Health care reform: Grandfathered health plan regulations

by Susan M. Nash, Amy M. Gordon, Jamie A. Weyeneth and Elizabeth A. Savard

Employers should review their current benefit plan offerings to determine whether the benefits of maintaining grandfathered health plan coverage outweigh the restrictions on plan design and cost-sharing changes imposed by these interim final rules.

Long-awaited guidance defining what is a “grandfathered health plan” under health care reform was recently issued in the form of interim final rules by the U.S. Departments of the Treasury, Labor, and Health and Human Services. Various requirements passed as part of health care reform under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, apply differently to grandfathered health plans than to non-grandfathered plans. For example, grandfathered health plans are not required to provide first-dollar coverage for preventive health services, and the requirement to cover adult children to age 26 does not apply to grandfathered plans until 2014 if the adult child is eligible for other employer-sponsored health plan coverage. The preamble to the interim final rules also clarifies the effective date of health care reform mandates as applied to collectively bargained plans.

What is a grandfathered health plan?

A grandfathered health plan is coverage provided on a fully insured or a self-insured basis and which was in existence on March 23, 2010 (the date of health care reform enactment — the “grandfather date”). Grandfathered health plan coverage includes coverage of an individual or an individual and the individual’s family members enrolled in the group health plan or health insurance coverage on the grandfather date. The plan does not lose grandfathered status simply because one or more (or even all) of the individuals enrolled in the plan or coverage on the grandfather date cease to be covered, as long as the plan or coverage has continuously covered someone since the grandfather date.

Susan M. Nash

Amy M. Gordon

Jamie A. Weyeneth

Elizabeth A. Savard

Grandfathered health plans may permit newly hired or newly enrolled employees and their families to enroll in the plan after the grandfather date without jeopardizing the plan’s grandfathered status. For example, an employee can switch from one grandfathered health plan offered by the employer to another grandfathered health plan offered by the employer without causing either plan to lose grandfathered status. In addition, an employee who had previously declined coverage prior to the grandfather date can enroll himself or herself and eligible family members in a grandfathered health plan after such date.

The grandfathering rules are applied separately to each benefit package made available under a group health plan or health insurance coverage. Subject to special rules for collectively bargained plans, health insurance products sold to new entities or individuals after the grandfather date will not be grandfathered, even if those products were offered in the group or individual market before the grandfather date. Therefore, insurers wishing to maintain grandfathered products will have to keep existing policies (and renewals of such policies) separate from newly sold policies which will not be eligible for grandfathered health plan protection. In addition, if a certificate of insurance is not renewed, and a new contract is entered into, then the new contract is not grandfathered.

Disclosure and documentation requirements

In order to maintain grandfathered health plan status, the group health plan or group health insurance coverage must maintain records documenting the plan or policy terms in effect on the grandfather date and any other documents necessary to verify, explain, or clarify the plan’s status as grandfathered health plan coverage. These records must be made available to participants, beneficiaries, individual policy holders, or state or federal agencies upon request.

The records must be kept for as long as the plan or health insurance coverage takes the position that the coverage remains grandfathered. Any plan materials provided to a participant or beneficiary describing the benefits provided under a plan or health insurance coverage must include a statement that the plan or coverage believes it is a grandfathered health plan.

The plan or coverage must also provide contact information for questions and complaints in any such materials. A model statement that will satisfy this disclosure requirement is included in the guidance.

Losing grandfathered status?

The interim final rules describe the types of changes that will cause a group health plan to lose grandfathered status:

• Entering into a new policy, certificate, or contract of insurance with the plan’s insurance issuer;
• Changing the insurance issuer of a group health plan (except with respect to collectively bargained plans during the term of any existing agreement). However, if a plan has three benefit options, and the plan only changes the health insurance issuer of one of the options, the coverage under the option that has a new issuer is no longer grandfathered health plan coverage. The remaining two benefit options remain grandfathered health plan coverage so long as those options do not lose grandfathered status for some other reason. Changing a self-insured plan’s third-party administrator would not, by itself, cause a plan to lose grandfathered status;
• Changing the plan to eliminate all or substantially all of the benefits to diagnose or treat a particular condition, or to eliminate benefits for any necessary element to diagnose or treat a condition;
• Increasing any percentage cost-sharing requirement (eg, coinsurance);
• Increasing a fixed-amount cost-sharing requirement, other than a copayment (eg, a deductible or out-of-pocket limit), if the total percentage increase in the cost-sharing requirement exceeds the “maximum percentage increase” (the increase in the overall medical care component of the Consumer Price Index for All Urban Consumers [CPI-U] plus 15%);
• Increasing a fixed-amount copayment, if the total increase in the copayment exceeds the greater of: $5 increased by medical inflations measured from the grandfather date, or a total percentage measured from the grandfather date that is more than the sum of medical inflation plus 15%;
• Decreasing the employer or employee organization’s contribution rate toward the cost of any tier of coverage for any class of similarly situated individuals by more than 5%. The contribution rate means the amount of contributions made by an employer or employee organization compared to the total cost of coverage, expressed as a percentage. The cost of coverage is determined in the same way the premium is calculated for COBRA continuation coverage purposes. It is unclear whether a plan could add new tiers of coverage, such as adding a new “employee plus two dependents” category to help defray the added cost of covering adult dependents, without losing grandfathered status; and
• Decreasing or imposing a new annual limit on the dollar value of benefits — however, plans with an existing lifetime limit are permitted to adopt an overall annual limit at a dollar value that is lower than the dollar value of the plan’s lifetime limit, subject to agency guidance regarding restrictions on annual limits.

In addition, the interim final rules contain anti-abuse rules with regard to certain mergers, acquisitions and plan transfers that do not have a bona fide employment-based reason in order to attempt to maintain grandfathered status.

Making changes without risking status

The following changes do not cause a plan or coverage to lose grandfathered status:

• Changes effective after the grandfather date pursuant to a legally binding contract entered into on or before the grandfather date, pursuant to a filing on or before the grandfather date with a state insurance department, or pursuant to written amendments to a plan that were adopted on or before the grandfather date;
• Changes adopted prior to the date the interim final rules are released (scheduled for publication in the Federal Register on June 17, 2010) that would otherwise cause the plan or coverage to lose grandfathered health plan 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;
• Voluntary changes to increase benefits, to conform to required legal changes (including health care reform mandates), and to voluntarily adopt health care reform requirements;
• Increasing a fixed-amount copayment, as long as the total increase in the copayment is less than $5 increased by medical inflations measured from the grandfather date, or a total percentage measured from the grandfather date that is more than the sum of medical inflation plus 15%; and
• Increasing a fixed-amount cost-sharing requirement other than a copayment as long as the total percentage increases in the cost-sharing requirement is less than the maximum percentage.

In addition, recognizing that group health plans and health insurance issuers 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.

Collectively bargained plans

Insured health plan coverage maintained pursuant to one or more collective bargaining agreements between employee representatives and one or more employers and ratified before the grandfather date is grandfathered health plan coverage — at least until the date the final collective bargaining agreement relating to the coverage in effect on the grandfather date terminates.

A coverage amendment made to conform to a requirement added by the market reform provisions added in health care reform is not treated as a termination of the collective bargaining agreement. As an exception to normal grandfathering rules, changing the insurance issuer during the period of a collective bargaining agreement will not cause the health plan to lose grandfathered status. After the termination date, the coverage is treated as grandfathered health plan coverage until it loses grandfathered status under one of the situations described earlier. The determination of grandfathered status is made by considering changes to the terms of the coverage since the grandfather date. Therefore, changes made during the period of a collective bargaining agreement could cause the plan to lose grandfathered status immediately upon the termination date.

There is no special grandfathering rule for self-insured collectively bargained plans. Therefore, a self-insured plan maintained pursuant to one or more collective bargaining agreements between employee representatives and one or more employers is only a grandfathered health plan to the extent that it satisfies the requirements described above and does not make any changes that result in the loss of grandfathered health plan status.

The guidance clarifies that there is no delayed effective date for health care reform requirements that apply to collectively bargained plans. Grandfathered collectively bargained health plans are subject to the same requirements as other grandfathered health plans, so changes may be required to bring a collectively bargained health plan into compliance with health care reform in the middle of a collectively bargaining agreement period.

Next steps for plan sponsors

Employers should 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 these 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 may find 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.

Susan M. Nash, Amy M. Gordon, Jamie A. Weyeneth and Elizabeth A. Savard are partners with the Employee Benefits & Pensions practice group of global law firm McDermott Will & Emery LLP. They can be reached at snash@mwe.com, agordon@mwe.com, jweyeneth@mwe.com, or esavard@mwe.com.