Health Care Reform - What Is A Grandfathered Plan?

June.21.2010

Employer-sponsored health plans that existed on March 23, 2010 are "grandfathered" and thereby exempt from some of the requirements of the Patient Protection and Affordable Care Act ("PPACA"). These include nondiscrimination requirements for insured plans, limits on permitted deductibles and out-of-pocket costs, and limits on cost sharing for preventative care.

On June 14, 2010, the Departments of Labor, Treasury and Health and Human Services (the "Departments") jointly released interim regulations outlining the types of plan changes that will result in a health plan losing its grandfathered status and thereby becoming subject to these PPACA requirements.

CHANGES THAT WILL CAUSE A LOSS OF GRANDFATHERED STATUS

The regulations do not address in detail all of the plan design changes that will threaten a health plan's grandfathered status. However, they do provide that any of the following changes to a health plan will cause that plan to no longer be considered a grandfathered plan as of the effective date of such change.

Changes in Employee Costs

In order to address the concern that employers will shift more of the cost of health coverage to employees, the regulations provide the following limits on the amount that employers may increase employee costs for coverage and still maintain the health plan's grandfathered status:

  • An employee's percentage of coinsurance may not increase at all from the level in effect as of March 23, 2010. For example, an employer cannot raise the percentage an employee must pay for inpatient surgery from 20% to 30%. The regulations explain that the amount of coinsurance automatically rises with medical inflation and that therefore any increase in the employee's coinsurance percentage would represent a significant change in the level of plan benefits.
  • Fixed-amount cost sharing (other than co-payments) may increase only by a total percentage that does not exceed medical inflation plus 15%. Medical inflation is defined as the increase in the overall medical care component of the consumer price index published by the Department of Labor for March 2010. For example, if an employer increases a $200 deductible amount or a $2,000 out-of-pocket limit by more than this threshold, the plan will no longer be considered grandfathered. 
  • Employee co-payments may only increase by the greater of: (1) medical inflation plus 15%; or $5 increased by medical inflation.

Grandfathered status also will be lost if an employer reduces its contribution rate by more than 5% below the rate in effect on March 23, 2010. For example, if as of March 23, 2010 an employer paid 80% of the cost of employee-only coverage, a reduction to less than 75% will result in the loss of the plan's grandfathered status.

Changes in Annual Limits

The regulations address three changes to annual limits that also will result in a plan no longer being a grandfathered plan:

  • A plan imposes an overall annual limit on the dollar value of benefits when, prior to March 23, 2010, the plan did not impose either an overall annual or lifetime limit.
  • A plan adopts an overall annual limit at a dollar value that is lower than the dollar value of the plan's lifetime limit when, prior to the March 23, 2010, the plan did not impose an annual limit.
  • Regardless of whether a plan imposed an overall lifetime limit as of March 23, 2010, the plan institutes a reduced annual limit.

Other Changes

If a plan eliminates all or substantially all benefits to diagnose or treat a particular condition, such plan will cease to be treated as a grandfathered plan. In addition, if an employer does not renew its existing insurance contract (whether it enters into a new insurance contract with its existing carrier or changes carriers), its health plan will no longer be considered grandfathered.

CHANGES THAT WILL NOT CAUSE A LOSS OF GRANDFATHERED STATUS

Changes to employer premiums, changes to comply with Federal or State legal requirements, changes to voluntarily comply with PPACA and a self-insured plan changing third party administrators will not cause a health plan to lose grandfathered status. In addition, changes made after March 23, 2010 that were required by a legally binding contract entered into prior to March 23, 2010 with a State insurance department, or made in accordance with written amendments to the plan that were adopted prior to March 23, 2010, will not threaten the plan's grandfathered status.

Also, because the Departments realize that group health plans often make routine changes from year to year, some of which may have taken place after March 23, 2010 and before the issuance of these interim regulations, the Departments will take into account good-faith efforts to comply with a reasonable interpretation of PPACA and may disregard changes that only modestly exceed the thresholds set forth above. In addition, if an employer made plan modifications before the issuance of these interim regulations that would remove its plan's grandfathered status, such status would be preserved if the employer revoked such changes effective prior to the first day of the first plan year beginning on or after September 30, 2010.

ADDITIONAL REQUIREMENTS

In order to maintain grandfathered status, a plan is also required to (1) include a statement in any plan materials provided to participants or beneficiaries that describes plan benefits, a statement that the plan is a grandfathered plan (model language for such statement is provided in the regulations); (2) include in such statement contact information for participants for questions and complaints; and (3) maintain records documenting the terms of the plan as of March 23, 2010 and any documents necessary to verify, explain or clarify its status as a grandfathered plan. 

CLARIFICATIONS & COMMENTS

The above rules apply separately to each benefit package made available under a group health plan. Therefore, if employees can choose two different coverage levels, the limits on changes that can be made to a grandfathered plan will be determined separately at each level.

The Departments have requested comments on whether the following changes should result in a plan's loss of grandfathered status: (1) changes to plan structure (such as switching from a health reimbursement account to major medical or from an insured product to a self-insured arrangement); (2) changes in a plan's provider network; (3) changes to a drug formulary; or (4) any other substantial change to the overall benefit design. 

Specific comments also are requested on the above guidance regarding cost sharing, benefit levels and reductions in employer contributions. Please let us know if we can help you prepare a comment.

MORE TO COME

More guidance is expected to be issued in the coming months regarding health care reform. We will continue to provide Orrick alerts as this guidance is issued.