The HR Legal News Blog

Out-of-Pocket Maximums for Generic vs. Brand Name Prescription Drugs

Under the Affordable Care Act, a non-grandfathered group health plan must limit a participant’s out-of-pocket expenses to a specified amount (currently, $6,350 for employee-only coverage and $12,700 for other coverage options).  The purpose of the out-of-pocket maximum is to ensure that the cost of health care coverage does not fall disproportionately on the participant rather than on the insurer or plan sponsor.

Yet individuals differ in their ability and/or willingness to spend money on certain health care services.  For example, some participants prefer to use brand-name prescription drugs–and are sometimes urged to do so by their physicians–regardless of whether a generic equivalent is available.  Group health plans typically impose great cost-sharing requirements on participants who choose brand-name prescription drugs over a generic equivalent.   If a participant chooses a more expensive brand-name drug, must the full co-payment counted towards his out-of-pocket maximum for the plan year?

According to the latest FAQs issued by the Departments of Labor, Health and Human Services and Treasury, the answer is…not necessarily.  Large group market coverage and self-insured group health plans have the discretion to define “essential health benefits.”  As a result, a plan may provide that medically appropriate and available generic drugs are “essential health benefits,” while providing separate coverage  and higher co-payments for brand-name drugs that are not considered to be “essential health benefits.”  The Departments stated that the plan may provide that the difference between the cost of the brand-name drug and the cost of the generic equivalent need not be counted towards the annual out-of-pocket maximum.

Two caveats are included in the Departments’ guidance.  First, in determining whether a generic drug is medically appropriate, a plan must use a “reasonable exception process,” such as deferring to the recommendation of the participant’s physician or offering an exceptions process under 45 CFR 156.122(c).  Second, the administrator of an ERISA plan must ensure that the SPD clearly explains the circumstances in which a covered benefit will not count towards the out-of-pocket maximum.