During its last session, the Tennessee General Assembly added T.C.A. § 56-7-2363 to the state's insurance code. The new law, effective January 1, 2004, requires health insurance companies to offer prospective and existing policyholders, on renewal, an optional benefit for colorectal cancer examinations and screening for symptomatic individuals. The new optional coverage shall be subject to the same annual deductible and co-insurance established for similar benefits in the policy.

The new law applies to all individual and group health insurance policies providing coverage on an expense incurred basis. Thus, sponsors of any employer-provided group health insurance plan that purchases a group health insurance policy to insure its benefits must offer this optional benefit in policies delivered after January 1, 2004. Similarly, individual and group service contracts issued by health maintenance organizations (HMOs) and managed health care delivery entities are covered.

The law also applies to all self-insured group arrangements "to the extent not preempted by federal law." This language most likely refers to the federal Employee Retirement Income Security Act ("ERISA"), which governs healthcare plans provided by most employers, whether by the purchase of a group health insurance policy or by a self-insured arrangement. In general, ERISA preempts state laws relating to any such employee benefit plan. State laws that directly regulate insurance are not preempted, however. Therefore, group insurance policies purchased by employers to insure benefits will be covered by the new requirement, but self-insured plans will not.

Some healthcare plans are totally exempt from ERISA, such as those provided by governmental employers and churches and other religious organizations. It is not clear whether the General Assembly intended for the new law to apply to these plans, either insured or self-insured. Since ERISA does not apply at all to these exempt plans, it is arguable that ERISA's preemption language is inapplicable and that these plans must follow the new law and offer the new optional benefit.

The new statute exempts the "TennCare program, . . . accident-only, specified disease, hospital indemnity, Medicare supplement, long-term care or other limited benefit health insurance policies, or . . . any health benefit that is individually underwritten." This last exemption is also unclear, but may mean benefits an individual purchases directly from a provider, since the statute generally covers both individual and group health insurance policies.

Many employers offer Health Care Flexible Spending Accounts (FSAs). FSAs allow employees to pay for medical care and other health care costs not covered by their health insurance (including deductible and co-pays) with pre-tax dollars which are deducted from the employees' pay each pay period and accumulated for this purpose. These deducted amounts are not included in the employees' taxable income. The general guideline for whether an expense may be reimbursed from an FSA is whether it would be deductible as a medical expense under the Internal Revenue Code.

On June 2, 2003, the Internal Revenue Service (IRS) issued Revenue Ruling 2003-57 approving the use of FSAs for breast reconstruction surgery after a mastectomy and for vision correction surgery, e.g., LASIK, but disallowing reimbursement for teeth-whitening procedures.

On the same day, in Revenue Ruling 2003-58, the IRS disapproved reimbursement for medicines or drugs that may be purchased without a doctor's prescription, but allowed reimbursement for amounts paid for certain equipment and supplies designed to mitigate the effects of an injury, such as crutches and bandages. Reimbursement was similarly approved by this Ruling for diagnostic devices such as blood-sugar test kits used by diabetics. The hypothetical injured person that was the subject of this Ruling was not allowed to be reimbursed for the aspirin taken for the pain of his injury, however, because it did not require a doctor's prescription.

While the September Ruling by the IRS (2003-108) seems to have overturned the June IRS Ruling on nonprescription medications (2003-58), the IRS continues to hold that such nonprescription products are nondeductible for purposes of the itemized medical expense deduction. Thus, the new ruling is an exception to the general rule that an expense is reimbursable from an FSA only when it is deductible as a medical expense under the Internal Revenue Code.

Because the latest Ruling discusses the reimbursability of specific items, questions remain regarding whether similar products are reimbursable through FSAs. A Wall Street Journal article of October 8, 2003, notes that "there is a big debate in the benefits industry as to whether the new Ruling covers items like acne medication, sun block and tampons," and suggested that many coverage decisions will have to be made by the employer's plan administrator.

Since FSAs are a function of Internal Revenue Code provisions and must be governed by written plans, employers may need to revise their plans to allow employees to take advantage of the new Ruling. However, employers who administer their FSAs through their own human resources employees-rather than an outside administrator-may wish to consider the extent to which amending their plans to include over-the-counter products will result in greater administrative expense as more employees take advantage of FSAs and the number of reimbursement claims increase.

If you have any questions about this article or any other employment issue, please feel free to contact a member of our Labor and Employment Group.