New Grandfathered Plan Rules Have Important Implications for Existing Group Health Plans
By Denise Atwood and Anne Meyer
The new health care reform legislation (the Patient Protection and Affordable Care Act, as amended by the Health Care & Education Affordability Reconciliation Act (collectively referred to as “PPACA”)) imposes requirements on all group health plans. Plans that were in existence on March 23, 2010, however, are given special status (“grandfathered status”) and are only subject to some of PPACA’s requirements. On June 14, 2010, the Departments of Treasury, Labor, and Health and Human Services (collectively the “Departments”) jointly issued interim final rules that clarify what a grandfathered plan is and identify what actions taken by plan sponsors can jeopardize grandfathered status. These interim final rules are effective for plan years beginning on or after September 23, 2010. The rules are summarized below.
What Is a Grandfathered Plan?
A grandfathered plan is any group health plan or individual coverage that was in effect on March 23, 2010, the date of PPACA’s enactment. The interim final regulations clarify that if a grandfathered plan consists of multiple benefit options, each option is looked at individually to determine whether it has retained grandfathered status applying the rules that are discussed in more detail below. If only one option is modified in such a way that it loses grandfathered status, the other options will retain grandfathered status.
PPACA provides that an existing plan may permit covered employees to re-enroll or new employees to enroll without losing its grandfathered status. Likewise, new dependents can be added without causing the plan to lose its grandfathered status as long as the plan offered dependent coverage prior to March 23, 2010. The regulations clarify that a plan will not cease to be a grandfathered plan because one or more (or even all) individuals who were enrolled in the plan on March 23, 2010 cease to be covered, so long as the plan has continuously covered someone since March 23, 2010.
The regulations include certain anti-abuse rules for mergers/acquisitions and plan transfers. If the principle purpose of a merger, acquisition or similar business restructuring is to cover new individuals under a grandfathered plan, then the plan will lose its grandfathered status. Likewise, certain transfers of employees from one group health plan to another will cause the plan accepting the transferred employees to lose grandfathered status absent a bona fide employment-based reason for the transfer.
What Will Cause a Plan to Lose Grandfathered Status?
The regulations provide that plans will lose their grandfathered status if significant changes are made to the plan that reduce benefits or increase costs to participants. Compared to the plan terms in effect on March 23, 2010, a grandfathered plan will lose its grandfathered status if it does any of the following:
- Significantly Cuts or Reduces Benefits – Plan sponsors cannot eliminate or significantly reduce benefits to diagnose or treat a particular condition. For example, if a plan eliminates all benefits for cystic fibrosis or all counseling benefits to treat mental health conditions, then the plan will lose grandfathered status.
- Raises Co-Insurance Rates – Any increase in the amount of co-insurance rates is considered significant, regardless of the amount. The co-insurance rate is the amount a participant pays toward medical costs, usually a set percentage after the deductible is met. For example, if a plan increases the amount a participant pays toward the cost of inpatient surgery from 20 percent to 30 percent, then the plan will lose grandfathered status.
- Significantly Raises Co-Payments – Compared with co-payments in effect on March 23, 2010, plans cannot raise co-payments by more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation plus 15 percent. The limits are measured on a cumulative basis, comparing the co-payments in effect on March 23, 2010 with the proposed co-payments.
- Significantly Raises Fixed-Amount, Cost-Sharing Requirements – Compared to the fixed-amount, cost-sharing requirements in effect on March 23, 2010, plans cannot raise the fixed-amount, cost-sharing requirements (e.g., deductibles or out-of-pocket maximums) by more than a percentage equal to medical inflation plus 15 percent. The limit is measured on a cumulative basis.
- Significantly Lowers Employer Contributions – Compared to employer contribution rates as of March 23, 2010, plans cannot decrease the percent of premiums an employer pays by more than five percent. The limit is measured on a cumulative basis.
- Adds or Tightens an Annual Limit – Plans cannot tighten any annual dollar limit in place as of March 23, 2010. Moreover, if a plan does not have an annual dollar limit, it cannot add a new one unless the plan is replacing a lifetime dollar limit with an annual dollar limit that is at least as high as the lifetime limit.
- Changes Insurance Companies – Plans cannot enter into a new policy, certificate, or contract of insurance after March 23, 2010, because, for example, the previous policy, certificate or contract is not being renewed.
Any reduction of plan benefits or increase in participant costs that does not exceed these limits will not cause a plan to lose its grandfathered status. Plans also can change premiums, make changes to comply with federal or state legal requirements, adopt voluntary changes to comply with PPACA, add new benefits and switch third-party administrators without losing grandfathered plan status.
According to the fact sheet issued jointly by the Departments, the limits on plan changes are designed to allow employers to be able to raise premiums to reasonably keep pace with health care costs, to make modest adjustments to the benefits that they offer and to increase deductibles and other out-of-pocket costs to keep pace with medical inflation. Other provisions of PPACA are intended to control the growth of health care costs by making changes to the health insurance system, thus the Departments maintain that the grandfathering rules should not make it difficult for employers to respond to the rising costs of health care and other changes. However, the Departments acknowledge that by 2013, anywhere from 34 percent to 64 percent of large employers (100 or more workers) and 49 percent to 80 percent of small employers (less than 100 workers) will lose grandfathered status.
Special Rules for Insured Collectively Bargained Plans
In the preamble to the final interim regulations, the Departments reject the suggestion that PPACA provides a delayed effective date for all collectively bargained plans to comply with all of the new insurance market reforms under PPACA, noting that a general delayed effective date was included in related bills, but not the final version of PPACA.
Instead, special rules apply to insured collectively bargained health plans that are maintained pursuant to one or more collective bargaining agreements that were ratified before March 23, 2010. These special rules do not apply to self-funded collectively bargained plans.
Such plans are grandfathered at least until the date on which the last of the collective bargaining agreements relating to such plans terminates. Thus, before the last of the applicable collective bargaining agreements terminates, any insured coverage provided pursuant to the collective bargaining agreement is a grandfathered plan, even if there is a significant change to the coverage.
The plans will not automatically lose grandfathered status after the date on which the last of the collective bargaining agreements terminates. Instead, whether or not the plan loses its grandfathered status will depend on whether any of the changes that have been made to the plan are considered “significant” by comparing the terms of coverage on the termination date with the terms that were in effect on March 23, 2010. However, the regulations clarify that a change in insurance carriers prior to the date the last of the collective bargaining agreements terminates will not be considered a “significant” change, causing the plan to lose grandfathered status.
Plans that fall under these special rules still have to comply with the requirements under PPACA that apply to grandfathered plans as the requirements become effective, even if the effective date occurs before the last of the applicable collective bargaining agreements terminates.
Some employers with non-calendar plan years facing open enrollment deadlines made changes to their plans before the final interim regulations were issued. The regulations include transition rules designed to assist employers who may have made changes that would otherwise jeopardize the plan’s grandfathered status.
Changes effective after March 23, 2010 that were made pursuant to a legally binding contract entered into, a state insurance filing made or a written amendment formally adopted before March 23, 2010, will be treated as if they were part of the plan terms on March 23, 2010, even though the changes were not yet effective. As a result, the changes that were made will not impact grandfathered status, even if the changes would have otherwise been considered significant.
Changes that were adopted on or after March 23, 2010 and before June 14, 2010 that are significant must be revoked or modified by the first plan year beginning on or after September 23, 2010 for the plan to retain its grandfathered status. In other words, the changes can remain in effect for the current plan year; however, the plan will lose grandfathered status unless the changes are revoked or modified for the next plan year beginning on or after September 23, 2010.
The Departments also included a good faith compliance exception in the preamble to the regulations. For purposes of enforcement, the Departments will take into account good faith efforts to comply with the requirements that were in the statute and may disregard plan changes that were adopted on or after March 23, 2010 and before June 14, 2010, that only modestly exceed the permissible limits described in the regulations.
Disclosure and Recordkeeping Requirements
To maintain grandfathered status, plans also must comply with certain administrative requirements:
- Disclosure Requirements – Plans must include a statement in all plan materials indicating that the plan is a grandfathered plan under PPACA and provide contact information for questions or complaints. The regulations provide model language that can be used to satisfy the disclosure requirements.
- Recordkeeping Requirements – Plans must maintain records documenting the terms of the plan that were in effect on March 23, 2010 and any other documents necessary to verify, explain or clarify its status as a grandfathered plan.
Does Grandfathered Status Really Matter?
If an employer determines that proposed changes to its plan will cause the plan to lose grandfathered status, it will have to weigh the cost of not making the proposed changes against the cost of having to comply with additional requirements under PPACA as the result of losing grandfathered status. Although many provisions of PPACA apply to grandfathered plans (these are discussed further below), others do not.
The following requirements under PPACA do not apply to grandfathered plans:
- Emergency Services – Plans must provide emergency services without prior authorization and at in-network levels, even if a non-network provider or facility is used. Most plans do not require prior authorization for emergency services. However, many plans do not provide emergency services at in-network levels.
- Preventive Services – Plans must provide certain preventive services, immunizations, and screenings without cost to participants. The preventive services, immunizations and screenings are based on federal guidelines. Many plans meet or exceed the guidelines. However, employers will have to compare the benefits provided under their plans to existing federal guidelines to ensure that their plans satisfy the requirements.
- Physician Choice – If a plan requires that participants designate a primary care physician, a participant must be allowed to select a primary care physician (or a pediatrician in the case of a minor) of his or her choice. Many plans already comply with this requirement.
- OB/GYN Services – Plans must provide women with direct access to obstetric or gynecologic care without the need for prior authorization or a referral. Many plans already comply with this requirement.
- Prohibition on Discrimination in Favor of Highly Compensated Employees – Section 105(h) of the Internal Revenue Code currently prohibits self-funded health plans from discriminating in favor of highly compensated employees with respect to eligibility and benefits. PPACA requires that fully insured plans comply with these nondiscrimination rules as well. This requirement could be a significant issue for employers that provide different levels of benefits to different groups of employees.
- Appeals Procedures – Plans must comply with internal and external review processes, provide notice to participants of the appeals processes in a culturally and linguistically appropriate manner and allow participants to present evidence and testimony as part of the appeals process. The internal claims procedures will be initially based on the Department of Labor’s current claims procedures regulations, so most plans should already comply. Fully insured plans will have to comply with state external review processes. If a state has not established an external review process or the plan is self-funded, then the external review processes will be established by the Department of Health and Human Services. Note that additional disclosures may be required and claimants will be entitled to testify, possibly requiring plans to provide for hearings.
- Dependent Child Coverage up to Age 26 – Plans that provide dependent coverage must continue to make such coverage available to children until age 26. This requirement applies to a limited extent to grandfathered plans prior to 2014 and then completely applies to grandfathered plans in 2014, as more fully explained below.
- Nondiscrimination in Health Care – Plans cannot discriminate against health care providers (e.g., chiropractors or optometrists) acting within the scope of their professional license and applicable state law.
- Disclosure of Quality of Care Information – Plans must report to the federal government and enrollees information on initiatives and programs that improve health outcomes. Presumably, this is something that will be compiled and reported by insurance carriers and third-party administrators on behalf of the plan.
- Prohibition on Gathering Certain Information – If the plan contains a wellness component, the plan cannot require disclosure of or collect information relating to the presence, storage or use of a lawfully possessed firearm or ammunition by a participant.
- Comprehensive Health Insurance Coverage – Plans must provide essential health benefits as determined by the Department of Health and Human Services (e.g., ambulatory, emergency, hospitalization, maternity, mental health and substance abuse, prescription, labs, preventive, pediatric services, etc.). This appears to be limited to insured plans. Employers will have to compare the benefits they provide with what the Department of Health and Human Services identifies as essential health benefits. For example, PPACA requires that dental and vision care be provided in connection with pediatric services.
- Limitations on Cost Sharing – Plans must not impose cost-sharing (i.e., out-of-pocket maximums and deductibles) in excess of limits provided under PPACA. The current limits are $5,950 for individual and $11,900 for family out-of-pocket maximums and $2,000 for single and $4,000 for family deductibles. These will be adjusted for inflation by the time the requirement goes into effect in 2014.
- Clinical Trials – Plans cannot exclude someone from coverage because the individual chooses to participate in a clinical trial, deny the individual participation in the clinical trial or deny coverage for routine care because the individual chooses to participate in a clinical trial. Employers will have to review their plans to determine if the plan’s exclusion for experimental and investigational services violates this requirement.
- Disclosure of Plan Information – Plans must disclose to the federal government and state insurance commissioner certain enrollee information such as claims payment policies and practices. Plans also have to provide information to enrollees on the amount of cost sharing for a specific item or service. Presumably, this is something that will be compiled and reported by insurance carriers and third-party administrators on behalf of the plan.
- Wellness Rewards – Plans must limit rewards for participating in a wellness program to 30 percent of the cost of coverage (and possibly 50 percent if increased by the Department of Health and Human Services). The current limit on wellness rewards is 20 percent.
Some Requirements Apply to Grandfathered Plans
Although grandfathered plans may avoid many of the new rules of PPACA, some provisions of PPACA are still applicable to grandfathered plans. Grandfathered and non-grandfathered plans are subject to the following requirements:
- Pre-Existing Conditions – Plans may no longer apply preexisting condition exclusions for children under the age of 19. Plans may no longer impose preexisting condition exclusions for all other participants beginning in 2014.
- Prohibition on Coverage Rescission – Plans cannot rescind health coverage except in the case of fraud or intentional misrepresentation.
- Coverage for Dependents – A grandfathered plan must offer coverage to dependent children up to age 26 if the child is not otherwise eligible for employer-sponsored coverage (other than coverage available under the other parent’s plan). In 2014, grandfathered plans also must provide coverage to children of covered employees until age 26, regardless of other available coverage.
- Elimination of Lifetime Limits and Annual Limits – Plans cannot impose lifetime limitations on “essential health benefits.” Prior to 2014, plans may establish certain restricted annual limits on essential health benefits. In 2014, plans cannot impose any annual limits on essential health benefits.
- Excessive Waiting Periods – Plans may not impose waiting periods in excess of 90 days.
Retiree-Only Plans and Excepted Benefit Plans
The preamble to the regulations provide an important clarification concerning retiree-only plans and excepted benefit plans (e.g., stand-alone dental and vision plans). Self-funded retiree-only plans and excepted benefit plans are not subject to any of the insurance market reforms. While a glitch in the statute does not appear to extend the same relief to insured retiree-only plans and excepted benefit plans, the Departments note no legislative intent to treat such plans differently and encourage the states not to impose any of the insurance market reforms on insured retiree-only plans and excepted benefit plans.
What Should a Plan Sponsor Do Now?
Employers who have already made changes to their existing group health plans should review whether the changes will cause the plan to lose grandfathered status. If the changes are significant and would result in the loss of grandfathered status, employers should compare the cost of revoking or modifying the changes to comply with the grandfathered plan rules with the cost of having to comply with the requirements that will apply if grandfathered plan status is lost.
Employers who are considering design changes to their existing plans should determine if such changes will cause the plan to lose its grandfathered status. If the changes are significant and would result in the loss of grandfathered status, employers should also perform a cost-benefit analysis to determine if making the changes is worth the cost of losing grandfathered status.
Employers trying to maintain grandfathered plan status must comply with PPACA’s recordkeeping and disclosure requirements, and they should update all plan materials to include the model language provided in the regulations.
If you have any questions on the subject of this article or would like more information, you may contact the authors or another Snell & Wilmer attorney at (602) 382-6000.