News & Knowledge
The definition of “grandfathered status” under the new Health Care Reform
Evelyn Small Traub
This is the fourth in a series of advisories we will issue on Health Care Reform. This alert focuses on the definition of “grandfathered status” and changes that will cause a plan to lose that status. Future advisories will further analyze these and other important provisions of Health Care Reform. This chart summarizes the Health Care Reform provisions in chronological order of effective dates to assist employers and group health plan sponsors in focusing on the issues that will become effective for most employers as group health plan sponsors as of January 1, 2011.
Why should an employer be concerned if its group health plan loses grandfathered status?
A plan that loses its grandfathered status becomes subject to a number of additional requirements effective after the loss of grandfathered status or, if later, for plan years beginning on or after September 23, 2010 (i.e., January 1, 2011 for calendar year plans). They include:
Non-discrimination requirements applicable to fully-insured plans,
Required coverage of preventive care and immunizations without cost sharing,
Required coverage of some expenses incurred in clinical trials in some circumstances,
A revamped appeals process, including external review,
Prohibition on requiring prior authorization or increased cost sharing for certain emergency services performed in connection with a legitimate emergency,
Prohibition on requiring authorization or referral for OB-GYN services, and
Requirement that enrollees be able to select a primary care provider, including in the case of children, a pediatrician, from any available primary care provider that is accepting new patients.
Additional provisions will become applicable for non-grandfathered plans for plan years beginning on or after January 1, 2014. These include:
Annual out-of pocket maximums may not exceed the level established for Health Savings Accounts in connection with qualified high deductible health plans, and
Deductibles may not exceed $2,000 for individual coverage and $4,000 for family coverage, and
Required coverage of some expenses incurred in clinical trials in some circumstances.
Employers need to weigh the cost versus benefits of retaining grandfathered status. Some employers may determine that the additional requirements imposed on non-grandfathered plans are actually less onerous, given their plan’s current benefit design, than the effort that would be needed to retain grandfathered status. Others may find the cost of complying with the new requirements to be significant.
What is a grandfathered plan?
A “grandfathered plan” is a group health plan was in existence on the date of enactment of Health Care Reform, March 23, 2010. Regulations published June 14, 2010 provide guidance on what will cause an existing group health plan to lose grandfathered status. Described below are the requirements for maintaining grandfathered status as well as certain disclosure and recordkeeping requirements on group health plans that intend to maintain grandfathered status.
What changes in group health plan or health insurance coverage will cause a plan to cease to be “grandfathered?”
The following changes in group health plans or health insurance coverage will cause a plan to cease to be grandfathered:
- Entering into a new policy, certificate or contract of insurance after March 23, 2010. Thus, changing insurance carriers will cause grandfathered status to be lost, even if the benefits and cost sharing arrangements remain the same. (For collectively bargained plans, see additional information below.)
- Eliminating all or substantially all benefits to diagnose or treat a particular condition. The elimination of benefits for any necessary element to diagnose or treat a condition is considered the elimination of all or substantially all benefits to diagnose or treat a particular condition. For example, if a plan eliminates all benefits for cystic fibrosis, the plan ceases to be grandfathered, even though this condition may affect relatively few individuals. As another example, if a plan provides benefits for a particular mental health condition the treatment for which is a combination of prescription drugs and counseling, elimination of the counseling benefit (i.e., a necessary element of treatment) causes the plan to lose grandfathered status.
- Increasing a percentage cost-sharing requirement (such as coinsurance) above the March 23, 2010 level. As an example, a change in the level of coinsurance from 20% to 25% for a particular type of service causes the plan to lose grandfathered status.
- Increasing fixed-amount cost-sharing requirements other than copayments, such as a $500 deductible or a $2,500 out-of-pocket limit, by a total percentage measured from March 23, 2010 that is more than the sum of medical inflation and 15%. Allowing increases based on medical inflation plus 15% does permit employers to make some changes to these fixed amount cost sharing elements. However, the permissible increase is measured on a cumulative basis from March 23, 2010 to the date of the change. The regulations contain examples describing the mathematical calculations of the permissible increases based on assumed medical inflation.
- Increasing copayments by an amount that exceeds the greater of: (i) a total percentage measured from March 23, 2010 that is more than the sum of medical inflation plus 15%, or (ii) $5 increased by medical inflation measured from March 23, 2010. Again, the permissible increase is measured on a cumulative basis from March 23, 2010 to the date of the change. The regulations contain examples describing the mathematical calculations of the permissible increases based on assumed medical inflation.
- Decreasing the employer’s contribution rate toward any tier of coverage for any class of similarly situated individuals by more than 5% below the contribution rate on March 23, 2010. For this purpose, the employer contribution rate is the employer’s contribution toward the cost of coverage for the period that includes March 23, 2010, expressed as a percentage of the total. The total cost of coverage is determined using the methodology for determining applicable COBRA premiums. If the employer’s contribution rate is based on a formula such as hours worked, a decrease of more than 5% in the employer’s contributions under the formula will cause the plan to lose grandfathered status.
These rules apply with respect to each tier and coverage classification under the plan. If the employer’s contribution rate for any tier or coverage classification decreases by more than 5%, the plan will cease to be grandfathered. For example, if the employer maintains (or increases) its contribution rate toward employee only coverage but decreases its rate of contribution toward family coverage by more than 5%, the plan will lose grandfathered status.
- With respect to annual limits, a plan or policy that, on March 23, 2010:
- did not impose an overall annual or lifetime limit on the dollar value of all benefits will lose grandfathered status if it later imposes an overall annual limit on the dollar value of benefits;
- imposed an overall lifetime limit on the dollar value of all benefits but no overall annual limit on the dollar value of all benefits will lose grandfathered status if it adopts an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010; and
- imposed an overall annual limit on the dollar value of all benefits will lose grandfathered status if it decreases the dollar value of the annual limit (regardless of whether the plan or health insurance coverage also imposes an overall lifetime limit on the dollar value of all benefits).
How do the regulations apply where the group health plan offers several benefit options?
The grandfathering rules apply separately to each benefit option. For example, where a group health plan offers one self-insured option and two fully insured options, if the plan replaces the insurance carrier for one of its fully insured options, coverage with that insurer is no longer grandfathered. However, the other options retain their grandfathered status until subsequent changes cause them to lose grandfathered status. Since grandfathered plans are subject to different eligibility requirements for children (because they are not required to offer coverage to a child who is eligible for other employer-sponsored coverage), an employer that maintains both grandfathered and non-grandfathered plans as in this example, must offer coverage under the fully insured option through the new carrier, even though coverage would not be available to the adult child under the other options until 2014.
Can a plan eliminate a coverage option and maintain grandfathered status?
An employer may transfer employees from one benefit option to another without affecting grandfathered status as long as is a bona fide employment-based reason for the transfer. An intention to change the cost or terms of coverage is not a bona fide employment-based reason. Thus, where an option is eliminated and employees are forced into a different option for reasons unrelated to a bona fide employment-based criteria, the option into which they are transferred will not be a grandfathered option. In the context of mergers and acquisitions, a restructuring that is solely driven by health plan considerations will cause the plan into which employees are transferred to lose grandfathered status.
What special rules apply to collectively bargained plans?
Health insurance coverage (i.e., insurance) maintained pursuant to a collective bargaining agreement ratified prior to March 23, 2010 is deemed grandfathered until the date the last collective bargaining agreement in effect on March 23, 2010 terminates. Then, the otherwise applicable grandfathering rules apply. For example, an insured collectively bargained plan that changes insurers, prior to the expiration of the agreement, remains grandfathered until the termination of the agreement. The plan must comply with the provisions of Health Care Reform that apply to grandfathered plans, such as the requirement to provide coverage for adult children. However, the Preamble to the regulations clarifies that this special deemed grandfathered rule applies only to insured plans.
Because the statute uses the term “health insurance coverage,” instead of “group health plan,” a self-insured plan maintained pursuant to a collective bargaining agreement ratified before March 23, 2010 does not automatically retain grandfathered status until that agreement terminates. Self-insured collectively bargained plans may lose grandfathered status in the same way as non-collectively bargained plans.
What does not cause a plan to lose its grandfathered status?
An employer may add new employees to its plans and employees may move between benefit options at open enrollment without affecting grandfathered status. Otherwise, only relatively small changes made within the boundaries of the grandfathered plan definition are permitted if a plan wishes to retain its status. While a fully insured plan cannot change its insurance carrier, a self-insured plan can change its third party administrator.
The regulations do not address the effect on grandfathered status of changes in plan structure (such as from a fully insured to a self-insured plan), changes in a provider network, changes to prescription drug formularies or other substantial changes in the overall plan design. Instead, comments on these types of changes have been requested, leaving plan sponsors with still unanswered questions about plan design for the upcoming year.
What must a plan do if it intends to maintain grandfathered status?
In addition to maintaining the plan within the boundaries of the grandfathered plan definition, the plan sponsor must comply with the following additional requirements.
Disclosure - To maintain grandfathered status, a plan or health insurance coverage must include in any plan material provided to the participant or beneficiary describing the benefits under the plan, a statement that the plan believes it is a grandfathered health plan and provide contact information for questions and complaints. The regulations provide model language that can be used for this purpose.
Recordkeeping - In addition, a plan that takes the position that it is grandfathered, must maintain records documenting the terms of the plan in effect on March 23, 2010, and any documents necessary to verify, clarify or explain grandfathered status. These retained records must be kept for as long as the plan relies on its grandfathered status and must be made available for examination by participants, beneficiaries and federal and state agencies upon request.
Can anything be done to regain grandfathered status if a group health plan has lost grandfathered status because of a change adopted after March 23, 2010?
There is a transition rule to regain grandfathered status. If a change made after March 23, 2010 causes loss of grandfathered status, that change may be revoked prior to the beginning of the first plan year beginning after September 10, 2010. If timely revoked, then the plan is considered to be grandfathered.
The regulations provide that a change made after March 23, 2010 and before the regulations were issued may be ignored by the agencies in determining grandfathered status where the change only modestly exceeded the parameters set in the regulations.
The regulations also provide that a change made before March 23, 2010 but becoming effective after March 23, 2010 will be ignored so long as the change was adopted pursuant to a legally binding contract, state insurance department filing or written plan amendment.
 Medical inflation is defined in the regulations by reference to the overall medical care component of the CPI. For purposes of making these calculations medical inflation is determined as of the time of the change as compared to March 23, 2010.