U.S. Agencies Clarify Restrictions on 'Grandfathered' Plans

Rules would limit employer changes to health care plans

By Stephen Miller June 14, 2010

The U.S. Departments of Health and Human Services (HHS), Labor and Treasury have issued interim final rules (published in the June 17, 2010, Federal Register) intended to clarify the changes that employers can make to their health care plans and still maintain "grandfathered" status under the Patient Protection and Affordable Care Act, the health care reform law enacted on March 23, 2010. In addition, HHS issued a fact sheet on the new regulations.

“With the announcement of the new ‘grandfather’ rule, we’re providing the market stability and flexibility to ensure that families and businesses can make the choices that work best for them,” said Secretary of Health and Human Services Kathleen Sebelius, in an official statement.

But according to a response from Susan Eckerly, senior vice president of the National Federation of Independent Business, the rules on grandfathered plans "mean small businesses will be left with even less choice and flexibility. Instead, they will be faced with the difficult choice of paying more to maintain grandfathered coverage, shopping for a new (and more expensive) plan or possibly dropping it entirely."

What Are "Grandfathered" Plans?

Employer-provided health plans that existed as of March 23, 2010, are "grandfathered" and do not have to comply with the new requirements to offer preventive health without cost sharing, establish external review procedures for the claims appeal process, cover clinical trials, and comply with certain quality of care reporting requirements, among other health reform mandates.

However, even grandfathered plans are subject to some new rules for plan years starting after Sept. 23, 2010, including no lifetime limits, no “restricted” annual limits (e.g., annual dollar-amount limits on coverage below standards to be set in future regulations), no pre-existing condition-exclusion requirements, and the requirement to cover adult children until they reach age 26. (See the SHRM Online article "GrandfatheredPlans Spared Some Reform Mandates.")

'Routine" Changes Permitted

The interim final rules clarify that plans will lose their grandfather status if they choose to significantly cut benefits or increase out-of-pocket spending for consumers. Grandfathered health plans will be able to make routine changes to their policies and maintain their status. These routine changes include:

  • Cost adjustments to keep pace with medical inflation.
  • Adding new benefits.
  • Making modest adjustments to existing benefits.
  • Voluntarily adopting new consumer protections under the new law.
  • Making changes to comply with state or other federal laws.

“The rule we are announcing today will allow employers to make routine and modest adjustments to co-payments, deductibles and employer contributions to their employees’ premiums without forfeiting grandfather status. This flexibility will encourage employers to continue offering health coverage to their employees and help to ensure coverage for all Americans,” said a statement by Secretary of Labor Hilda Solis.

'Significant' Changes Imperil Exemption

Plans will lose their grandfathered status, however, if they choose to make significant changes that reduce benefits or increase costs to employees. Details about what routine changes insurers and employers can make without losing their grandfathered status, and the projected impact on large and small employer plans, can be found in the HHS fact sheet.

Briefly, under the rule, a health insurance plan can lose its grandfathered status if it eliminates all benefits for a particular condition or if it increases deductibles or co-payments by more than the rate of medical inflation plus 15 percentage points.



Allowable Percent Change in Co-Payments from 2010

Medical inflation* (4%) + 15% = 19%

Medical inflation* (4% x 3 years = 12%) + 15% = 27%

Deductibles or co-payments can increase 15 percentage points above medical inflation over time

* Assumes annual medical inflation at 4%.

Source: U.S. Department of Health and Human Services

In addition, a health plan would lose its grandfathered status if an employer reduces its contribution so that its share of the total cost of coverage declines by more than 5 percentage points below its contribution rate on March 23, 2010, for any tier of coverage affecting any class of similarly situated individuals.

The HHS fact sheet provides further details on these and other restrictions under the interim final rules. According to the fact sheet, compared to polices in effect on March 23, 2010, grandfathered plans:

  • Cannot significantly cut or reduce benefits. For example, if a plan decides to no longer cover care for people with diabetes, cystic fibrosis or HIV/AIDS.
  • Cannot raise co-insurance charges. Typically, co-insurance requires a patient to pay a fixed percentage of a charge (for example, 20 percent of a hospital bill). Grandfathered plans cannot increase this percentage.
  • Cannot significantly raise co-payment charges. Frequently, plans require patients 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. 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. In recent years, medical costs have risen an average of 4 percent to 5 percent, so this formula would allow deductibles to go up, for example, by 19 percent to 20 percent between 2010 and 2011, or by 23 percent to 25 percent 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. Many employers pay a portion of their employees’ premium for insurance and this is usually deducted from their paychecks. Grandfathered plans cannot decrease the percent of premiums the employer pays by more than 5 percentage points (for example, decrease their own share and increase the workers’ share of premium from 15 percent to 25 percent).
  • 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 self-insured employers switch plan administrators, or to collective bargaining agreements.

Notification and Other Requirements

In addition, the interim final rules provide for:

  • Promoting transparency by requiring a plan to disclose to consumers every time it distributes materials whether the plan believes that it is a grandfathered plan and therefore is not subject to some of the additional coverage requirements under the health care reform law.
  • Revoking a plan’s grandfathered status if it forces consumers to switch to another grandfathered plan that, compared to the current plan, has less benefits or higher cost sharing as a means of avoiding new coverage requirements.
  • Revoking a plan’s grandfathered status if it is bought by or merges with another plan to avoid complying with the law.

Good Faith Compliance

Recognizing that group health plans may have made design changes since the grandfather date, the preamble to the interim final rules states that changes made in good faith compliance with the health care reform grandfathering requirements prior to the date of the interim final rules release may be disregarded by regulators for enforcement purposes if the changes only modestly exceed the permitted changes described above.

Comments Sought

Deadline for written comments from the public on the final interim rules is Aug. 17, 2010. Comments may be submitted online to www.regulations.gov with identification number RIN 1210-AB42.

Comments may also be sent to:

Office of Health Plan Standards and Compliance Assistance
Employee Benefits Security Administration, Room N-5653
Attention: RIN 1210-AB42
U.S. Department of Labor
200 Constitution Ave. NW
Washington, DC 20210

Next Steps for Plan Sponsors

An alert from law firm McDermott Will & Emery LLP advises employers to review their current benefit plan offerings to determine whether the benefits of maintaining grandfathered health plan coverage outweighs the restrictions on plan design and cost-sharing changes imposed by the interim final rules. Employers who decide to retain the grandfathered status of their group health plan should carefully document the plan or policy terms in effect on the grandfather date and include the model grandfather statement in plan materials distributed to participants and beneficiaries.

Employer sponsors of insured group health plans should be aware that their insurance carriers may not continue to offer certain products as grandfathered health plan coverage because of the need to separately track and administer grandfathered policies and non-grandfathered policies.

Stephen Miller
is an online editor/manager for SHRM.

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