Grandfathered Plans: To Be or Not to Be?
By Sandra E. Quilty, Baudino Law Group, PLC, Des Moines, IA
Last month, the Departments of Health and Human Services, Labor and Treasury issued an anxiously awaited Interim Final Rule on “grandfathered” health plans. The Interim Final Rule (“Rules”) was issued on June 14 and published in the June 17 Federal Register. The Rules provide guidance regarding what employers must do to maintain the grandfathered status of their plans as well as what would cause a plan to lose its status. The Rules are effective upon publication and comments are invited and due on or before August 16, 2010.
Under the Patient Protection and Affordable Care Act – also known within the industry as the Affordable Care Act (“ACA”) – plans or coverage in existence on the date of enactment are subject to some but not all provisions. The Rules are intended, ultimately, to protect the ability of individuals and businesses to keep their current plan. The Administration estimated that by 2013, health plans covering as few as 39 percent and as many as 69 percent of employees could lose protected status.” Consistent with Congress’ intent, the Rules seek to strike a balance in preserving one’s right to maintain existing coverage, containing costs and improving quality of healthcare coverage.
The ACA provides that group health plans in existence on the date of enactment – March 23, 2010 – are considered “grandfathered” and exempt from certain insurance reforms. Despite the many exceptions to some of the burdensome requirements under the new law made for grandfathered plans, however, there is a subset of provisions with which it must comply. Routine changes can be made without the risk of lost status. These changes include cost adjustments to stay pace with medical inflation, increased benefits, minor adjustments to existing benefit packages, adoption of consumer protections, change in third-party administrator, enrollment of new employees or family members of new or current enrollees, and any other changes required by law. Generally, a health plan that significantly decreases benefits and materially increases cost sharing to the extent that it may discourage beneficiaries from seeking needed treatment will lose its grandfathered status.
All plans, regardless of being grandfathered or not, must provide certain benefits for plan years starting September 23, 2010. All plans must: ensure no lifetime limits on coverage; not rescind coverage unless due to fraud; extend parental coverage to adult children 26 years of age; not exclude children for pre-existing conditions; and not have “restricted” annual limits.
The Rules set forth the reasons for which a plan would lose its grandfathered status. The requirements are as follows:
- Entering into a new policy, certificate or contract with the insurance issuer;
- Changing the insurance issuer for a group health plan;
- Eliminating all or substantially all benefits to diagnose or treat a particular condition regardless of how few may be affected ;
- Increasing any percentage of cost-sharing, such as co-insurance;
- Increasing a fixed amount cost sharing requirement, other than a co-payment, in excess of 15 percent over the medical inflation rate ;
- Increasing a fixed-amount copayment, if the total increase exceeds the greater of $5 increased by medical inflation or a percentage equal to 15 percent over the medical inflation rate;
- Adding or decreasing certain annual or lifetime limits on the dollar value of benefits; or
- Decreasing the contribution rate toward the cost of coverage by more than 5 percentage points.
Recognizing that some plans and issuers may have implemented changes since the ACA’s enactment, the Interim Final Rule provides transition rules for changes already in process. Essentially, regulators for enforcement purposes may disregard changes made in good-faith compliance prior to the publication of the Rules. Hence, changes adopted prior to release of the Rules that would have resulted in a plan’s loss of status will not trigger such loss so long as the changes are revoked in a timely manner. This so-called “grace period” for an employer is only triggered if the plan is modified to remove the changes that would have otherwise rendered it non-compliant before the first plan year beginning after September 23, 2010. As long as the plan is restored to its March 23, 2010 form, the plan will be deemed grandfathered.
Additionally, the Interim Final Rules contain anti-abuse rules to ensure that certain employer-related activities have a “bona-fide employment-based reason” and are not being conducted in order to attempt to maintain grandfathered status. The Rules include two provisions specifically, which are intended to prevent abuse by issuers of grandfathered plans . First, if the principal purpose of a merger and acquisition or any other type of organizational restructuring is to cover new individuals under a grandfathered plan then the plan ceases to be grandfathered. The intention behind this provision is to prevent grandfathered status from being treated as a commodity that can be bought and sold. Second, if an employer makes a change in plan eligibility for purposes of reducing benefits and there is no legitimate employer reason it then loses grandfathered status. The standard for plan issuers to consider is whether the change is occurring due to a “bona fide employment-based reason.”
The Rules also impose disclosure and recordkeeping requirements in order to maintain grandfathered status. A statement that the plan is believed to be a grandfathered plan must be included in any plan materials provided to participants. Moreover, contact information must be provided to participants for any questions and complaints. Group health plans must maintain records documenting the plan or policy terms in effect on March 23, 2010. Any other documents necessary to verify, explain, or clarify the plan’s status must be kept on-hand and made available upon request. Participants, beneficiaries or state or federal officials may request examination of the records. The records shall be kept for as long as the Plan holds itself out as grandfathered. The Rules contain model language that can be used and will satisfy the disclosure requirement.
The Obama Administration has frequently promised that “most of the 133 million Americans with employer-sponsored health insurance through large employers will maintain the coverage they have today”. Plan sponsors will need to decide whether to continue offering the grandfathered plan, significantly change the terms of the plan, or to cease offering the plan. Decisions will be significantly affected by the preferences and behaviors of it enrollees. Employers are in a world of considerable uncertainty as the health care landscape evolves to comply with the changes of the ACA. Essentially, an employer considering changes or modifications to its group health plan will need to weigh the importance of maintaining the grandfathered status or allowing it to be forfeited.
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