sharp is its sole member, with appointment authority over 100% of the HMO's Board of Director positions. The HMO offers a provider network that consists of 5 Sharp-affiliated hospitals, 5 Sharp-affiliated urgent care clinics, 11 Sharp-affiliated pharmacies, and 347 Sharp-affiliated (or Sharp-contracted) physicians in 4 different medical groups. Additionally, the HMO offers access to 7 non-Sharp affiliated hospitals, 25 non-Sharp affiliated urgent care clinics, approximately 360 non-Sharp affiliated pharmacies, and 570 non-Sharp affiliated physicians comprised of 290 physicians in 4 different medical groups, and 280 independent physicians. The HMO is licensed by the California Department of Managed Health Care and is offered to San Diego employers and individuals. The Applicant notes that the HMO and Sharp's facilities have a good reputation in San Diego County and have received numerous awards for quality over the years. Additionally, Sharp states that it has more licensed hospital beds than any other health care provider in San Diego County.
Sharp provides health benefits to its employees under the Plan. As of March 2012, the Plan had 10,993 participants and provided benefits to approximately 24,339 individuals. In 1993, Sharp began providing its employees' medical and vision benefits under the HMO. As the HMO is the only available option under the Plan, all participants were covered under the HMO. Each year, Sharp establishes a flat employee contribution rate for different levels of coverage (e.g., employee-only, employee plus-one, employee plus-family) and Sharp pays any remaining premiums based on the rates that it negotiates with the HMO. Between 2006 and 2010 Sharp paid approximately 85% of the premium cost of such coverage and employees paid the remaining 15% through pre-tax salary deferral contributions. Employee contributions are collected by Sharp, put into its general account and used as part of the premium payment to the HMO. The Applicant represents that all such plan assets are spent on premiums almost immediately upon being withheld from employees' paychecks. Employees also make co-payments directly to the actual providers of the medical care they receive, including Sharp, if the services have been provided in one of its facilities.
The HMO sets premiums for Sharp employees based on the experience of the Sharp employee population, as is the case with its other employer clients. The Applicant notes that, as a non-profit, the HMO only retains sufficient earnings to maintain its legally required reserves. In addition, the Applicant states that the HMO reduces its claims administration costs and is able to get better capitated rates from providers by pooling all of the covered lives under the HMO, rather than negotiating separate claims administration and capitated rate negotiations for just the Sharp employee population. According to the Applicant, this reduces the overall cost of health benefits under the Plan, ultimately reducing the cost Sharp employees pay for their coverage.
Sharp is designated as the plan administrator of the Sharp HealthCare Group Health and Welfare Plan.
Sharp's Vice President of Compensation and Benefits conducts an annual review to determine the reasonableness of total premiums paid by Sharp employees for coverage under the HMO. Sharp's Vice President of Compensation and Benefits also reviews the “employee share” rates to make sure that they are competitive when compared to the rates their peer employers are charging. The Applicant notes that the Vice President of Compensation and Benefits has used the services of outside vendors, such as Keenan & Associates and SDH Consultants to assist her in this comparison, and based on these surveys, Sharp has concluded that the premiums paid, as well as the employees' share of such premiums, for coverage under the HMO were reasonable.
The Applicant represents that for 18 years, Sharp has provided its employees with health insurance through the HMO, under the mistaken belief that this coverage was permissible under Prohibited Transaction Exemption (PTE) 79-41, 44 FR 46365 (August 7, 1979). The Applicant relates that, on April 5, 2011, the Los Angeles Regional Office of the Department of Labor (the Department) concluded an audit of the Plan and determined that the Plan's provision of coverage under the HMO did not meet the requirements of Section II(a)(1) of PTE 79-41, as described below.
PTE 79-41 provides that the restrictions of sections 406(a), 406(b)(1) and (2), and 407(a) of the Act and the taxes imposed by section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) through (E) of the Code, shall not apply to the sale, in any taxable year, by an insurance company which is a party in interest or disqualified person with respect to an employee benefit plan, of life insurance, health insurance, and annuities if certain conditions are met.
Section II(a) of PTE 79-41 provides that the insurance company making the sale must:
(1) [Be] a party in interest or disqualified person with respect to the plan by reason of a stock or partnership (including a joint venture) affiliation with the employer establishing or maintaining the plan that is described in section 3(14)(E) or (G) of the Act* * *,
(2) [Be] licensed to sell insurance in at least one of the United States or in the District of Columbia,
(3) [Have] obtained a Certificate of Compliance from the insurance commissioner of its domiciliary state within the 18 months prior to the date when the transaction is entered into or when such certificates were last made available by the domiciliary state, if earlier, and
(4)(i) [Have] undergone a financial examination (within the meaning of the law of its domiciliary state) by the insurance commissioner of such state within 5 years prior to the end of the year preceding the year in which the sale occurred, or
(ii) [Have] undergone an examination by an independent certified public accountant for its last completed taxable year.
The Applicant states that Section II(a)(1) has not been complied with because Sharp does not have a stock or partnership interest in the HMO, but instead is the sole member of the HMO, and as such, has the power to appoint 100% of the HMO's Board of Directors. Nevertheless, the Applicant contends that Sharp's control of the HMO is no less complete than it would be if Sharp's ownership interest was denominated in the form of stock or a partnership interest.
The Applicant maintains that the general premise undergirding PTE 79-41 is no less applicable in the case of a non-profit health care system whose ownership is through membership rather than a shareholder interest. In this regard, the Applicant states that health systems that maintain their own HMO or insurance policies invariably use those policies to provide health insurance benefits to their own employees. Thus, according to the Applicant, it would be “contrary to ordinary business practices, and unnecessarily restrictive, to require” an employer who is in the business of selling health insurance to purchase such health insurance for its employees from a competitor.
Furthermore, Sharp contends that its control of the HMO via a non-profit membership interest presents a non-substantive, technical violation of the class exemption that has no bearing on the relief afforded to the Plan and its parties in interest, or the protection of the interests of the Plan and its participants and beneficiaries. The Applicant states that the relationship between Sharp and the HMO reflects the “qualities” behind PTE 79-41's affiliation requirement. In this regard, the Applicant observes that Sharp and the HMO are part of a closely connected system that have a common mission and integrated operations, and that Sharp could not find an independent carrier that would be as responsive to employer and participant needs as the HMO. According to the Applicant, the fact that Sharp and the HMO are non-profit corporations and do not have stock or partnership interests, and, therefore, exercise control through Sharp's Board of Directors' appointment authority, does not in any way diminish Sharp's control over and comprehensive integration with the HMO. Thus, the Applicant submits that Sharp's failure to meet the affiliation condition of PTE 79-41, as described herein, is merely technical in nature and not meaningful to the Department's granting of relief under PTE 79-41.
The Applicant is therefore requesting a retroactive exemption from sections 406(a)(1)(A), 406(a)(1)(D), 406(b)(1) and 406(b)(2) of the Act for the Plan's purchase of health care coverage from the HMO, which Sharp wholly-owns through a non-profit membership interest, effective August 1, 2006 through and until the date of publication of a final grant of exemption in the
After considering the Applicant's request, the Department has determined to propose an individual prohibited transaction exemption. The proposed exemption has been requested in an application filed by Sharp pursuant to section 408(a) of ERISA and in accordance with the procedures set forth in 29 CFR 2570, Subpart B (55 FR 32836, August 10, 1990).
The Applicant urges the Department to propose exemptive relief, because, according to the Applicant, all of the conditions of relief required under PTE 79-41 have been satisfied with respect to the Sharp arrangement described herein, except the condition in Section II(a)(1), requiring that Sharp control the HMO via a stock or partnership ownership interest. In this regard, the Applicant represents that the HMO: Is licensed as an HMO in California by the Department of Managed Healthcare; has been certified by the California Department of Managed Healthcare as being in compliance with the requirements for a licensed HMO within the last 18 months; and has undergone a financial examination by the California Department of Managed Healthcare within the last five years and is audited by an independent certified public accountant each year, including its last completed taxable year. Therefore, the Applicant maintains that Sharp has satisfied the conditions set forth in Sections II(a)(2), (3), and (4) of PTE 79-41. The Applicant also represents that the amount the Plan pays to Sharp for HMO coverage is reasonable and does not exceed the amount that would be paid for similar services in an arm's length transaction between unrelated parties, thereby satisfying Section II(b) of PTE 79-41. The Applicant also represents that no commissions are paid by the Plan for the insurance coverage purchased from the HMO, thereby satisfying Section II(c) of PTE 79-41. Finally, the Applicant states that the total HMO premiums collected for participants in the Plan (including employee and employer payments) have always, during the period covered by this application, been less than 50% of total premiums collected by the HMO. Therefore, the Applicant maintains that the condition contained in Section II(d) of PTE 79-41 is satisfied.
According to the Applicant, the HMO, as a licensed HMO in California, employs an underwriter and contracts with an actuary to calculate the appropriate premiums that it charges to employers who purchase group HMO contracts from the HMO. According to the Applicant, this analysis involves a study of industry trends and also the particular demographics of the employer's workforce and, for a continuing employer, such as Sharp, a review of the historic experience that the HMO has had with the employer's population. Based on this underwriting analysis, premiums are set for a contract year.
In addition, the Applicant states that it also conducts its own survey of premiums that are being paid for HMO coverage by other San Diego area hospitals, using the services of third-party benefit consultants to conduct these surveys.
The Applicant notes that Sharp will continue with these efforts, going forward, and will commit to hiring an independent third-party consultant each year to issue a formal report. According to the Applicant, the consultant will determine whether the amount employees and/or their dependents pay for coverage is reasonable and does not exceed the amount that would have been paid for similar services in an arm's length transaction between unrelated parties. This amount will include the cost of co-payments and other out-of-pocket expenses for such coverage borne by participants and/or their dependents, and copies of the certification will be distributed to Plan participants along with summaries of health care costs for similar, competing health care providers.
The Applicant states that if the proposed exemption is granted, the Board of Directors of Sharp will appoint a committee (the Plan Committee) consisting of the Senior Vice President and General Counsel, the Senior Vice President and Chief Financial Officer, and the Vice President, Compensation and Benefits, and such other representatives as the Board may deem appropriate, which will annually ascertain and certify in writing that the above requirements of this proposed exemption, if granted, continue to be met.
The Applicant states that the covered transactions are in the interest of the Plan and its participants and beneficiaries. The Applicant maintains that the covered transactions allow the Plan to provide quality medical coverage to its participants at a lower price and in a manner that harmonizes with the business practices of employers who are in the insurance and health care industry. Sharp maintains that participants in the Plan pay for less than half of the Plan's cost for coverage under the HMO and by electing coverage under the HMO, participants have access to a wide range of high quality Sharp and non-Sharp affiliated health care providers.
The Applicant represents that the savings garnered from the HMO's efficiencies of scale, and the lack of need for commissions, redounds to the benefit of Plan participants. In this regard, the Applicant explains that there
Moreover, the Applicant represents that an exemption, if granted, would be administratively feasible because the covered transactions are standard for employers who are in the insurance and health care industry. The Applicant also observes that, because the HMO is a fully licensed HMO carrier whose claims processing activities are subject to regulation and periodic review by the California Department of Managed Health Care, no third party audit of its claims processing is necessary.
Notice of the proposed exemption will be provided to all interested persons in the manner agreed upon by the Applicant and the Department within 3 days of the date of publication in the
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption under section 408(a) of ERISA does not relieve a fiduciary or other party in interest from certain other provisions of ERISA, including any prohibited transaction provisions to which the exemption does not apply and the general fiduciary responsibility provisions of section 404 of ERISA, which, among other things, require a fiduciary to discharge his duties respecting the plan solely in the interest of the participants and beneficiaries of the plan and in a prudent fashion in accordance with section 404(a)(1)(b) of ERISA;
(2) Before an exemption may be granted under section 408(a) of ERISA, the Department must find that the exemption is administratively feasible, in the interests of the plan and of its participants and beneficiaries, and protective of the rights of participants and beneficiaries of the plan;
(3) The proposed exemption, if granted, will be supplemental to, and not in derogation of, any other provisions of ERISA, including statutory or administrative exemptions and transitional rules. Furthermore, the fact that a transaction is subject to an administrative or statutory exemption is not dispositive of whether the transaction is in fact a prohibited transaction; and
(4) The proposed exemption, if granted, will be subject to the express condition that the material facts and representations contained in the application are true and complete, and that the application accurately describes all material terms of the transaction which is the subject of the proposed exemption.
Based on the facts and representations set forth in the application, the Department is considering granting the requested exemption under the authority of section 408(a) of the Act and in accordance with the procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990), as follows:
A. If the proposed exemption is granted, the restrictions of sections 406(a)(1)(A), 406(a)(1)(D), 406(b)(1), and 406(b)(2) of the Act shall not apply, effective August 1, 2006 through and until the date of publication in the
B. If the proposed exemption is granted, the restrictions of sections 406(a)(1)(A), 406(a)(1)(D), 406(b)(1), and 406(b)(2) of the Act shall not apply, effective as of the date of publication in the
(a) Sharp is the sole member of the HMO, and more than 50% of the appointment power for the HMO's Board of Directors is held by Sharp.
(b) Sharp is licensed to sell HMO coverage in the State of California.
(c) The HMO is certified by the California Department of Managed Health Care as being in compliance with the requirements for a licensed HMO within the last 18 months.
(d) The HMO has undergone a financial examination by the California Department of Managed Health Care within the past 5 years and will continue to undergo such financial examinations at least once every five years.
(e) The HMO has been, and will continue to be, examined by an independent certified public accountant annually.
(f) The amount the Plan pays to Sharp for HMO coverage is reasonable and does not exceed the amount the Plan would have paid for similar services in an arm's length transaction between unrelated parties.
(g) All HMO-offered health care providers meet all applicable licensure requirements and certifications.
(h) The HMO offers a sufficient number of non-Sharp affiliated health care providers to effectively allow Plan participants the opportunity to receive health care services from either Sharp or non-Sharp affiliated health care providers.
(i) No commissions are paid by the Plan with respect to the sale of HMO coverage.
(j)(i) With respect to the relief provided in section I. A., for each taxable year of the HMO, the gross premiums received in that taxable year by the HMO from the Plan did not exceed 50% of the gross premiums received by the HMO for all HMO coverage issued in that taxable year; or (ii) with respect to the relief provided in section I. B., for each taxable year of the HMO, the gross premiums received in that taxable year by the HMO from the Plan will not exceed 50% of the gross premiums received by the HMO for all HMO coverage issued in that taxable year.
(k) Sharp maintains or causes to be maintained for a period of six years from the date of any covered transaction hereunder such records as are necessary to enable the persons described in paragraph (l)(i) below to determine whether the conditions of this proposed exemption, if granted, have been met, provided that (i) a separate prohibited transaction will not be considered to
(l)(i) Except as provided below in paragraph (l)(ii), and notwithstanding any provisions of subsections (a)(2) and (b) of section 504 of the Act, the records referred to above in paragraph (k) are unconditionally available at their customary location for examination during normal business hours by:
(A) Any duly authorized employee or representative of the Department,
(B) Any duly authorized representative of the California Department of Managed Health Care or any State or Federal governmental body responsible for regulatory oversight of Sharp or the HMO, and
(C) Any fiduciary of the Plan or the Plan's authorized representative; and
(ii) None of the persons described above in paragraph (l)(i)(C) shall be authorized to examine trade secrets of Sharp, or commercial or financial information which is privileged or confidential, and should Sharp refuse to disclose information on the basis that such information is exempt from disclosure, Sharp shall, by the close of the thirtieth (30th) day following the request, provide a written notice advising that person of the reasons for the refusal and that the Department may request such information.
(a) Sharp retains annually the services of an independent third-party consultant to determine whether the amount employees and/or their dependents pay for coverage is reasonable and does not exceed the amount that would be paid for similar services in an arm's length transaction between unrelated parties, which amount includes the cost of co-payments and other out-of-pocket expenses for such coverage borne by participants and/or their dependents, and written copies of such determination are distributed to Plan participants along with summaries of health care costs for similar, competing health care providers.
(b) The Board of Directors of Sharp appoints a committee (the Plan Committee) consisting of the Senior Vice President and General Counsel, the Senior Vice President and Chief Financial Officer, the Vice President, Compensation and Benefits, and such other representatives as the Board of Directors may deem appropriate. The Plan Committee will annually ascertain and certify in writing that the above requirements of this proposed exemption, if granted, continue to be met.