Mother of All Loopholes

Some of Your Patients Might Not Have Insurance Coverage After All

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Medical Economics Feature -- August 2003  

By Walt Borges
Associate Editor

With so much hype circulating about HIPAA, it's easy to forget that the "P" in the acronym stands for "portability," not privacy. But physicians and their practice staff had better not forget that distinction when treating patients employed by some state and local governments and school districts. A Houston-area man and his doctor learned that the hard way earlier this year.

When Congress passed the Health Insurance Portability and Accountability Act in 1996, it allowed nonfederal state and local governments with self-funded employee insurance plans to opt out of six key provisions of HIPAA. They include a ban on the use of preexisting conditions to deny coverage for patients with continuous health insurance coverage, standards relating to benefits for newborns and their mothers, required coverage for reconstructive surgery following mastectomies, and parity in applying limits to mental health benefits.

HIPAA also allows employers with exemptions to not hold special enrollment periods and to discriminate in health plan enrollment based on an individual's health status.

The exemptions went unnoticed by many in the medical community until a recent incident caught the attention of the Texas Medical Association and the Texas Medical Group Management Association (TMGMA).

Klein Independent School District (ISD) custodian Allan Barnett, of Spring, and his doctor, Howard Lippman, MD, of the Northwest Urology Associates PA, discovered the problems such exemptions can cause when Mr. Barnett opted for elective lithotripsy sound waveprocedures to crush kidney stones. Insurance coverage initially was verified orally and by fax by the school district's self-funded health plan, but payment was denied after the procedures were performed on the basis that the kidney stones were a preexisting condition when Mr. Barnett joined the school district health plan on Jan. 1, 2003.

Mr. Barnett was left with a bill of $77,000, including fees of at least $7,800 for Dr. Lippman.  And though Dr. Lippman has applied the adjustments that the insurer would have made if Mr. Barnett's treatments were covered, Mr. Barnett and his wife, Evelyn, still must deal with at least $67,000 in hospital billings, fees that would devastate their retirement savings.

The Barnetts were left to ponder what went wrong with their well-researched elective treatment. Dr. Lippman and his staff are left with a difficult situation not of their making. 

"We feel horrible for the Barnetts," said Debbie Love, the administrator for Northwest Urology. "Mr. Barnett had continuous [health insurance] coverage with absolutely no lapse in coverage, and we thought that HIPAA's portability provisions prevented denials for preexisting conditions. We were stunned when the plan said they would not pay because it was a preexisting condition. We thought that was prohibited."

Physicians, Beware!  

Northwest Urology may reasonably expect to receive Dr. Lippman's fee, but the incident highlights the risk physicians take if an insurer doesn't pay their fees and the patient does not have sufficient resources to pay. The number of government employees in large cities compounds that risk.

As of late June, the Centers for Medicare and Medicaid Services (CMS) listed 218 Texas state agencies, cities, counties, universities, school districts, hospital districts, and government-related health insurance pools as taking at least one of the six exemptions from HIPAA requirements. Most took all six exemptions.

San Antonio, Dallas, and Austin are among the cities taking the HIPAA exemptions. Dallas, Tarrant, Lubbock, and Montgomery counties also opted out. Educational entities taking the exclusions included Dallas ISD, Houston ISD (the state's second largest public sector employer, according to the Texas Workforce Commission), The University of Texas System, the University Health System, and the Employee Retirement System of Texas (ERS).

"It would be wise for doctors who treat government employees to make sure that they are covered for conditions that could be classified as preexisting," said Lewis E. Foxhall, MD, chair of TMA's Council on Socioeconomics. "At the same time, trying to collect fees from patients who were expecting insurance coverage may strain the relationship between doctors and patients." (See " What's a Physician to Do?")

Dr. Foxhall said patients may be reluctant to fully share their past history and that leads over time to a decrease in the free exchange of medical information and impacts the quality of care.

"Fixing this loophole may require the Texas Legislature to address the problem," he added.

Four of the exemptions relate directly to medical conditions and requirements for health insurance coverage.

HIPAA says health plans cannot exclude preexisting conditions if the patient has had "creditable" health insurance for 12 straight months, with no lapse of 63 days or more. In addition to the preexisting conditions loophole, HIPAA also allows the self-funded government plans to exempt themselves from the requirements of:

  • The Women's Health and Cancer Rights Act of 1998, which requires employers who pay for mastectomies to provide coverage for reconstruction of the breast, for prostheses, and for complications of the mastectomy;
  • The Newborns' and Mothers' Health Protection Act of 1996, which countered "drive-through deliveries" by prohibiting health plans from restricting benefits for hospital stays in connection with childbirth to less than 48 hours for a vaginal delivery and 96 hours for a cesarean section; and
  • The Mental Health Parity Act of 1996, which prevents health plans from placing annual or lifetime dollar limits on mental health benefits that are less than those for medical and surgical services.

To obtain the exemptions, nonfederal state and local government agencies with self-funded health plans must apply to CMS. The agency requires the exemptions to be renewed each year and employees to be notified of the exemptions.

CMS lists the agencies with exemptions on its Web site at .

Exemptions Sometimes Not Used  

Just how many state, local, and school employees are affected is difficult to determine, government officials and association experts say. There are more than 350,000 state government employees in Texas, and local government and schools employ another 1.1 million Texans. While state employees are covered by the ERS and its self-funded health plans, assessing the impact on the thousands of city, county, and school employees is harder, as no single entity tracks the number of enrollees in self-funded plans.

June Kissinger, director of risk management support services for the Texas Association of School Boards (TASB), estimates that no more than 100 of the 1,000 school districts in Texas have self-funded health plans. Those districts are likely to be the largest ones, as it takes about 500 insured lives to create the economics for a district to fund a plan itself.

By choosing to abide by HIPAA's intent while taking exemptions, TASB was protected from liability for mistakes that violated the HIPAA provisions, Ms. Kissinger notes, which is why some government entities find the exemptions attractive.

Andy Homer, director of governmental relations for the Texas Public Employees Association (TPEA), says his organization monitored the exemptions taken by the ERS, the state retirement system that covers state government employees and those of all university and junior colleges except The University of Texas and Texas A&M University systems.

The ERS has taken only the exemptions covering special enrollment periods and discrimination based on health status.             

An Unintended Expense  

From the Barnetts' perspective, the insurance hassle over treatment of Mr. Barnett's kidney stones has been an unmitigated financial disaster.

The first factor in the situation was the status of Mr. Barnett's insurance. Although he had been employed by the Klein ISD since 1994, he did not enroll in its self-funded insurance plan until January 2003. That was because his wife had enrolled him in her much better plan offered through Compaq Computer Corp., for whom she worked until she was laid off in June 2001. She then signed up to extend her health benefits under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

COBRA's extension of health insurance lasts only 18 months, which meant the COBRA benefits lapsed on Dec. 31, 2002, prompting the switch to the Klein ISD plan.

The second factor in the predicament was the timing of the discovery of Mr. Barnett's recurring condition.

"He had an annual prostate exam in December 2002 and they found blood in the urine," Ms. Barnett recalls. "Later in December, they did procedures to determine the cause. The results didn't come back until Dec. 30. Were we supposed to schedule a treatment on Dec. 31, on the last day we were covered under COBRA?"

In fact, it was not until mid-January that doctors recommended using sound waves to crush the kidney stones, Ms. Barnett says. Concerned with how to pay for the procedure, the Barnetts worked with Northwest Urology to ensure they were covered by the new insurance before agreeing to the procedure. Ms. Love says the practice received a faxed verification of the coverage, complete with all the boilerplate disclaimers, including one that warned that verification was no guarantee the practice would be paid.

The procedure was performed in March and then again when remnants of the stones were discovered in one kidney. Everything seemed to be okay until the health plan's explanation of benefits (EOB) arrived in April.

After applying the appropriate discounts, the EOB said the claim would not be paid because treatments for preexisting conditions were excluded.

"This was not a health calamity," Ms. Barnett noted. "It was well researched. We expected to spend approximately $2,500, but now we owe about $80,000. We were duped into a situation that could leave us bankrupt."

Dr. Lippman's fees may total $7,800, but the practice has already written off more than $2,000, Ms. Love explained. To make the unexpected bill more reasonable for the Barnetts, Northwest Urology took off the adjustments made by the health insurer in its initial EOB, Ms. Love says.

The hospital made no such effort, Ms. Barnett says. Instead of the $8,400 that the Klein ISD plan would have paid to the hospital after discounts, the Barnetts were presented with a full-undiscounted bill for more than $67,000.  To date, the Barnetts have paid $1,680 -- 20 percent of the discounted amount due to the hospital -- while they appeal the insurer's coverage decision.

"It's just bizarre," said Ms. Love, noting that this was the first time she had heard that HIPAA did not preclude preexisting condition denials. "Who would have known?"

Ms. Love quickly brought the situation to the attention of the Harris County Medical Society, the Health Care Financing Department of TMA, and a group of 30 practice administrators, including TMGMA President John Watson. No one, she discovered, was aware of the exemption for nonfederal self-funded government health plans.

What really chafes Ms. Love is the discovery that one of HIPAA's key benefits -- the limiting of preexisting condition denials -- apparently has a substantial loophole.

"This was a procedure that didn't have to be done immediately," Ms. Love said. "Mr. Barnett was not in pain. It could have waited until he was covered by his insurance. We're just sick for them."


What's a Physician to Do?

Physicians who want to be more certain of being paid for services provided to employees of nonfederal state and local governments need to be vigilant in dealing with such employees. Lewis Foxhall, MD, chair of the Texas Medical Association Council on Socieconomics, recognizing the additional administrative burden involved, suggests the following measures:

  • Check patient insurance information cards. If a patient is employed by a state or local government, check the Centers for Medicare and Medicaid Services Web link at for programs with exemptions.
  • If listed, have staff call the health plan to confirm its status. Check to see if the plan will cover preexisting conditions, pre- and postbirth treatments, reconstructive surgery following mastectomies, and mental health. Make sure your staff are schooled on which plans cover which services.
  • Ask for written verification from the plan administrator or employer sponsor. Better still, ask if the plan will guarantee payment for the procedure, regardless of an exemption.
  • Because plans must renew the exemptions each year, note renewal dates and ask staff to update status of health plan exemptions on those dates.
  • Keep the patient in the loop. Talk to your patients about the problems with their coverage under the HIPAA exemptions and their responsibilities in paying for exempted treatments.

Another solution to the problem may lie in state legislation. HIPAA regulations say that each state may "limit the extent to which its nonfederal governmental employers may exempt their self-funded plans" from the HIPAA requirements. Physicians who are aware of situations of this type should report them to TMA.Dr. Foxhall says legislative action may be considered in the future.

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