Guidance Tells How to Maintain-or Lose-Grandfathered Status Under the Patient Protection and Affordable Care Act

The Patient Protection and Affordable Care Act enacted a package of health insurance reforms for group health plans, including benefit mandates and health insurance market reforms. "Grandfathered plans”-plans in effect on March 23, 2010 (the date of enactment) are exempt from certain-but not all-of the law's provisions.

The Internal Revenue Service, Department of Labor's Employee Benefits Security Administration and Department of Health and Human Services have jointly issued an interim final rule regarding grandfathered plans, in particular, what changes to grandfathered plans will and will not affect a plan's status.

Among the Act's provisions that do not apply to grandfathered plans are the following:

• The requirement that preventive care services, including immunizations and screenings, are covered with no cost-sharing for plan participants.

• Requirements under Sec. 105(h) of the Internal Revenue Code that plan provisions do not discriminate in favor of highly compensated employees.

• Maintenance of claims and appeals processes that include external review.

• Certain benefits requirements involving provider choice, emergency services and clinical trials.

According to the interim final rule, if a grandfathered plan does any of the following, it will lose its grandfathered status:

• Eliminate all or substantially all benefits to diagnose or treat a particular condition. This includes the elimination of an element necessary to treat the condition (for example, if a plan provides counseling and prescription drugs for a mental health condition, and eliminates the counseling benefit while maintaining the prescription drug benefit, it will be considered to have eliminated substantially all benefits for the condition and lose its grandfathered status).

• Increase coinsurance rates, to any extent at all, for plan participants.

• Increase participant copayment levels by more than the greater of $5 (adjusted annually for inflation) or a percentage equal to medical inflation plus 15 percentage points.

• Increase a fixed-dollar cost-sharing requirement other than a copayment-such as a deductible-by more than medical inflation plus 15 percentage points.

• Lower employer cost-sharing by more than 5 percentage points (for example, decreasing employer cost-sharing while increasing the percentage of employee cost-sharing from 10% to 20%).

• Add or tighten limits on what an insurer pays (for example, capping or lowering the annual dollar amount covered by a plan for specific services or adding an annual dollar limit maximum where one did not exist on March 23, 2010).

• Change insurance carriers or purchase a product from a new insurance carrier.

Plan changes such as premium increases and changes in third-party administrators will not cause a plan to lose its grandfathered status.

The interim final rule includes special provisions for insured collectively bargained plans. If the collective bargaining agreement was ratified before March 23, 2010, a fully insured plan will be considered grandfathered until the date on which the last agreement relating to the coverage in effect on that date is terminated. Self-insured collectively bargained plans are subject to the same rules as grandfathered plans that are not under a collective bargaining agreement.

As noted above, while grandfathered plans are not subject to some of the Act's provisions, they are subject to others, such as the prohibition on lifetime limits on the dollar value of benefits and the prohibition on coverage rescissions, except in cases of fraud or an intentional misrepresentation of a material fact by an enrollee.

A grandfathered plan also is required to disclose to plan participants that, as a grandfathered plan, it may not include certain elements of the consumer protections provided for under the Act.

While grandfathered status can offer significant advantages, especially in regard to avoidance of some of the Act's benefits mandates, employers will need to assess how these balance against the need or desire to modify plan provisions or change carriers in response to rising plan costs and rates.

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