WASHINGTON—After intense criticism, the Obama administration last week said nonprofit affiliates of religious organizations, like hospitals and universities, will not be required to offer prescription contraceptive drug coverage to their employees.

Under the new policy, full coverage, with no copayments or other cost-sharing requirements, instead would have to be provided by the employers' health insurers.

The insurer could not charge a premium for the coverage. A senior administration official said extending the coverage would be cost neutral due to a reduction in the number of pregnancies.

In regulations issued Friday, the administration said it will develop a comparable rule that would apply to employers affiliated with religious organizations that self-fund their health care plans.

“The departments intend to develop policies to achieve the same goals for self-insured group health plans sponsored by nonexempted, nonprofit religious organizations with religious objections to contraceptive coverage” according to regulations released by the Internal Revenue Service and the Departments of Labor and Health and Human Services.

For now, “I see a gaping hole” on the self-insurance issue, said Andy Anderson, a partner with Morgan, Lewis & Bockius L.L.P. in Chicago.

“We need to see the details on how this will work,” said Ilyse Schuman, a shareholder with Littler Mendelson P.C. in Washington.

The new rule, as it applies to affiliates of religious organizations, contrasts sharply with one the administration released last month. Under that rule, which is mandated by the health care reform law, employers would have had to include the prescription contraceptive drug coverage directly in their group policies.

But that rule triggered a huge wave of criticism from religious organizations and lawmakers on both sides of the aisle.

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Last week, Speaker of the House John Boehner said he would work to get legislation passed to block the rule, with the Ohio Republican drawing support from some Democrats as well.

“If the president does not reverse the...attack on religious freedom, then the Congress, acting on behalf of the American people and the Constitution we are sworn to uphold and defend, must” act, Speaker Boehner said on the House floor.

The change in the administration's position helps to “avoid a big congressional battle,” said Helen Darling, president of the National Business Group on Health in Washington.

“This should be enough to mollify lawmakers,” said Chantel Sheaks, a principal with Buck Consultants L.L.C. in Washington.

Some religious-affiliated organizations backed the new rule.

“The framework developed has responded to the issues we identified that needed to be fixed,” Sister Carol Keehan, president and CEO of the Catholic Health Care Assn. of the United States in Washington, said in a statement.

The change in policy does not affect other parts of the prescription contraceptive drug rule.

The requirement to offer full coverage will apply to other employers—those not affiliated with religious organizations with religious objections to contraceptive coverage—for plan years that begin on or after Aug. 1, 2012.

The new prescription contraceptive drug requirement affecting affiliates of religious organizations would apply for plan years that begin on or after Aug. 1, 2013.

However, the mandate would not apply to religious organizations, such as churches, that primarily employ those who share in their beliefs, and to employers with grandfathered health care plans.