Under the Public Health Service Act, the word “state” is meant to include U.S. territories, such as Puerto Rico and the U.S. Virgin Islands. HHS has long deemed the territories to be subject to the same requirements as the states. But no longer. In a letter from our good friend Marilyn Tavenner at HHS, we learn that after a “careful review” the territories will no longer be deemed a state, and will not be subject to Obamacare requirements that will “underminin[e] the stability of the territories’ health insurance markets.”

Currently, the Department uses the existing Public Health Service Act (PHS Act) definition of “state” for new PHS Act requirements and funding opportunities included in title I of the Affordable Care Act. Under this definition, the new market reforms in the PHS Act apply to the territories. We have been informed by representatives oft he territories that this interpretation is undermining the stability o f the territories’ health insurance markets. After a careful review of this situation and the relevant statutory language, HHS has determined that the new provisions of the PHS Act enacted in title I are appropriately governed by the definition of “state” set forth in that title, and therefore that these new provisions do not apply to the territories. This means that the following Affordable Care Act requirements will not apply to 1 individual or group health insurance issuers in the U.S. territories:

What justified this “careful review”? Absolutely no reasoning, whatsoever. Stay tuned Marilyn tells us:

The Centers for Medicare & Medicaid Services (CMS) intends to issue regulations to affirm this interpretation and eliminate any text in the existing rules that is inconsistent with this interpretation (e.g., the definition of”state” that includes territories set forth in the rate review regulations at 45 CFR 154.102). Pending the completion of such rulemaking, CMS will apply this interpretation and will not subject health insurance issuers in the territories to the Affordable Care Act requirements at issue.

I’m sure the rulemaking will go something like this. Because applying these rules to the territories will disrupt the market, we interpret states, not to mean territories, regardless of what the statute says. An HHS spokesperson just announced the statute would be rewritten.

But don’t worry. This redefinition of a territory will *only* apply to this provision of the ACA, and nothing else.

Our analysis applies only to health insurance that is governed by the PHS Act. It does not affect the PHS Act requirements that were enacted in the Affordable Care Act and were incorporated into the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code) and apply to group health plans (whether insured or self-insured), because such applicability does not hinge on, or rely upon the term “state” as it is defined in either the PHS Act or in the Affordable Care Act. Similarly,it also does not affect the PHS Act requirements that were enacted in the Affordable Care Act and apply to non-federal governmental plans. As a practical matter, therefore, PHS Act, ERISA, and Code requirements applicable to group health plans continue to apply to such coverage and issuers selling policies to both private sector and public sector employers in the territories will want to make certain that their products comply with the relevant Affordable Care Act amendments to the PHS Act applicable to group health plans since their customers- the group health plans- are still subject to those provisions. Group health plans remain subject to those provisions of the PHS Act that were enacted in the Affordable Care Act, including, inter alia, the prohibition on lifetime and annual limits (PHS Act section 2711), the prohibition on rescissions (PHS Act section 2712), coverage of preventive health services (PHS Act section 2713), and the revised internal and external appeals process (PHS Act section 27 I9)

So in other words, HHS is only rewriting the statute where it causes inconveniences.

Also, territories that do not comply are not required to return any funds conditioned on complying! They just can’t get any more money

Because this interpretation applies prospectively, territories will not have to pay back to the federal government any grants that have been spent by the territories as of the date of this letter, such as those provided for rate review (section 2794 of the PHS Act) and for consumer assistance (section 2793 of the PHS Act). However, all unspent grant funding must be returned to CMS, because the interpretation of the law making the territories eligible to expend such funds is no longer in place.

There you have it. Regulation by letter, blog post, or whatever.