Health care reform update: new regulations spell out how health plans can lose their grandfathered status
June 25, 2010
On June 14, 2010, the federal government issued interim final rules that spell out how health plans could lose their “grandfathered” status under the recent health care reform legislation. Of particular note, plans could lose their grandfathered status if their employees’ cost for coverage increases beyond permitted levels or plan benefits are cut. It appears possible, however, to increase benefits offered under the plan without running afoul of the grandfathering rules.
Consequently, many employers may choose to abandon their grandfathered plan status in light of the significant limitations on benefit reductions and increasing employee costs for coverage.
If you would like to review the new regulations, you can download a copy at: http://www.dol.gov/federalregister/PdfDisplay.aspx?DocId=23967
The new regulations present several general principles for determining grandfathered plan status. Some of the key requirements are noted below:
- Component Benefit Packages. The definition of a grandfathered plan applies separately to each component benefit package under a group health plan. For example, if a group health plan offers a self-insured coverage option and two insured coverage options, the grandfathered status of each coverage option is analyzed separately.
- Renewed Policy. A renewed policy can still be grandfathered, but a new policy is not grandfathered.
- Disclosure Requirement. The plan must disclose to participants that the plan is grandfathered. The regulations contain model disclosure language. (See model language in the section below.)
- Enrolling New Employees and Family Members. Generally, newly-hired or newly-enrolled employees and their family members can be covered under a grandfathered plan without the plan losing its grandfathered status.
- Abusive Transactions. Anti-abuse rules are provided for business mergers and business activities that result in a transfer of employees into a grandfathered plan, if the transfer does not serve a bona-fide employment-based reason.
Many employers have wondered what changes can be made to a health plan without resulting in the plan losing its grandfathered status. The regulations clarify that the changes listed below will result in a loss of grandfathered status if the changes are made to polices in effect on March 23, 2010:
- Cannot Significantly Cut or Reduce Benefits. For example, grandfathered status would be lost if a plan decides to no longer provide coverage for prescription drugs.
- Cannot Raise Co-Insurance Charges. Typically, co-insurance requires a participant to pay a fixed percentage of a charge (for example, 20% of a hospital bill). Grandfathered plans cannot increase this percentage.
- Cannot Significantly Raise Co-Payment Charges. Frequently, plans require participants to pay a fixed-dollar amount for doctor’s office visits and other services. Compared with the co-payments in effect on March 23, 2010, grandfathered plans will be able to increase those co-pays by no more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation plus 15 percentage points. For example, if a plan raises its co-payment from $30 to $50 over the next two years, it will lose its grandfathered status.
- Cannot Significantly Raise Deductibles. Many plans require participants to pay the first bills they receive each year (for example, the first $500, $1,000, or $1,500 a year). Compared with the deductible required as of March 23, 2010, grandfathered plans can only increase these deductibles by a percentage equal to medical inflation plus 15 percentage points. For example, if medical costs were to rise an average of 4–5%, this formula would allow deductibles to go up by 19–20% between 2010 and 2011, or by 23–25% between 2010 and 2012. For a family with a $1,000 annual deductible, this would mean if they had a hike of $190 or $200 from 2010 to 2011, their plan could then increase the deductible again by another $50 the following year.
- Cannot Significantly Lower Employer Contributions. Grandfathered plans cannot decrease the percent of contributions the employer pays by more than 5 percentage points. For example, a plan would lose its grandfathered status if an employer decreased its share of premium from 80% to 70%.
- Cannot Add or Tighten an Annual Limit on What the Insurer Pays. Some insurers cap the amount that they will pay for covered services each year. If they want to retain their status as grandfathered plans, plans cannot tighten any annual dollar limit in place as of March 23, 2010. Moreover, plans that do not have an annual dollar limit cannot add a new one unless they are replacing a lifetime dollar limit with an annual dollar limit that is at least as high as the lifetime limit (which is more protective of high-cost enrollees).
- Cannot Change Insurance Companies. If an employer decides to buy insurance for its workers from a different insurance company, this new insurer will not be considered a grandfathered plan. This does not apply when employers when self-insured plans switch plan administrators.
Model disclosure of grandfathered status
To maintain status as a grandfathered health plan, a plan (1) must include a statement, in any plan materials provided to participants or beneficiaries (most likely the SPD) describing the benefits provided under the plan or health insurance coverage, that the plan believes that it is a grandfathered health plan within the meaning of section 1251 of the Patient Protection and Affordable Care Act and (2) must provide contact information for questions and complaints.
The Department of Labor published the model language below, which can be used by a group health plan to satisfy this disclosure requirement.
This [group health plan] believes this [plan] is a “grandfathered health plan” under the Patient Protection and Affordable Care Act (the Affordable Care Act). As permitted by the Affordable Care Act, a grandfathered health plan can preserve certain basic health coverage that was already in effect when that law was enacted. Being a grandfathered health plan means that your [plan] may not include certain consumer protections of the Affordable Care Act that apply to other plans, for example, the requirement for the provision of preventive health services without any cost sharing. However, grandfathered health plans must comply with certain other consumer protections in the Affordable Care Act, for example, the elimination of lifetime limits on benefits.
Questions regarding which protections apply and which protections do not apply to a grandfathered health plan and what might cause a plan to change from grandfathered health plan status can be directed to the plan administrator at [insert contact information]. [For ERISA plans, insert: You may also contact the Employee Benefits Security Administration, U.S. Department of Labor at 1-866-444-3272 or www.dol.gov/ebsa/health
reform. This website has a table summarizing which protections do and do not apply to grandfathered health plans.]
The benefits of maintaining grandfathered status
A grandfathered plan is not subject to certain benefit mandates under the health care reform legislation. Many employers will have to decide whether the benefits of maintaining grandfathered status outweigh the costs. The table below highlights the key benefit mandates that are avoided if the grandfathered plan status is maintained:
Benefit Mandates That Do NOT Apply to Grandfathered Plans
A plan that maintains its grandfathered status is not subject to certain benefit mandates that would otherwise apply for plan years starting on or after September 23, 2010, including:
- Insured plans will not be subject to the nondiscrimination rules of Internal Revenue Code Section 105(h);
- Coverage of recommended prevention services (e.g., immunizations and screenings) without cost sharing;
- External review of claims appeals;
- Emergency services without prior certification and allow out-of-network expenses under the same cost structure applicable to in-network emergency services;
- Participant choice of primary care physician and direct access to an obstetrician or gynecologist; and
- Coverage of treatments that are part of clinical trials.
In addition, a plan that maintains its grandfathered status is not subject to certain benefit mandates that would otherwise apply for plan years beginning on or after January 1, 2014, including the following:
- Coverage of certain “essential benefits” (e.g., emergency, pediatric, obstetric, and gynecological care);
- Total cost sharing for a year cannot exceed the out-of-pocket limits applicable to high-deductible health plans (currently $5,950 for individual coverage and $11,900 for family coverage); and
- Maximum deductible is limited to $2,000 for individual coverage and $4,000 for family coverage.
- This list was adapted from an EBSA fact sheet available at http://healthreform.gov/newsroom/keeping_the_health
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