The grandfathered plan guidance we have been waiting for has finally arrived! The Department of Health and Human Services, the Department of Labor's Employee Benefits Security Administration and the Department of the Treasury recently issued much-needed guidance on the "grandfathered" plan provisions of the Patient Protection and Affordable Care Act (PPACA) and the related Health Care and Education Reconciliation Act of 2010 (together, the Health Care Reform Law). Although the Health Care Reform Law generally applies to all group health plans and health insurance coverage going forward, certain existing plans and coverage are deemed "grandfathered" and exempt from a number of the new requirements. The regulations, published in the Federal Register on June 17, 2010, outline the steps that group health plans must take to maintain their grandfathered status and clarify what changes a grandfathered plan can make without jeopardizing its grandfathered status. The regulations also provide helpful "transitional rules" under which plans that adopted changes prior to the issuance of these regulations may be able to preserve their grandfathered status.
What is a "grandfathered" health plan? A "grandfathered" health plan is any group health plan or health insurance coverage in which an individual was enrolled on March 23, 2010, the date of PPACA's enactment. A grandfathered plan can be an insured or a self-insured arrangement, and can be a single employer plan, a multi-employer plan, or a multiple employer plan.
Drinker Biddle Note: As discussed later in this client alert, the new guidance provides that grandfathered status is to be determined separately with respect to each "benefit package" made available under a group health plan.
Is a grandfathered plan required to apply for or otherwise document its grandfathered status?
A grandfathered plan is not required to apply for grandfathered status. For as long as a plan takes the position that it is a grandfathered plan, however, it must maintain records documenting the terms of the plan in effect on March 23, 2010, and it must maintain any other "documents necessary to verify, explain, or clarify its status as a grandfathered health plan." These documents could include intervening and current plan documents, health insurance policies, certificates or contracts of insurance, summary plan descriptions, documentation of premiums or the cost of coverage, and documentation of required employee contribution rates. These records must be available for examination upon request.
Drinker Biddle Note: This documentation is essential to establish that a grandfathered plan has not been so substantially changed from its terms in effect on March 23, 2010, that it loses its grandfathered status.
Is a grandfathered plan required to notify participants of its grandfathered status?
The guidance clarifies that to maintain status as a grandfathered health plan, a plan must include a statement in any plan materials provided to a participant or beneficiary describing the benefits provided under the plan (i.e., the summary plan description or open enrollment materials) that the plan "believes" it is a grandfathered health plan. The statement must provide contact information for directing questions and complaints. The regulations provide model language that can be used to satisfy the disclosure notice.
Drinker Biddle Note: Additional guidance is expected on the disclosure requirement and the model language will likely be evolving. For example, the regulators are considering a requirement to describe or list all provisions from which a grandfathered plan is exempt.
What changes and/or amendments are permitted without losing grandfathered status? The Health Care Reform Law does not expressly prohibit amendments to a grandfathered plan, nor does it require that plan sponsors maintain benefits at a certain level. A grandfathered plan may enroll new employees (including both new hires and eligible employees who previously declined enrollment) without losing the plan's grandfathered status. And an individual who is covered under a grandfathered plan may enroll new dependents in the plan without affecting the grandfathered status of the plan, provided the plan offered dependent coverage on March 23, 2010. The regulations clarify that a plan does not lose grandfathered status simply because one or more of the individuals (or even all individuals) enrolled in the plan as of March 23, 2010, cease to be covered, as long as the plan has continuously covered someone since March 23, 2010.
The preamble to the regulations also clarifies that changes to a plan other than those specified in the regulations (and summarized below) will not cause a plan to cease to be a grandfathered plan. For example, a plan will retain its grandfathered status if it changes third-party administrators, changes the plan to comply with federal or state law, or voluntarily adopts Health Care Reform Law changes it is not otherwise required to adopt.
What changes and/or amendments will cause a group health plan to lose its grandfathered status?
Until the June 17, 2010, guidance was issued, it was unclear what amendments or other changes could be made to a grandfathered plan without jeopardizing its grandfathered status. The guidance clarified that a group health plan will cease to be a grandfathered plan under the following circumstances:
- Elimination of Benefits. A plan will cease to be a grandfathered plan if it eliminates all or substantially all benefits to diagnose or treat a particular condition.
- Example. The elimination of benefits for counseling that are needed to treat a particular mental health condition will cause the plan to lose grandfathered status.
Drinker Biddle Note: This is a very broad rule. Plan sponsors should review the impact of this rule carefully whenever considering eliminating coverage for any procedure or benefit offered as of March 23, 2010.
- Increase in Percentage Cost-Sharing Requirement. A plan will cease to be grandfathered if it increases its percentage costsharing requirement (such as co-insurance) from its March 23, 2010, level.
- Example. On March 23, 2010, a group health plan has a coinsurance requirement of 20 percent for inpatient surgery; if the plan is subsequently amended to increase the coinsurance requirement to 25 percent, the plan will lose grandfathered status.
Drinker Biddle Note: The regulations divide cost-sharing requirements into three types and provide a different rule for each type. This restriction described in this paragraph 2 applies to any cost-sharing requirement that is determined based on a percentage instead of a fixed amount. The two rules applicable to fixed amount cost-sharing requirements are described below.
- Increase in a Fixed-Amount Copayment. A plan will cease to be a grandfathered plan if it increases its copayments (over the March 23, 2010, amount) by an amount that exceeds the greater of: (a) a percentage equal to the sum of medical inflation (expressed as a percentage) plus 15 percentage points, or (b) $5 increased by medical inflation.
- Example. On March 23, 2010, a grandfathered health plan has a copayment requirement of $30 per office visit for specialists. The plan is subsequently amended to increase the copayment requirement to $40 (a 33.33 percent increase). If medical inflation is 22.69 percent, the permissible maximum increase is 37.69 percent (22.69 percent + 15 percent). Because 33.33 percent does not exceed 37.69 percent, the change in copayment does not cause this plan to lose grandfathered status.
Drinker Biddle Note: Medical inflation is defined in the new regulations and is generally based on the increase in the medical care component of the Consumer Price Index for All Urban Consumers (CPI-U) over its March 2010 level.
- Increase in a Fixed-Amount Cost-Sharing Requirement Other Than a Copayment. A plan will cease to be a grandfathered plan if it increases a fixed-amount cost-sharing requirement (e.g., deductible or out-of-pocket maximum) by a total percentage measured from March 23, 2010, that is more than the sum of medical inflation (expressed as a percentage) and 15 percentage points.
- Example. On March 23, 2010, a grandfathered health plan has a deductible of $1,000 per covered individual. The plan is subsequently amended to increase the deductible to $1,200 (a 20 percent increase). If medical inflation is 22.69 percent, the permissible maximum increase is 37.69 percent (22.69 percent + 15 percent) and this particular change in the deductible does not cause the plan to lose a grandfathered status.
- Decrease in Employer Contribution Rate. A plan will cease to be a grandfathered plan if the employer decreases its contribution rate for any tier of coverage for any class of similarly situated individuals by more than five percentage points below the contribution rate that was in effect on March 23, 2010.
- Examples. On March 23, 2010, a self-insured group health plan provides two tiers of coverage – self-only and family. The employer contributes 80 percent of the total cost of coverage for selfonly and 60 percent of the total cost of coverage for family. Subsequently, the employer reduces the contribution rate to 50 percent for family coverage, but keeps the same contribution rate for self-only coverage. The decrease of 10 percentage points for family coverage causes the plan to lose grandfathered status. The fact that the contribution rate for self-only coverage remains the same does not change the result. If, instead of reducing the family rate by 10 percent, the employer reduced its contribution rate for self-only coverage to 75 percent and its contribution rate for family coverage to 55 percent, the plan would not lose grandfathered status (because neither tier was reduced by more than 5 percent).
Drinker Biddle Note: The new guidance makes it clear that the total cost of the plan may increase (i.e., employer and employee portions) but the employer may not lower its percentage contribution by more than 5 percent. As a result the employees' actual premium amount may increase, but employees cannot be required to pay a portion of the cost greater than the portion employees paid in March 2010, plus 5 percent.
- Decreasing or Imposing a New Annual Limit on the Dollar Value of Benefits.
- A plan that did not impose an overall annual or lifetime limit on March 23, 2010, ceases to be a grandfathered plan if it later imposes an overall annual limit on the dollar value of benefits.
- A plan that on March 23, 2010, imposed an overall lifetime limit but no overall annual limit will cease to be a grandfather plan if it later adopts an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010.
- A plan that on March 23, 2010, imposed an overall annual limit on the dollar value of all benefits ceases to be a grandfathered plan if it decreases the dollar value of the annual limit.
Drinker Biddle Note: Under the Health Care Reform Law, for plan years beginning on or after September 23, 2010, all plans (both grandfathered and non-grandfathered) generally are prohibited from applying a lifetime limit or an annual limit on "essential health benefits;" however, "restricted" annual limits may still be permitted prior to plan years beginning on or after January 1, 2014, pending regulatory guidance. The preamble to these new grandfathered regulations indicates that the regulations on restricted annual limits will be issued, "in the very near future."
Will changing insurance carriers affect a plan's grandfathered status? Yes. A fully insured group health plan that changes insurance carriers will lose its grandfathered status. Under the regulations, if an employer chooses not to renew its previous policy, certificate or contract of insurance and enters into a new policy, certificate or contract of insurance after March 23, 2010, the new policy, certificate or contract of insurance is not grandfathered health plan coverage.
Are the six categories above, plus changing insurers, the only changes that will jeopardize a plan's grandfathered status? Not necessarily... the Departments have asked for comments on whether the following changes should result in loss of grandfathered status: (1) changes to plan structure (e.g., from an insured plan to a self-insured plan); (2) changes in a network plan's provider network; (3) changes to a prescription drug formulary; or (4) any other "substantial change to the overall benefit design." Any new standards that are more restrictive will be applied prospectively.
How do the grandfathered plan rules apply to collectively bargained plans? The regulations clarify that there is no delayed effective date for collectively bargained plans generally. Collectively bargained plans (both insured and self-insured) in effect on March 23, 2010, may take advantage of the general grandfather rule, however. And insured collectively bargained plans retain grandfathered status, even if changes are made that would otherwise jeopardize the plan's grandfathered status (e.g., changing insurers), until the date on which the collective bargaining agreement relating to the coverage on March 23, 2010, terminates. At that time, an insured collectively bargained plan either retains or loses grandfathered status, depending on the changes made after March 23, 2010 (see discussion above regarding permitted changes).
Drinker Biddle Note: Self-funded collectively bargained plans cannot take advantage of the special grandfathered rule that is available for insured collectively bargained plans.
If one option under a plan (e.g., a PPO option) loses grandfathered status, will the remaining options offered under the plan also lose grandfathered status? The grandfathered plan rules apply separately to each "benefit package" made available under a group health plan. If one option under the plan loses grandfathered status, the other options may still qualify as grandfathered health plan coverage. Although "benefit package" is not defined in the new guidance, the following example from the regulations illustrates the intent:
- Example. Facts: A group health plan not maintained pursuant to a collective bargaining agreement offers three benefit packages on March 23, 2010. Option F is a self-insured option. Options G and H are insured options. Beginning July 1, 2013, the plan replaces the issuer for Option H with a new issuer.
Conclusion: In this example, the coverage under Option H is not grandfathered health plan coverage as of July 1, 2013. Whether the coverage under Options F and G is grandfathered health plan coverage is determined separately under the regulations. The fact that Option H ceases to be grandfathered health plan coverage does not necessarily affect the grandfathered status of Options F and G.
What if an employer wants to eliminate a benefit package option, is involved in a corporate transaction, or wants to make other changes to restructure its plan design (e.g., merge two plans)? Any employer who will be restructuring its group health plan design (e.g., due to a corporate merger or as part of a streamlining of its benefit options), should ensure that any changes do not violate the "anti-abuse" rules if the employer wants to be sure the plan(s) involved retain grandfathered status. Under the new regulations, a plan ceases to be a grandfathered plan if (1) employees are transferred into that plan (the transferee plan) from another plan (the transferor plan), (2) the terms of the two plans are compared and the differences, if made as an amendment to the transferor plan, would cause a loss of grandfathered status, and (3) there is no bona fide employment-based reason for the transfer. The regulations state that changing the terms or cost of coverage is not a bona fide employmentbased reason. In addition, if the principal purpose of a merger, acquisition, or similar business restructuring is to cover new individuals under a grandfathered health plan, the plan ceases to be a grandfathered health plan.
Drinker Biddle Note: It would be helpful to have more guidance on the application of these anti-abuse rules. For example, it is not clear how these rules would apply to the elimination of a benefit package where more than one option remains after elimination.
What happens to a plan that adopted changes or amendments prior to the issuance of the regulations that may affect its grandfathered status? The regulations include two transition rules that provide relief to plans that may have unknowingly jeopardized their grandfathered status by adopting changes before the grandfather regulations were issued. Under the first transition rule, if a group health plan adopted changes before March 23, 2010, that are not effective until after March 23, 2010, the changes are considered part of the terms of the plan on March 23, 2010, and do not jeopardize the plan's grandfathered status if those changes fall under one of these categories:
- changes effective after March 23, 2010, pursuant to a legally binding contract entered into on or before March 23, 2010;
- changes pursuant to a filing on or before March 23, 2010, with a state insurance department; or
- changes pursuant to written amendments to a plan that were adopted on or before March 23, 2010.
Under the second transition rule, a plan will not cease to be a grandfathered plan if it adopts changes after March 23, 2010, and prior to June 14, 2010, that would otherwise cause the plan to lose grandfathered status, if such changes are revoked or modified, effective as of the first day of the first plan year on or after September 23, 2010.
The preamble to the regulations also provides that the "Department will take into account good-faith efforts to comply with a reasonable interpretation of the statutory requirements and may disregard changes to plan and policy terms that only modestly exceed those changes described" in the regulations and that are adopted before June 14, 2010.
Drinker Biddle Note: The regulations do not define "modestly exceed" and additional guidance is needed on this good faith compliance rule. In the absence of additional guidance, the conservative approach would be to revoke or modify any changes to the plan that might affect its grandfathered status, effective as of the first plan year after September 23, 2010.
So, is it worth it to be a grandfathered health plan? Each plan sponsor will need to evaluate its particular circumstances and plan design to assess whether retaining grandfathered status is desirable. As noted above, plan sponsors that intend to maintain their plans as grandfathered health plans will have to maintain detailed documentation to be able to compare current plan terms to those in effect on March 23, 2010. In addition, the plans will need to notify participants of grandfathered status and the significance of this status. Aside from these administrative factors, plan sponsors will need to evaluate whether they are willing to limit future plan design changes to those permitted by the grandfathered plan regulations. Some plan sponsors may maintain grandfathered plan status for only a short transition period. Grandfathered plans will want to continually re-assess that status as new guidance is issued in the future. In addition, over time, many of the Health Care Reform Law changes that are not applicable to grandfathered plans will become "industry standard," which may result in more and more plans eventually choosing not to retain their grandfathered status. Below we discuss some advantages of grandfathered status (i.e., the reform provisions that do not apply to grandfathered plans), as well as highlight a few of the Health Care Reform Law changes that apply even if a plan is grandfathered.
What are the advantages of grandfathered status? Grandfathered plans may benefit from either a delayed effective date or an exemption from certain requirements of the Health Care Reform Law. If a plan were to lose its grandfathered status, in addition to the other Health Care Reform Law changes generally applicable to all group health plans (see next Q&A), the following health care reform provisions will apply:
Effective for plan years beginning on or after September 23, 2010 (except as noted below):
- Certain preventive health services, including certain immunizations and cancer screenings, must be provided without cost sharing (i.e., copayment or coinsurance).
- Nondiscrimination rules apply to fully insured plans.
Drinker Biddle Note: This is a key issue for any fully insured plan provided exclusively to highly paid individuals.
- The claims and appeals process must include both internal and external review procedures.
Drinker Biddle Note: For a group health plan, the internal process must be consistent with the ERISA claims procedures (including as may be modified by future regulations). The external process will be an additional level of review with reviewers independent of the plan/plan sponsor. This external appeal process is significant because it could mean that the plan loses control over interpreting its own terms.
- Participants must be permitted to select any participating primary care provider as the participant's primary care provider.
- Emergency room services must be covered without pre-authorization and out-of-network services must be provided without increased cost-sharing.
- Pre-authorization and referral requirements may not be imposed on obstetrician and gynecologist services.
- Insured group health plans will be required to submit a report about the plan's terms that are designed to improve health outcomes (e.g., wellness programs, disease management techniques, etc.). [Note: Guidance is required to be issued no later than March 23, 2012; actual compliance date is unknown.]
Effective for plan years beginning on or after January 1, 2014 (except as noted below):
- The plan will be required to meet certain costsharing restrictions. In particular, the plan's annual out of pocket maximum (OPX) may not exceed the 2014 OPX limits for health savings accounts (HSAs) (adjusted based on changes in the average premium rate for 2015 and later years). The 2010 HSA OPX limit is $5,950 for singles ($11,900 for families).
- Annual deductibles cannot exceed $2,000 ($4,000 for families) (as indexed).
- Health care coverage must be issued on a "Guaranteed Issue" basis.
- Certain types of minimum coverage must be provided to an individual who is eligible to participate in an approved clinical trial for the treatment of cancer or other life-threatening disease.
Other Special Rules:
- Employers will be required to make certain reports regarding enrollment, plan design, contribution rates, etc. The effective date of these reporting requirements is unclear.
- A grandfathered plan is not required to fully implement the adult child (age 26) mandate until the first plan year beginning on or after January 1, 2014. If the adult child has access to any other employer-sponsored health plan (disregarding the parents' plans), then a grandfathered plan is not required to provide access to that child for the plan years starting in 2011-2013.
Does grandfathered status relieve a plan from all of the Health Care Reform Law requirements?
No. A grandfathered plan is only relieved of some of the Health Care Reform Law requirements. All employers with more than 50 employees are subject to the employer shared responsibility provisions and will be assessed a penalty if the employer provides "no coverage" or "unaffordable coverage," beginning in 2014, and grandfathered plans are not exempt from this requirement. Free-choice vouchers may need to be provided to employees. In addition to the employer mandate provisions, grandfathered plans are also subject to a number of new "insurance reforms" under the Health Care Reform Law, including:
- A plan may not impose pre-existing condition exclusions on children under the age of 19 (effective for plan years beginning on or after September 23, 2010). No pre-existing condition exclusion may be imposed on any participant for plan years beginning on or after January 1, 2014.
- Waiting periods for eligibility purposes may not exceed 90 days (effective for plan years beginning on or after January 1, 2014).
- A plan may not rescind coverage unless the covered individual committed fraud or made an intentional misrepresentation of a material fact (effective for plan years beginning on or after September 23, 2010).
- Plans must eliminate lifetime maximum limits on coverage of essential benefits and eliminate certain annual limits (effective for plan years beginning on or after September 23, 2010).
- Every plan must provide a uniform explanation of coverage and 60 days advanced notice of any material modifications to the terms summarized in that explanation (effective March 23, 2012). Please note that this list is not exhaustive, but highlights many of the group insurance market reform provisions of the Health Care Reform Law that apply to grandfathered plans
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.