Health Care Reform - Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

June 16‚ 2010

Departments of Treasury, Labor, and Health and Human Services Publish Interim Final Rules Implementing “Grandfather” Rules under Health Care Reform

By Alden J. Bianchi

The Patient Protection and Affordable Care Act of 2010, together with the Health Care and Education Reconciliation Act of 2010 (collectively, the “Act”), have ushered in a new era of comprehensive health care regulation. A key feature of the Act is its impact on group health insurance carriers and employer-sponsored group health plans, which are principally (though not exclusively) regulated under the Act’s provisions governing “Individual and Group Market Reforms” and “Health Insurance Market reforms” (collectively, “insurance market reforms”). The obligation on the part of group health plans and policies to implement the insurance market reforms is mitigated to a degree under the Act’s “grandfather” rules, which delay certain of the Act’s requirements and provide a complete exemption from the other requirements.

Grandfathered plans will be able to maintain some of their current coverage provisions, and will require fewer changes to plan documents and administrative procedures in order to comply with the Act. These rules are therefore critically important to plan design and operation. But the Act’s grandfather provisions left many unanswered questions. The Departments of Treasury, Labor, and Health and Human Services recently issued interim final rules (the “interim final rules”), which answer many questions and generally provide guidance on the application of the grandfather rules. The interim final rules are effective July 12, 2010.

Grandfather Rules—Overview

The Act provides that certain group health plans and health insurance coverage existing as of March 23, 2010 (the date of enactment of the Act) are subject only to certain provisions of the new law. These plans are referred to as “grandfathered” health plans. A “grandfathered” plan is defined as a group health plan (which includes single employer plans, multiemployer plans, whether insured or self-funded) or health insurance coverage in which an individual was enrolled on March 23, 2010. Grandfather status is not affected by renewals or the addition of new participants after March 23, 2010. Similarly, family members may be added provided that the plan otherwise offered family coverage as of March 23, 2010. But the Act does not address at what point changes to a group health plan or health insurance coverage in which an individual was enrolled on March 23, 2010 are significant enough to cause the plan or health insurance coverage to cease to be a grandfathered health plan. This and other issues are addressed by the interim final rules.

Controlling Law and Application to Retiree-Only Plans

The Act’s insurance market reforms reorganize, amend, and add to the provisions of the Public Health Service Act (PHSA). But the Act also amends the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (the Code) to incorporate most of the insurance market reforms into ERISA and the Code, thereby making them applicable to group health plans and health insurance issuers providing health insurance coverage in connection with group health plans. The Act provides that, to the extent ERISA or the Code conflicts with the PHSA’s insurance market reform provisions, the PHSA rules will apply—but only with respect to provisions added by the Act. The preamble to the interim final rule applies these rules to conclude that the Act’s insurance market reforms do not apply to plans with less than two participants who are current employees. Accordingly, retiree-only plans that cover less than two participants who are current employees need not adopt the Act’s insurance market reforms.

The Grandfather Rule—Generally

A group health plan or group or individual health insurance coverage is a grandfathered health plan with respect to individuals enrolled on March 23, 2010. A group health plan or group health insurance coverage does not cease to be grandfathered health plan coverage merely because one or more (or even all) individuals enrolled on March 23, 2010 cease to be covered, provided that the plan or group health insurance coverage has continuously covered someone since March 23, 2010. The rules apply separately to each benefit package made available under a group health plan or health insurance coverage. Except in the case of certain collectively bargained plans, if an employer or employee organization enters into a new policy, certificate, or contract of insurance after March 23, 2010 (e.g., any previous policy, certificate, or contract of insurance is not being renewed), then that policy, certificate, or contract of insurance is not a grandfathered health plan.

Notice Requirement

For a health plan that is otherwise eligible for grandfather status to gain the benefits of grandfather status, the plan or health insurance coverage must include a statement, in any plan materials provided to participants or beneficiaries (in the individual market, primary subscribers) describing the benefits provided under the plan or health insurance coverage, that “the plan or health insurance coverage believes it is a grandfathered health plan within the meaning of section 1251 of the Affordable Care Act” and providing contact information for questions and complaints. The interim final rules provide the following helpful model language:

This [group health plan or health insurance issuer] believes this [plan or coverage] is a “grandfathered health plan” under the Patient Protection and Affordable Care Act (the Affordable Care Act). As permitted by the Affordable Care Act, a grandfathered health plan can preserve certain basic health coverage that was already in effect when that law was enacted. Being a grandfathered health plan means that your [plan or policy] may 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. However, grandfathered health plans must comply with certain other consumer protections in the Affordable Care Act, for example, the elimination of lifetime limits on benefits.

Questions regarding which protections apply and which protections do not apply to a grandfathered health plan and what might cause a plan to change from grandfathered health plan status can be directed to the plan administrator at [insert contact information]. [For ERISA plans, insert: You may also contact the Employee Benefits Security Administration, U.S. Department of Labor at 1-866-444-3272 or www.dol.gov/ebsa/healthreform. This website has a table summarizing which protections do and do not apply to grandfathered health plans.] [For individual market policies and nonfederal governmental plans, insert: You may also contact the U.S. Department of Health and Human Services at www.healthreform.gov.]

In addition, the health plan or health insurance issuer must maintain records documenting the terms of the plan or health insurance coverage that were 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.

Adding New Employees

The Act and the interim final rules expressly allow a grandfathered health plan to add new employees (whether newly hired or newly enrolled) and their families without jeopardizing grandfathered status. The interim final rules add a gloss to the rule; however, under which grandfather status is forfeited where “the principal purpose of a merger, acquisition, or similar business restructuring is to cover new individuals under a grandfathered health plan.” The interim final rule contains a second anti-abuse rule that addresses a situation under which employees who previously were covered by a grandfathered health plan are transferred to another grandfathered health plan. Thus, grandfather status may not be retained indirectly by making changes that would result in loss of grandfather status if the changes were made directly, unless there is a valid business purpose for doing so (e.g., the closing of a plant or division accompanied by the transfer of affected employees to another of the employer’s grandfathered group health plans).

Applicability of the Insurance Market Reforms to Grandfathered Plans

Only certain of the Act’s insurance market reforms are affected by grandfather status, and some but not all grandfather rules continue indefinitely. The following provisions do not apply to grandfathered plans:

PHSA Provision

Provision

§ 2701

Fair health insurance premiums

§ 2702

Guaranteed availability of coverage

§ 2703

Guaranteed renewability of coverage

§ 2705

Prohibiting discrimination against individual participants and beneficiaries based on health status

§ 2706

Nondiscrimination in health care

§ 2707

Comprehensive health insurance coverage (applicable to issuers in the individual and small group markets)

§ 2709

Coverage for individuals participating in approved clinical trials

§ 2713

Coverage of preventive health

§ 2715A

Provision of additional information

§ 2716

Prohibition on discrimination in favor of
highly-compensated individuals (not applicable to
self-insured plans)

§ 2717

Ensuring quality of care

§ 2719

Appeals process

§ 2719A

Patient protections

 

Thus, the following of the Act’s requirements do apply to grandfathered plans:

 

PHSA Provision

Provision

§ 2704

Prohibition on preexisting condition exclusion or other discrimination based on health status (not applicable to grandfathered individual health insurance coverage)

§ 2708

Prohibition on excessive waiting periods

§ 2711

No lifetime or annual limits (annual limits: not applicable to grandfathered individual health insurance coverage)

§ 2712

Prohibition on rescissions

§ 2714

Extension of adult child coverage to age 26 (but for plan years beginning prior to January 1, 2014, grandfathered plans may exclude adult children eligible for certain employer-sponsored plans)

§ 2715

Development and utilization of uniform explanation of coverage documents and standardized definitions

§ 2718

Bringing down the cost of health care coverage (applicable to insured pans only)

Maintenance of Grandfather Status

The most important provisions of the interim final rules are those governing the maintenance of grandfather status, i.e., to what extent can changes be made to a plan or health insurance coverage without losing grandfather status? The interim final rules answer this question by establishing the following rules:

(a)

Elimination of a benefit

The elimination of all or substantially all benefits to diagnose or treat a particular condition will cause a plan or health insurance coverage to cease to be a grandfathered health plan. (For example, if a plan eliminates all benefits for cystic fibrosis, the plan will cease to be a grandfathered health plan, even though this condition may affect relatively few individuals covered under the plan.) Similarly, the elimination of a benefit necessary to diagnose or treat a condition is considered the elimination of all or substantially all benefits to diagnose or treat a particular condition. (Thus, if a plan provides benefits for a particular mental health condition, the treatment for which is a combination of counseling and prescription drugs, and subsequently eliminates benefits for counseling, the plan is treated as having eliminated all or substantially all benefits for that mental health condition.)

(b)

Increase in a cost-sharing percentage

Any increase (measured from March 23, 2010) in a percentage cost-sharing requirement (such as the requirement that an individual pay 20% of a hospital bill) will result in a group health plan or health insurance coverage ceasing to be a grandfathered health plan.

(c)

Increase in a fixed-amount cost-sharing requirement other than a copayment

Any increase in a fixed-amount cost-sharing requirement other than a copayment (for example, a deductible or out-of-pocket limit), determined as of the effective date of the increase, causes a group health plan or health insurance coverage to cease to be a grandfathered health plan if the total percentage increase in the cost-sharing requirement measured from March 23, 2010 exceeds the rate of medical inflation (from March 23, 2010) plus 15 percentage points.

(d)

Increase in a fixed-amount copayment

Any increase in a fixed-amount copayment, determined as of the effective date of the increase, causes a group health plan or health insurance coverage to cease to be a grandfathered health plan if the total increase in the copayment measured from March 23, 2010 exceeds the greater of (i) $5 increased by medical inflation (i.e., $5 multiplied by the medical inflation rate plus $5), or (ii) the rate of medical inflation (from March 23, 2010) plus 15 percentage points.

(e)

Decrease in contribution rate by employers and employee organizations

A group health plan or group health insurance coverage ceases to be a grandfathered health plan if the employer or employee organization 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 on March 23, 2010. A group health plan or group health insurance coverage will also forfeit grandfather status if the employer or employee organization decreases its contribution rate based on a formula towards the cost of any tier of coverage for any class of similarly situated individuals by more than 5 percent below the contribution rate for the coverage period that includes March 23, 2010. “Similarly situated individuals” are those described in the HIPAA nondiscrimination regulations (26 CFR 54.9802-1(d), 29 CFR 2590.702(d), and 45 CFR 146.121(d)), and the cost of coverage is calculated with reference to the cost of COBRA continuation coverage (ERISA § 604, Code § 4980B(f)(4), and PHSA § 2204).

(f)

Changes in annual limits

A group health plan, or group health insurance coverage, that, on March 23, 2010, did not impose an overall annual or lifetime limit on the dollar value of all benefits will cease to be a grandfathered health plan if the plan or health insurance coverage imposes an overall annual limit on the dollar value of benefits. Where a plan or coverage imposed an overall lifetime limit on March 23, 2010 on the dollar value of all benefits but no overall annual limit, the plan or coverage will cease to be a grandfathered health plan if the plan or health insurance coverage adopts an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010. Lastly, a group health plan or group health insurance coverage that, on March 23, 2010, imposed an overall annual limit on the dollar value of all benefits ceases to be a grandfathered health plan if the plan or health insurance coverage decreases the dollar value of the annual limit (irrespective of whether the plan or health insurance coverage also imposed an overall lifetime limit on March 23, 2010 on the dollar value of all benefits).

Collectively Bargained Plans

The application of the grandfather rules to collectively bargained arrangements was less than clear under the Act. Specifically, the Act refers to and confers grandfather status on “health insurance coverage” offered pursuant to one or more collective bargaining agreements ratified before March 23, 2010. These plans are not subject to the Act’s insurance market reforms and coverage mandates until the date on which the last collective bargaining agreement relating to coverage terminates. Moreover, plan amendments adopted for the purpose of complying with the Act will not cause the plan to lose grandfathered status.

Health insurance coverage maintained pursuant to one or more collective bargaining agreements ratified before March 23, 2010 is treated as grandfathered health plan coverage at least until the date on which the last of the collective bargaining agreements relating to the coverage that was in effect on March 23, 2010 terminates. Any coverage amendment made pursuant to a collective bargaining agreement for the purpose of complying with the Act is not treated as a termination of the collective bargaining agreement. Once the last collective bargaining agreement relating to the coverage that was in effect on March 23, 2010 terminates, the determination of whether health insurance coverage maintained pursuant to a collective bargaining agreement is grandfathered health plan coverage is made by comparing the terms of the health insurance coverage to the coverage in effect on March 23, 2010, and applying the general grandfather rules. Thus, for example, a change in carriers with respect to collectively bargained health coverage prior to the date on which the last bargaining agreement in effect on March 23, 2010 terminates will not result in the loss of grandfather status. But a change in carrier following the agreement’s expiration would result in the loss of grandfather status.

Transitional Rules

The interim final rule includes transitional rules for plans and issuers that (i) made changes after the enactment of the Act pursuant to a legally binding contract entered into prior to enactment; (ii) made changes to the terms of health insurance coverage pursuant to a filing before March 23, 2010 with a state insurance department; or (iii) made changes pursuant to written amendments to a plan that were adopted prior to March 23, 2010. Generally, changes made for these purposes are considered part of the plan terms on March 23, 2010. They are, therefore, not taken into account in considering whether the plan or health insurance coverage remains a grandfathered health plan. In addition, the regulators will take into account good faith efforts to comply with a reasonable interpretation of the statutory requirements implemented before the interim final rule.

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Alden J. Bianchi
Chair‚ Employee Benefits and
Executive Compensation

(617) 348-3057
AJBianchi@mintz.com

Tom Koutsoumpas
Senior Vice President of
ML Strategies/U.S.

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TKoutsoumpas@mintz.com

Karen S. Lovitch
Practice Leader,
Health Law Practice

(202) 434-7324
KSLovitch@mintz.com

Jeremy Rabinovitz
Senior Executive Vice President of Government Relations‚
ML Strategies

(202) 434-7443
JRabinovitz@mlstrategies.com

Stephen M. Weiner
Chair, Health Law Practice
(617) 348-1757
SWeiner@mintz.com

Employee Benefits and
Executive Compensation

BOSTON

Tom Greene
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