Health Care Reform - Grandfathered Health Plan Regulations

By  Daniel R. Salemi

As mentioned in a previous alert, certain new requirements under the Patient Protection and Affordable Care Act (PPACA), signed into law on March 23, 2010, as modified by the Health Care and Education Reconciliation Act of 2010 ("Reconciliation Bill" and combined, "Health Care Act") will not apply to group health plans that qualify for "grandfathered" status. On June 17, 2010, the Departments of Labor, Health and Human Services, and Treasury issued interim final regulations regarding the requirements for achieving and maintaining grandfathered status under the Health Care Act. These regulations are effective immediately, although the regulations provide a grace period through September 23, 2010, as discussed below.

The Health Care Act provides grandfathering protection in two circumstances. There is a general provision that applies to all group health plans and a more specific provision for collectively bargained plans.

General Grandfather Rule
The general grandfather provision requires group health plans to have had an individual enrolled in the plan on March 23, 2010. Each different benefit package offered under a plan (for example, PPO or HMO options) is treated as a separate plan for grandfathering purposes.

Grandfather Rule for Collectively Bargained Plans
The grandfather provision for collectively bargained plans requires the underlying collective bargaining agreement to have been ratified before March 23, 2010. A collectively bargained plan loses its grandfathered status upon the termination of the underlying collective bargaining agreement. The regulations clarify that a collectively bargained plan that is fully insured and that loses its grandfathered status following the termination of the underlying collective bargaining agreement may then qualify under the general grandfather rule based on a comparison of the terms of the plan at the termination of such agreement and the terms that were effective on March 23, 2010. Importantly, the collectively bargained grandfather rule does not apply to self-insured plans (although the general grandfather rule may apply).

Benefits of Having Grandfathered Status
Grandfathered plans are exempt from the following new requirements of the Health Care Act:

• Coverage of Preventive Care
• Uniform Explanations of Coverage
• Application of Nondiscrimination Rule to Fully-Insured Plans
• Reporting of Wellness and Health Promotion Benefits
• Claims Procedures
• Prohibition of Discrimination Based on Health Status
• Prohibition of Discrimination Against Providers
• Limitations on Cost Sharing

All of the Health Care Act’s other requirements will apply regardless of grandfathered status. So while the benefits of being a grandfathered plan are considerable, plan sponsors should weigh the administrative burden/costs of maintaining grandfathered status described below.

Maintaining Grandfathered Status
Disclosure Requirement
The regulations require a grandfathered plan to include a disclosure statement regarding the plan’s grandfathered status in the materials that describe the plan to participants. The regulations provide a model disclosure that can be used to satisfy this requirement.

Prohibited Changes
In general, a plan other than a collectively bargained plan will lose its grandfathered status as a result of the following plan changes after March 23, 2010:

• The plan sponsor entering into a new insurance policy for the plan.
• The elimination of all or substantially all benefits to diagnose or treat a particular condition.
• Any increase in a percentage cost-sharing requirement (for example, a coinsurance obligation).
• Any increase in a fixed-amount cost-sharing requirement other than a copayment (for example, deductibles or out-of-pocket limits) that exceeds medical inflation plus 15%.
• Any increase in a fixed-amount copayment that exceeds the greater of $5 or medical inflation plus 15%.
• A decrease in the employer’s contribution rate of more than 5%.
• Certain changes in annual limits:
  • The addition of a new overall annual limit on the dollar value of benefits.
  • The addition of an overall annual limit that is lower than the plan’s previously-existing lifetime limit.
  • A decrease in the plan’s previously-existing overall annual limit.

Anti-Abuse Provision
The regulations also contain an anti-abuse provision that generally prohibits the use of mergers, acquisitions or similar transactions if the principal purpose is to avoid losing grandfathered status. The anti-abuse provision also prohibits the transfer of employees between grandfathered plans to avoid losing grandfathered status, unless there is a separate, bona fide, employment-based reason for doing so.

Grace Period for Revoking Disqualifying Plan Changes
Finally, the regulations include a grace period during which a plan can revoke any disqualifying plan changes that were made after March 23, 2010, but before June 14, 2010. The disqualifying plan changes must be revoked before the first day of the plan year beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans).

The text of the regulations may be found here.