Employers have anxiously awaited the release of the interim final rules (pdf) relating to “grandfathered” health care plans under the Patient Protection and Affordable Care Act (PPACA).  The regulations have garnered a significant amount of controversy in the past couple of days, as a leaked draft version indicated that more than half of employer-sponsored plans would not qualify for the grandfathered status.  Under PPACA, health plans that were implemented before the Act was signed into law on March 23rd are exempt from many, but not all, of the law's consumer protections.  The regulations seek to clarify how plans may qualify for and/or lose the grandfathered status. 

To temper the building criticism, Labor Secretary Hilda Solis and Department of Health and Human Services Secretary Kathleen Sebelius held a press conference on Monday to outline the new regulations and answer questions.  As explained during the press conference and reiterated in a fact sheet, the regulations stipulate that health plans will lose their grandfathered status if they chose to make “significant changes that reduce benefits or increase costs to consumers.” 

Grandfathered health plans do not need to comply with many of the new rules under the PPACA.  Retiree-only health plans, dental and vision only plans and health Flexible Spending Accounts (FSAs) are also generally exempt from the PPACA’s plan operation and design changes.  Some of the most important provisions of the new Act that grandfathered plans do not need to meet are:  changes in appeals process requirements; preventive care coverage with no cost sharing; clinical trial coverage; discrimination against individual participants based on health status; certain quality of care requirements; and nondiscrimination rules (exempt for insured grandfathered plans only).  However, employer-sponsored plans, including grandfathered plans, will be required to provide certain benefits for plan years beginning on or after September 23, 2010.  These benefits include:  no lifetime limits on coverage; no rescissions of coverage due except for fraud or intentional misrepresentation; extending dependent coverage until age 26; no pre-existing condition exclusions for children; and no “restricted” annual limits.

The top 11 things to know about the new regulations are as follows:

1.  Grandfathered Health Plans.  Any group health plans in which an individual was enrolled on March 23, 2010 is a grandfathered health plan, even if all of the individuals enrolled in the plan on March 23, 2010 cease to be covered in the future as long as someone is enrolled.  Family members enrolling after March 23, 2010 do not impact grandfathered status.   Each benefit package under a group health plan is treated as separate grandfathered plans.  The regulations, however, contain an anti-abuse feature to stop employers from certain business reorganizations or transfers among divisions or between employers to avoid losing grandfathered status.

2. New Policies, Certificates or Contracts ("Policies").  Other than collectively bargained plans, if an employer enters into a new Policy after March 23, 2010, that Policy is NOT a grandfathered plan.  Changing from Carrier A to Carrier B would cause the plan to lose grandfathered status.

3.  Disclosure and Recordkeeping Requirements.  Grandfathered plans must provide a written notice to all participants and beneficiaries about the grandfathered status of the plan.  A model notice is contained in the regulations.  The notice specifically provides "[b]eing a grandfathered health plan means your plan does not include certain consumer protections of the Affordable Care Act , that apply to other plans. For example, the requirement for the provision of preventive health services without any cost-sharing."  This language may be problematic in retaining good employee relations.  The grandfathered health plan must retain records regarding the coverage and costs in effect on March 23, 2010.  This should not be problematic since record retention is currently required under ERISA.

4.  Elimination of Benefits.  The elimination of all or substantially all benefits to diagnose or treat a particular condition will cause a plan to lose grandfathered status.  For example, eliminating the treatment for Cystic Fibrosis will cause a plan to lose grandfathered status. The elimination of benefits for any necessary element to diagnose or treat a condition is also an automatic loss of grandfathered relief.  For example, if a certain mental illness requires counseling and prescription drugs, the elimination of counseling will cause the plan to lose grandfathered status.

5.  Increase in Percentage of Cost Sharing.  Any increase, measured from March 23, 2010, in a percentage cost-sharing requirement (co-insurance) causes a group health plan to lose grandfathering.  For example, an increase from 20% for inpatient surgery to 30% will cause the plan to lose grandfathered status. 

6.  Increase in Fixed-Amount Cost-Sharing (excluding co-pays).   Any change to the fixed amount cost-sharing ($500 deductible or $2,500 out of pocket) must be less than the maximum amount determined by a formula.  If the total percentage increase in the cost-sharing measured from March 23, 2010 exceeds the maximum percentage increase then a plan loses its grandfathered status. The maximum percentage increase is medical inflation plus 15 percentage points.  

7.  Increase in a Fixed-Amount Co-Pay.  Any increase in a fixed-amount co-pay, determined as of the date of the increase, causes a grandfathered plan to lose grandfathered status if the total increase in the co-pay measured from March 23, 2010 exceeds the GREATER of (A) $5 increased by medical inflation ($5 times medical inflation, plus $5) or (B) the maximum percentage increase determined by expressing the total increase in the co-pay as a percentage.  To illustrate:  on March 23, 2010 grandfathered plan A has a $30 specialist office visit co-pay and the plan is amended to increase the specialist co-pay to $40.  On that date the medical care component of the CPI-U is 475.  The $10 increase in co-pay is expressed as a percentage (33.33%) (40-30=10;10 divided by 30=.3333; 3333=33.33%).  Medical inflation from March 23, 2010 is .2269.  The maximum percentage increase permitted is 37.69% (22.69% +15% = 37.69%).  The change is allowed because 33.33% is less than 37.69%). 

8.  Decrease in Contribution Rate by Employers.  A grandfathered plan will lose its grandfathered status if the employer decreases its contribution rate towards the cost of ANY tier of coverage for any class of similarly-situated individuals by more than five percentage points below the contribution rate for the coverage period that includes March 23, 2010. 

9.  Increase in Annual Dollar Limits.  Plans that do not have annual dollar limits cannot add a limit unless the new limit is replacing a lifetime dollar limit with an annual dollar limit that is at least as high as the lifetime limit.  

10.  Collectively Bargained Plans.  PPACA contains a special rule for collectively-bargained plans.  However, the interpretation of this provision in the interim final rule significantly diminishes its apparent intent, scope and utility, and is expected to generate controversy.  With respect to health insurance coverage maintained pursuant to one or more collective bargaining agreements ratified before March 23, 2010, the coverage is grandfathered at least until the date on which the last of the agreements relating to the coverage terminated, even if there is a change in issuers.  However, this provision applies only to fully-insured health plans maintained pursuant to a collective bargaining agreement.  At the termination of the last agreement, the terms of the coverage will be compared to the terms in effect on March 23, 2010 to determine if the coverage remains grandfathered.  Moreover, there is no deferred effective date for collectively-bargained plans from the provisions that apply to grandfathered plans, such as the extension of dependent coverage or prohibition on lifetime limits.  In essence, these changes must be made to the health care coverage before the contract expires just as they must be made to other grandfathered plans.  

11.  Transition Rules.  Any changes made after March 23, 2010 and before the regulations are first officially released to the public can be rescinded retroactively to maintain grandfathered status. 

Please see Littler's ASAP, "Healthcare Reform:  Long-Awaited "Grandfathered" Regulations Released - What Do Employers Need to Know?" for additional analysis. 

Melissa B. Kurtzman and Ilyse W. Schuman co-authored this entry.