PPACA Grandfathered Health Plan Status Rule Issued

 

            On June 14, 2010, the Departments of Labor, Health and Human Services (HHS), and the Treasury issued an Interim Final Rule relating to a group health plan's status as a "grandfathered" health plan under the Patient Protection and Affordable Care Act (PPACA).  The Interim Final Rule addresses the types of plan changes that will cause a group health plan to lose grandfathered status, and, thereby, lose the plan's exemption from several coverage mandates under the PPACA.  The Interim Final Rule also clarifies the status of a collectively-bargained plan and provides transitional relief for employers that have made changes to their group health plans that became effective after March 23, 2010, but prior to publication of the Interim Final Rule.  Lastly, in the preamble to the Interim Final Rule, the Secretaries of Labor, HHS and the Treasury make clear their intent to not apply the PPACA's coverage mandates to retiree-only health plans.  We will soon issue a separate Ice Miller Health Care Reform Alert addressing retiree-only plans.

 

General Definition of a "Grandfathered Health Plan"

           

            The PPACA generally provides that group health plans in existence as of March 23, 2010 (the date of enactment of the PPACA), are exempt from many, but not all, of the coverage mandates under the PPACA.  These plans are "grandfathered health plans" to which the PPACA mandates have a limited application.  For example, a grandfathered health plan is not subject to the mandate to provide first-dollar coverage for preventive care, and although it must extend dependent coverage to children under age 26, a grandfathered health plan can exclude children who have employer-sponsored coverage through their own employer or a spouse's employer until 2014.  As long as a plan maintains its grandfathered status, the limited application of the PPACA lasts indefinitely.

 

            The PPACA offers little guidance on how a plan may maintain grandfathered status.  The statutory language states that a plan will remain a grandfathered health plan even if:

 

1.      an existing enrollee renews coverage;

2.      an existing enrollee enrolls family members; and

3.      a new employee (and his or her family members) enroll in coverage under the plan.

 

The Interim Final Rule clarifies that new employees include both new hires and existing employees that are new enrollees.  Aside from these general parameters, the PPACA does not address what changes, if made to a grandfathered health plan, will cause the plan to lose its grandfathered status, leaving that question to be answered in regulatory guidance.  The Interim Final Rule is the first piece of guidance to address the issue.

 

Special Rule for Collectively Bargained Insured Plans

 

            A special rule applies to insured group health plans that are maintained pursuant to one or more collective bargaining agreements.  This special rule does not apply to self-funded collectively bargained plans.  Those plans are subject to the general grandfather rules discussed below.  Insured collectively bargained plans maintain their grandfathered status at least until the date on which the last agreement relating to the coverage that was in effect on March 23, 2010, terminates.  This is so even if there is a change in insurance issuers during that time period.

 

            The Interim Final Rule makes two key clarifications with respect to collectively bargained plans.  First, it confirms that collectively bargained plans (both insured and self-funded) that are grandfathered health plans are subject to the same coverage reform mandates under the PPACA at the same time that such mandates are effective with respect to other grandfathered health plans.  Therefore, collectively bargained plans must comply with the extension of dependent coverage mandate, the elimination of lifetime and annual dollar limits, and the prohibition on pre-existing condition exclusions at the same time that such mandates become effective for all other grandfathered health plans.

 

            Second, the Interim Final Rule states that a collectively bargained insured plan may maintain its grandfathered status beyond the termination of the last of the applicable collective bargaining agreements, provided that any changes to the terms of coverage under such plan are not changes that would cause the plan to lose grandfathered status under the rules set forth in the Interim Final Rule.  This essentially means that collectively bargained insured plans are treated the same as all other grandfathered health plans upon the termination of the last of the applicable collective bargaining agreements in effect on March 23, 2010, and so their grandfathered status may last indefinitely as well.

 

Maintaining and Losing Grandfathered Status: What Changes Are Allowed?

 

            The Interim Final Rule sets forth specific standards regarding the plan changes that an employer or employee organization may make without losing grandfathered status.  Plan changes that do not exceed these standards do not risk the plan's grandfathered status; however, noncompliance with even one of the standards will cause a complete loss of grandfathered status.  The Interim Final Rule clarifies that these standards are applied separately to each benefit package made available under a group health plan.  Thus, if an employer's group health plan contains a preferred provider organization (PPO) plan option and a high deductible health plan (HDHP) option, the grandfathering standards are applied separately to each of those options.  It is therefore possible that, depending on changes made to each option, the HDHP option could maintain grandfathered status, while the PPO might not.

 

            The Interim Final Rule provides standards with respect to five main categories of plan design changes:

·        Elimination of benefits.  If a group health plan eliminates all or substantially all benefits to diagnose or treat a particular condition, it will lose its grandfathered status.  The preamble to the Interim Final Rule notes that it does not matter if the condition for which benefits are eliminated affects relatively few individuals covered under the plan, such as cystic fibrosis.  In an example under the Interim Final Rule, a plan that provides counseling and prescription drugs as treatment for a particular mental health condition is treated as having eliminated all or substantially all benefits for that condition if the plan eliminates counseling as a treatment for the condition. 

·        Increase in percentage cost-sharing requirements.  If a group health plan increases the percentage cost-sharing requirements on participants above the percentage in effect on March 23, 2010, for any benefits under the plan, it will lose its grandfathered status.  This includes any changes to the percent of coinsurance imposed on plan participants.  This rule is different from the rules on fixed-amount cost sharing, discussed next.

·        Significant increase in fixed-amount cost-sharing requirements.  If a group health plan makes significant increases in fixed-amount cost-sharing requirements above the amount in effect on March 23, 2010, it will lose its grandfathered status.  A grandfathered health plan is still permitted to make some increases, provided that any such increases fall under certain maximum thresholds. 

o       With respect to fixed-amount cost sharing requirements other than co-payments, the maximum increase permitted without losing grandfathered status is medical inflation plus 15 percent (the "maximum percentage increase"). 

o       With respect to fixed-amount co-payments, the maximum increase permitted without losing grandfathered status is the greater of the maximum percentage increase or five dollars increased by medical inflation.  

Medical inflation is measured by the increase since March 2010 in the overall medical care component of the Consumer Price Index for All Urban Consumers (CPI-U) (unadjusted) published by the Department of Labor using the 1982-1984 base of 100.

·        Decrease in contribution rate by employers and employee organizations.  If an employer or employee organization decreases its contribution rate for any tier of coverage for any class of similarly situated individuals by more than five percent below the contribution rate in effect on March 23, 2010, the group health plan will lose its grandfathered status.  In an example under the Interim Final Rule, a decrease in employer contributions with respect to family coverage causes the plan to lose grandfathered status even though the contribution rate for self-only coverage remains the same.  The "contribution rate" is determined by the amount of contributions made by an employer or employee organization compared to the total cost of coverage, expressed as a percentage.  The total cost of coverage is determined in the same manner as COBRA premiums are calculated.  In the case of a self-insured plan, contributions by an employer or employee organization are equal to the total cost of coverage minus the employee contributions toward the total cost of coverage.

·        Changes in annual limits.  Changes related to annual limits can cause a loss of grandfathered status in three circumstances. 

o       If a group health plan did not impose an overall annual or lifetime limit on the dollar value of benefits as of March 23, 2010, the plan will lose its grandfathered status if it imposes an overall annual limit on the dollar value of benefits.

o       If a group health plan imposed an overall lifetime limit but not an overall annual limit on the dollar value of benefits as of March 23, 2010, the plan will lose its grandfathered status if it imposes an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010.

o       If a group health plan imposed an overall annual limit on the dollar value of benefits as of March 23, 2010, the plan will lose its grandfathered status if it decreases the dollar value of the annual limit.  This rule applies regardless of whether the plan also imposed an overall lifetime limit on the dollar value of benefits as of March 23, 2010.

This restriction on changes to a grandfathered health plan's annual limits must be read in conjunction with the PPACA's elimination of annual and lifetime limits.  Beginning with the first plan year on or after September 23, 2010 (January 1, 2011 for calendar year plans), group health plans, including grandfathered health plans, may not impose an overall lifetime limit on the dollar value of benefits.  However, plans may still impose "restricted" annual limits on the dollar value of benefits, as defined in regulations, until 2014.  The preamble to the Interim Final Rule indicates that the Secretaries of Labor, HHS and the Treasury expect to publish regulations regarding restricted annual limits in the very near future.  

           

            In addition to the above standards, a group health plan will also lose its grandfathered status if the employer or employee organization enters into a new policy, certificate, or contract of insurance after March 23, 2010 (which is not a renewal of an existing policy, certificate, or contract of insurance).  This means that if a plan changes insurance companies – even if it still meets all of the coverage and cost standards described above – it will lose grandfathered status.  A self-funded plan may change its third-party administrator without losing grandfathered status.  There is an exception for collectively bargained insured plans that allows them to change insurers as long as the plan is still maintained pursuant to a collective bargaining agreement that was in effect on March 23, 2010.  There are also anti-abuse provisions under the Interim Final Rule to prevent employers from shifting employees to other grandfathered health plans with fewer benefits to circumvent the limits on plan changes.

 

            Plan changes that do not exceed the standards described above will not cause a group health plan to lose grandfathered status.  For example, the Interim Final Rule permits a grandfathered health plan to make voluntary changes to the plan to increase benefits, to conform to required legal changes, to adopt voluntarily other coverage mandates in the PPACA, and to change third-party administrators without losing grandfathered status.  In addition, changes in premiums do not impact a group health plan's grandfathered status.

 

Responsibilities of a Grandfathered Health Plan

            To maintain grandfathered status, the Interim Final Rule requires a group health plan to include a statement in its plan materials provided to participants or beneficiaries describing the benefits provided under the plan with the following information:

1.      A statement that the group health plan believes it is a grandfathered health plan within the meaning of Section 1251 of the PPACA; and

2.      Contact information for questions and complaints, including, for ERISA plans, contact information for the Employee Benefits Security Administration.

 

            The Interim Final Rule contains model language that may be used by group health plans to satisfy this disclosure requirement.  The Secretaries of Labor, HHS and the Treasury have invited comments on possible improvements to the model language.  In addition, the Interim Final Rule requires that, for as long as a group health plan takes the position that it is a grandfathered health plan, such plan must maintain records documenting the plan or policy terms in connection with the coverage in effect on March 23, 2010, and any other documents necessary to verify, explain, or clarify its status as a grandfathered health plan.  These records must be made available for examination upon request.

 

Transitional Relief for Changes Already Made

 

            The Interim Final Rule provides transitional relief for employers that implemented plan changes that became effective after March 23, 2010, but prior to the publication of the Interim Final Rule in the Federal Register.  The Interim Final Rule was issued on June 14, 2010, and publication typically occurs within a few days of issuance.  The relief available depends on whether the change was adopted before or after March 23, 2010.

 

            If an employer made changes to its group health plan before March 23, 2010, but such changes were not effective until after March 23, 2010, those changes will be treated as the terms of the plan as of March 23, 2010 in the following instances:

 

1.      the change was pursuant to a legally binding contract entered into on or before March 23, 2010;

2.      the change was pursuant to a filing on or before March 23, 2010 with a state insurance department; or

3.      the change was pursuant to written amendments to a plan that were adopted on or before March 23, 2010.

 

In such case, the group health plan, as amended by such changes, is considered to be a grandfathered health plan.

 

            If an employer made changes to its group health plan after March 23, 2010, but adopted the changes before publication of the Interim Final Rule, the plan is permitted to either revoke or modify such changes, as necessary, effective as of the first day of the first plan year beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans).  If modified, the change must not exceed the standards described above in order for the plan to maintain its grandfathered status.  To take advantage of this relief, the Interim Final Rule provides that the adopted changes must be effective either before the date of publication of the Interim Final Rule, or effective on or after that date, provided that such changes are pursuant to a legally binding contract entered into before that date, a filing with a state insurance department before that date, or written amendments adopted before that date.

 

            For more information regarding the grandfathered status rules under the PPACA, or for any other questions regarding how health care reform impacts group health plans, please contact Christopher Sears, Tara Sciscoe, Shalina Schaefer, Mary Beth Braitman, Terry Mumford or an Ice Miller employee benefits attorney.

 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.