Coordination of Benefits for Health Plans

Question: How do employer-sponsored group health plans typically determine which plan pays primary and which plan pays secondary when an employee or dependent is covered under more than one plan?

• Short Answer: In most cases, plans will follow an approach that tracks the NAIC model coordination of benefit rules—either pursuant to state insurance requirements or plan terms designed to mirror those model rules—to determine which plan is primary and which is secondary. Where governmental programs such as Medicare, Medicaid, TRICARE, or VA services are involved, special coordination rules apply.

General Rule: Health Plans May Set Coordination of Benefits Rules
Employees may have coverage under more than one plan for themselves and/or their dependents. For example, an employee may be covered through their employer and as a dependent through their spouse’s employer. Parents might also have dual coverage for their children as dependents under their respective plans. Employees might also have forms of governmental coverage (e.g., Medicare, Medicaid, TRICARE, VA) in addition to coverage through their employer. These situations raise the question as to which plan will pay primary and which will pay secondary, typically referred to as “coordination of benefits” or “COB” issues.

The main COB issue is which plan pays first (“primary”) and which pays second (“secondary”):

• Primary Coverage: In a standard COB situation, the primary coverage will pay the claim first by disregarding the other available coverage and paying the standard amount for an item and service under the primary plan’s terms.

• Secondary Coverage: Once the primary plan has paid the full amount owed under its plan terms, the secondary plan will typically provide coverage for any remaining amount of the claim up to how much it would pay under the secondary plan’s terms.

The general rule is that health plans can set their own provisions as to how to coordinate benefits among one or more other plans. Needless to say, an individual covered by two plans with dramatically different COB provisions could create confusion among the parties as to which plan will pay primary.

Fortunately, as discussed below, most plans have similar COB rules that minimize the potential for this thorny claim processing issue to arise in practice.

NAIC Coordination of Benefits Model Regulation
Given the potential for conflict and confusion with inconsistent plan COB terms, the National Association of Insurance Commissioners (NAIC) has developed a Coordination of Benefits Model Regulation (the “NAIC Model COB Rules”). This model serves as a framework that states can use to establish COB rules applicable to insurance policies in their state.

The document states that the model provision serves three purposes:

1. Establish a uniform order of benefit determination under which plans pay claims;

2. Reduce duplication of benefits by permitting a reduction of the benefits to be paid by plans that, pursuant to rules established by this regulation, do not have to pay their benefits first; and

3. Provide greater efficiency in the processing of claims when a person is covered under more than one plan.

These are all worthy goals, and fortunately there is widespread adoption of the NAIC Model COB Rules by states and health plans.

• For more details: The NAIC Coordination of Benefits Model Regulation

Fully Insured Plans: State Insurance Code Typically Sets COB Rules
Many states have set COB rules into their state insurance code to ensure consistency in application of determining which plan will pay primary in the state.

ERISA expressly preempts state laws that relate to ERISA employee benefit plans. However, one major exception from the general rule is that ERISA does not preempt any state insurance laws for a fully insured plan (the “Savings Clause”). Employer-sponsored group health plans that are fully insured must therefore comply with state insurance mandates, including state COB rules.

Most states closely follow the NAIC Model COB Rules in their state insurance code terms. There have been multiple updates to the NAIC Model COB Rules over the years, and in some cases the state insurance code remains codified based a previous version. However, in most cases it is likely that COB rules either identical or substantially similar to the NAIC Model COB Rules will apply when dealing with fully insured health plans.

• For more details: NAIC Chart of States Adopting the Coordination of Benefits Model Regulation

Self-Insured Plans: Not Subject to State Insurance Code COB Rules
Self-insured plans are not subject to any state insurance mandates because of ERISA preemption (the “Deemer Clause”). Employer-sponsored group health plans that are self-insured (including level funded) therefore are not subject to the mandates imposed by state COB rules.

For more details:

• ERISA Preemption of State Insurance Mandates

• Newfront ERISA for Employers Guide

Many self-insured health plans nonetheless still follow the NAIC Model COB Rules to avoid confusion and conflict in their interaction with other plans. This approach will generally provide the most desirable employee experience when dealing with potentially complex COB issues.

Where plan COB rules conflict (e.g., two self-insured plans both providing that the other plan must pay primary for a given situation), the plans will have to find some way to resolve their dispute—which can in some cases rise to the level of litigation. Courts addressing these cases have had to resort to federal common law rules as the only possible way to address those impasses. Given that courts will generally look to following the same rules outlined in the NAIC Model COB Rules, it seems more desirable for plans to conform to those rules at the outset and avoid such costly and burdensome disputes.

Overview of the NAIC Model COB Rules
The NAIC Model COB Rules are set forth in an extensive 20-page document covering many layers of details. For any inquiry as to how those rules would resolve the coordination in a specific situation, the full document is always the best resource.

However, for illustrative purposes only, the following is a high-level overview of how the NAIC Model COB Rules generally determine which health plan pays primary. The first of the rules that apply will determine the order of benefits:

1) Non-Dependent or Dependent
This will most commonly occur where an employee is covered both under their employer’s plan and as a dependent under their spouse, domestic partner, or parent’s plan. In general, the plan that covers the person other than as a dependent (e.g., as an employee) is the primary plan, and the plan that covers the person as a dependent is the secondary plan.

2) Dependent Child Covered Under More Than One Plan (Birthday Rule)
This will most commonly occur where both parents cover a child as a dependent under each of their employers’ plans. In general, the plan of the parent whose birthday falls earlier in the calendar year is the primary plan, and the plan of the parent whose birthday falls later in the year is the secondary plan. This is often referred to as the “birthday rule”. If both parents have the same birthday, the plan that has covered the parent longest is the primary plan.

3) Active Employee or Retired or Laid-Off Employee
This will most commonly occur where the employee has coverage through the end of the month after terminating with the prior employer, and within the same month enrolls in date of hire coverage through the new employer. It can also occur where an employee has retiree plan coverage available through a prior employer and active coverage through the new employer. The plan that covers a person as an active employee is the primary plan, and the plan that covers the same person as a retired or laid-off employee (or as a dependent of a retired or laid-off employee) is the secondary plan.

4) COBRA or State Continuation Coverage
This will most commonly occur where an employee has COBRA coverage (or state mini-COBRA coverage) through a prior employer and active coverage through the new employer. The plan covering the person as an employee (i.e., active employee coverage) is the primary plan, and the plan covering that same person through COBRA (or state mini-COBRA) is the secondary plan. Note that in some situations, enrolling in the new employer’s plan will cut short the employee’s COBRA rights.

5) Longer or Shorter Length of Coverage
This approach applies only where the preceding rules do not determine the order of benefits. In this case, the plan that covered the person for the longer period of time is the primary plan, and the plan that covered the person for the shorter period of time is the secondary plan.

6) No Rules Apply
In the exceedingly rare situation where none of the preceding rules determines the order of benefits, the NAIC Model COB Rules essentially wave the white flag and direct the plans to share the expenses equally.

Special COB Rules: The Medicare Secondary Payer Rules
The Medicare Secondary Payer (MSP) rules generally apply to employers with 20 or more employees for each working day for at least 20 calendar weeks in either the current or preceding calendar year. The MSP rules prohibit employer-sponsored group health plans from taking into account the Medicare enrollment of a current employee or a current employee’s spouse or family member.

Among the provisions that flow from this general MSP rule is the requirement that for any active employee or spouse covered by the employer-sponsored group health plan and Medicare, the employer-sponsored group health plan pays primary. In other words, an active employee or spouse enrolled in the employer-sponsored group health plan and Medicare will always have the employer plan pay primary and Medicare pay secondary.

The MSP rules do not apply to COBRA or retiree plan coverage. In those situations, the plan can (and generally will) treat Medicare as primary and the employer plan as secondary—even if the employee or spouse is not enrolled in Medicare. This is one of multiple reasons why age 65+ retirees should avoid ever enrolling solely in COBRA—and always enroll in Medicare immediately upon the loss of active coverage.

For more details:

• Newfront Medicare for Employers Guide

• The Medicare Form CMS-L564 for Employers

• How COBRA and Medicare Interact for Retirees

• Medicare Secondary Payer Employer Size Thresholds

Special COB Rules: Medicaid as Payer of Last Resort
The Medicaid COB rules require that all third parties meet their legal obligation to pay claims before the Medicaid program pays any amount. Employer-sponsored group health plans (whether fully insured or self-insured) qualify as third parties that must pay claims as primary before Medicaid considers payment.

In other words, employees or dependents covered by both the employer’s group health plan and Medicaid will have the employer plan as primary coverage. Medicaid is always the last payer for services absent a rare scenario where there is a federal statute making Medicaid primary to a specific federal program.

For more details:

• Medicaid Coordination of Benefits & Third Party Liability

• Medicaid COB FAQs

• Medicaid COB Handbook

Special COB Rules: TRICARE as Secondary Payer
TRICARE pays secondary to any employer-sponsored group health plan (referred to in the TRICARE jargon as “other health insurance”). Accordingly, when an employee is enrolled in both TRICARE and the employer’s plan, the employer’s plan will always pay primary.

• For more details: TRICARE—Using Other Health Insurance

Special COB Rules: VA Must Bill Health Insurance
Veterans Affairs (VA) eligibility to access health services is not “coverage” in the traditional sense (it is more like access to a provider network of services), and therefore the standard COB rules do not apply. Rather, the VA rules provide that the VA must bill private health insurance (including an employer-sponsored group health plan) for any medical care, supplies, and prescriptions provided for treatment of nonservice-connected conditions (illnesses or injuries not related to military service).

Veterans must provide information to the VA of what other coverage they have available, including through their employer or a spouse’s employer. Any amounts paid by the other coverage may be used to offset some or all the veteran’s VA copay responsibility.

• For more details: VA Health Care and Other Insurance

Special COB Rules: Newborns Covered Under Both Parents
One pain point that will sometimes arise in the area of COB is where a newborn child is inadvertently covered by both parents’ plans, and the child’s claims unexpectedly must be coordinated between the two plans. The issue is that many states have a state insurance mandate requiring automatic (i.e., no enrollment required) coverage for newborns for a set period following birth or adoption. The automatic coverage applies regardless of whether the participant is a birth parent or non-birthing parent.

For example, California insurance law requires that newborns be covered automatically for a period of 31 days. The NAIC has a model rule that recommends states adopt an automatic coverage period of 60 days.

For more details:

• NAIC Newborn and Adopted Children Coverage Model Act

• NAIC Chart of States Adopting the Newborn and Adopted Children Coverage Model Act

Note: Self-insured plans (including level funded plans) are not subject to these state insurance mandates to provide automatic newborn coverage because of ERISA preemption (see “Self-Insured Plans: Not Subject to State Insurance Code COB Rules” above). Therefore, whether to incorporate similar automatic coverage terms in a self-insured plan is a matter of plan design. Many self-insured plans do not include an automatic coverage provision for newborns.

The HIPAA special enrollment event rules provide employees with the right to enroll a newborn or newly adopted child within 30 days of the event. Where both parents have coverage through their employer, typically only one parent will elect to enroll in the newborn in plan. Even where automatic coverage applies, enrollment of the child is still required to ensure coverage for the newborn after expiration of the automatic coverage period. The HIPAA special enrollment rules provide that enrollment of a newborn or newly adopted child within 30 days of the birth/adoption will always be retroactive to the date of birth/adoption.

For more details:

• HIPAA Special Enrollment Events

• Newfront Section 125 Cafeteria Plan Guide

In a situation where only one of the parents enrolls the newborn in their plan, and the other parent’s plan provides automatic initial coverage (31 days in CA, varies by state) for newborns, the parents typically are unaware that there is also coverage through the other parent’s plan in the initial period following the birth. This creates an unexpected COB situation for claims incurred by the newborn in that initial period.

Most state insurance rules will follow the NAIC Model COB Rules described above, which apply the “birthday rule” to situations where both parents have coverage for a dependent under their respective employer’s plans. The birthday rule generally provides that the plan of the parent whose birthday falls earlier in the calendar year is the primary plan, and the plan of the parent whose birthday falls later in the year is the secondary plan.

Accordingly, parents are often caught off guard where Parent A elects to enroll a newborn in Parent A’s plan, but Parent B’s birthday falls earlier in the calendar year than Parent A. In that situation, Parent B’s plan may have automatic coverage for the newborn in the initial period (e.g., first 31 days in California), and therefore Parent B’s plan will provide primary coverage for that initial period under most COB provisions pursuant to the birthday rule. This can lead to bureaucratic hassles for new parents as they sort through the unexpected dual coverage and surrounding coordination issues with both plans.

Ultimately dual coverage will result in at least as good of a position for the claims as single coverage, but the additional complexity of the claim processing and coordination can cause significant consternation for sleep-deprived new parents unfamiliar with the process and who simply wish the claim was a simple matter to be addressed solely under the plan they elected. Particularly where one plan is an HMO that does not use the same network or regional service area as the other plan, the coordination issues can be complex and take additional time and effort to coordinate and process correctly.

Summary
It is common for employees or their dependents to have coverage under more than one health plan. In these situations, the plans’ COB rules will govern which plan pays primary and which plan pays secondary. While there is the potential for conflicting plan COB terms that cause difficulties processing claims across both plans, fortunately most plans—either as a matter of plan design or as required under the applicable state insurance code—follow terms that are generally in line with the NAIC Model COB Rules. This provides some level of predictability for those in dual coverage situations, as well as consistency throughout the industry in processing claims covered by more than one plan.

Relevant Cites:
Cal. Code Regs. tit. 10, § 2232.56 [California COB Order of Benefits Rules]:
(d) For the purposes of paragraph (c) above, the rules establishing the order of benefit determination are:
(1) The benefits of a Plan which covers the person on whose expenses claim is based other than as a dependent shall be determined before the benefits of a Plan which covers such person as a dependent.
(2) Except for cases of a person for whom claim is made as a dependent child whose parents are separated or divorced, the benefits of a plan which covers the person on whose expenses claim is based as a dependent of a person whose date of birth, excluding year of birth, occurs earlier in a calendar year, shall be determined before the benefits of a Plan which covers such person as a dependent of a person whose date of birth, excluding year of birth, occurs later in a calendar year. If either Plan does not have the provisions of this paragraph regarding dependents, which results either in each Plan determining its benefits before the other or in each Plan determining its benefits after the other, the provisions of this paragraph shall not apply, and the rule set forth in the Plan which does not have the provisions of this paragraph shall determine the order of benefits.
(3) In the case of a person for whom claim is made as a dependent child whose parents are separated or divorced and the parent with custody of the child has not remarried, the benefits of a Plan which covers the child as a dependent of the parent with custody of the child will be determined before the benefits of a plan which covers the child as a dependent of the parent without custody.
(4) In the case of a person for whom claim is made as a dependent child whose parents are divorced and the parent with custody of the child has remarried, the benefits of a Plan which covers the child as a dependent of the parent with custody shall be determined before the benefits of a Plan which covers that child as a dependent of the stepparent, and the benefits of a Plan which covers that child as a dependent of the stepparent will be determined before the benefits of a Plan which covers that child as a dependent of the parent without custody.
(5) In the case of a person for whom claim is made as a dependent child whose parents are separated or divorced, where there is a court decree which would otherwise establish financial responsibility for the medical, dental or other health care expenses with respect to the child, then, notwithstanding paragraphs (3) and (4) above, the benefits of a Plan which covers the child as a dependent of the parent with such financial responsibility shall be determined before the benefits of any other Plan which covers the child as a dependent child.
(6) When rules (1) through (5) do not establish an order of benefit determination, the benefits of a Plan which has covered the person on whose expenses claim is based for the longer period of time shall be determined before the benefits of a Plan which has covered such person the shorter period of time, provided that:
(A) the benefits of a plan covering the person on whose expenses claim is based as a laid-off or retired employee, or dependent of such person, shall be determined after the benefits of any other Plan covering such person as an employee, other than a laid-off or retired employee, or dependent of such person; and
(B) if either Plan does not have a provision regarding laid-off or retired employees, which results in each Plan determining its benefits after the other, then the provisions of (A) above shall not apply.

Cal. Ins. Code § 10119 [California Automatic Newborn Coverage]:
(a) No policy of disability insurance which, in addition to covering the insured, also covers members of the insured’s immediate family, may be issued or amended in this state if it contains any disclaimer, waiver, or other limitation of coverage relative to the accident and sickness coverage or insurability of newborn infants of an insured from and after the moment of birth or of any minor child placed with an insured for adoption from and after the moment the child is placed in the physical custody of the insured for adoption.
(b) Each such policy of disability insurance shall contain a provision granting immediate accident and sickness coverage to each newborn infant of, and each minor child placed for adoption with, any insured as required by subdivision (a).

Redlands Cmty. Hosp. v. New England Mut. Life Ins. Co., 23 Cal. App. 4th 898 (1994) [California Automatic Newborn Coverage]:
On the basis of the foregoing analysis, we hold that the unconditional coverage of a newborn infant in section 10119 extends for 31 days after the birth.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).