Editor’s Note: Earlier posts by Timothy Jost provide analyses of regulations implementing provisions of the new health reform legislation governing tax exempt hospitalsthe small employer tax creditthe Web portal, reinsurance for early retirees, and young adult coverage

From the beginning of his push for health care reform, President Obama promised “If you like your insurance plan, your doctor, or both, you will be able to keep them.” He never meant to say by this, however, “if you don’t like the plan you have, you will be stuck with it forever,” or, for that matter, “if your insurance plan changes dramatically to your disadvantage, you will not be able to escape it.” 

Balancing the desire to let individuals and employers maintain relatively inexpensive pre-reform health plans on the one hand, and, on the other hand, to protect Americans from being stuck in low value health plans as the coverage offered by those plans deteriorates  posed a difficult task for Congress and continues to pose a challenge to the Administration.

On June 14, the Departments of Health and Human Services, Treasury, and Labor issued interim regulations intended to operationalize section 1251 of the Patient Protection and Accountable Care Act, which in turn attempts to realize the President’s promise. Entitled “Preservation of Right to Maintain Existing Coverage,” section 1251 provides that PPACA shall not be construed to require an individual to terminate coverage under an individual or group plan in which that person was enrolled at the time of enactment of PPACA (March 23, 2010, to be precise), and that none of the insurance reforms of PPACA shall apply to these “grandfathered” plans, except as specified in PPACA.  Section 1251 further provides that new family members and employees can be added to grandfathered plans, and that renewal of plan membership does not terminate grandfathered status.

This seemingly absolute realization of the President’s promise was cut back by provisions added by the manager’s amendment in the Senate and changed much further by the reconciliation bill.  Under the final legislation, grandfathered plans are subject to the following provisions of the Public Health Services Act, as modified by the PPACA:

  • The coverage disclosure and transparency provisions of section 2715;
  • The requirements of section  2718 that plans pay out a minimum of 80 or 85 percent of their premiums to cover health care claims or quality improvement activities;
  • The prohibition against waiting periods in excess of 90 days found in section 2708;
  • The provisions of section 2711 prohibiting lifetime limits;
  • The ban on rescissions except in the case of fraud found in section 2712; and
  • The requirement that plans cover adult children up to age 26 found in section 2714.

In addition, the provisions of section 2711 relating to annual limits and of 2704 prohibiting exclusion of pre-existing conditions (initially only for children) apply to grandfathered group plans, although grandfathered group plans need not cover adult children if other non-grandfathered coverage is available.

Grandfathered plans, however, remain free from a number of the significant reforms found in PPACA. In the long-term, the most important provisions from which grandfathered plans are exempt will probably be requirement that individual and small group plans cover federally-defined “essential health benefit” beginning in 2014.  The essential benefit provisions also require all health plans to limit out-of-pocket expenditures to the amounts now permitted for high-deductible health plans coupled with health savings accounts and require small group health plans to limit deductibles to $2000 for single coverage, $4000 for family coverage.  In the short term, grandfathered plans are also free from mandates that plans:

  • Cover preventive services without cost-sharing;
  • Do not discriminate in favor of highly compensated individuals;
  • Report on their quality of care improvement activities;
  • Provide their enrollees internal and external appeal procedures against claims denials (although group plans must already provide internal appeals under ERISA and most states require that plans provide both internal and external appeal procedures); and
  • Provide unimpeded access to emergency, pediatric, obstetric, and gynecological care.

Grandfathered plans will also remain exempt from some of the other 2014 reforms, including a right to coverage of the routine costs of clinical trials or and a prohibition of discrimination against providers based on their licensure status.

The Regulations: When Do Plans Cease To Be Grandfathered? 

Although the statute distinguishes between grandfathered and non-grandfathered plans, it does not identify the circumstances under which a grandfathered plan might cease to be grandfathered.  This is the task of the regulations.

The regulations begin with the statutory principle that as long as an enrollee remains with a plan in which the enrollee was a member on March 23, 2010, the terms of that plan do not need to change to accommodate requirements of PPACA that do not apply to grandfathered plans.  Insurers or employers may add new benefits to health plans, change the terms of a plan to comply with state or federal requirements (including PPACA requirements that apply to grandfathered plans), voluntarily adopt consumer protections that they are not required to adopt, make modest adjustments in benefits or cost sharing, and — most importantly — raise premiums, without losing grandfathered status.  

Grandfathered plans may also add new family members or employees, and may be renewed.  Indeed, a grandfathered group plan could add new employees as existing employees left the plan, ending up eventually with no members who were enrollees as of the effective date, but still remain grandfathered.  The regulations, however, bar certain subterfuges that employers may be tempted to engage in to maintain grandfathered status.   A plan loses its grandfathered status if an employer engages in a merger or other business restructuring primarily to extend the coverage of a grandfathered plan.  Employers may also not transfer employees from one grandfathered plan to another if the terms of the  original plan could not have been changed into those of the transferee plan without loss of grandfathered status.

Major Changes That Result In Loss Of Grandfathered Status

The primary way in which a plan will lose grandfathered status, however, is if certain major changes are made in the plan to the disadvantage of enrollees.  The regulation adopts bright line rules identifying the changes that will end grandfathered status so that insurers, employers, and enrollees will not have to guess when a plan ceases to be grandfathered.

Changes that will result in the loss of grandfathered status include:

  • Elimination of all or substantially all of any benefit necessary to diagnose or treat a particular condition;
  • Any increase in coinsurance percentages;
  • An increase in a deductible, out-of-pocket limit, or other fixed dollar cost-sharing requirement or limit other than a copayment by more than the increase in the medical component of the CPI since March 2010 plus a total of 15 percentage points;
  • An increase in a copayment in excess of the greater of 1) medical inflation plus $5.00 or 2) medical inflation plus a total of 15 percentage points;
  • A decrease of the employer contribution, whether based on the cost of coverage or on a formula, by more than 5 percentage points below the contribution rate in place on March 23, 2010; and
  • The reduction in the dollar value of existing annual limits, the imposition of an annual limit on coverage by plans that did not impose any limits before, or the adoption of annual limits less than any lifetime limits a plan imposed before if it only imposed lifetime limits before the effective date. 

The interim rule does not determine whether other changes in a plan such as changes in plan structure, provider network, or formulary could ever result in loss of grandfathered status, and invites comments on these issues.

If an employer or employee organization enters into a new policy, certificate, or insurance contract, the new plan is not grandfathered.  Grandfathered status is not lost, however, if a self-insured plan changes its plan administrator.  Collectively bargained  insured plans (but not self-insured plans) are grandfathered until the expiration of the last of the collective bargaining agreements governing the grandfathered coverage expires.  Thereafter the plans become subject to the general grandfathered status rules (comparing the plan as it then exist with the plan as it existed on March 23, 2010).

Grandfathered plans must disclose to their enrollees the fact that they are grandfathered and that they are therefore not required to comply with all of the requirements of PPACA.  They must also disclose that they are required to comply with some of the health reform requirements.   They must also maintain documentation to verify, explain, and clarify their continuous existence as a grandfathered plan since March 23, 2010.

The Effects Of The Interim Regulations On Different Sectors

Grandfathered status is important to health insurers that do not want to comply with the PPACA requirements as they come into force; to individual plan enrollees who for whatever reason prefer to stay with their current plan, or, prior to 2014, do not have any option except staying with their current plan; and to employers who do not want to cover the cost of the enhanced consumer protections provided by PPACA. 

The Large-Group Market. The interim regulations will have different effects on these different groups.  Large-group plans, including self-insured plans, already comply with many of the reforms found in the reform legislation.  The existing Health Insurance Portability and Accountability Act (HIPAA) already prohibits group plans from discriminating on the basis of health status or refusing to renew coverage and limits their ability to apply preexisting conditions exclusions.  Further, laws in many states impose on group plans many of the reforms found in PPACA, such as required coverage of adult dependents or external review of claims denials. 

Finally, most large-group insured and self-insured plans already provide the essential benefits that will be required under PPACA.  Indeed, section 1302 of PPACA defines the essential benefits as equal to those provided under the typical employer plan.   The CBO in its review of the effect of PPACA on insurance premiums projected that PPACA would have little impact on premiums in the small-group market and virtually none in the large-group market.

Large employers, which currently insure 133 million enrollees, may find complying with PPACA’s reforms less of a burden than staying with grandfathered plans and living within the limits that the regulations impose with respect to changes in cost sharing, benefits, and employee premium sharing. 

The Small-Group Market. Smaller employers, which currently insure 43 million enrollees, may have to significantly increase coverage to comply with the essential benefit requirements in 2014, and may find grandfathered coverage more valuable.  On the other hand, the absolute limits that the regulations impose on increasing cost sharing above medical inflation may be exhausted by 2014, making full compliance with PPACA, including the essential benefits, a more attractive alternative than continuing to live within the regulatory constraints.  The agencies estimate that between 49% and 80% of small employer plans and between 34% and 64% of large employer plans will relinquish grandfathered status by 2013.

Of course, another alternative open to an employer is to abandon coverage altogether.   Health insurance, however, continues to be supported by tax deductions and exclusions, and will likely continue to be an important employee benefit and contributor to a healthy workforce.  Small employers also can obtain tax credits to help insure their workers.  And large employers who fail to provide health insurance will be penalized if their employees end up getting premium affordability credits.  For many employers, offering either a grandfathered plan or accepting the PPACA requirements will be more attractive alternatives than abandoning health insurance altogether.

The Individual Market. PPACA will  bring about the greatest changes for the 17 million enrollees in the individual market.  Here turnover is so significant in the ordinary course of business, however, that relatively few policies will remain grandfathered for any significant period of time.  The individual market is primarily a residual market, to which Americans resort when group coverage is not available.  The behavior of insurers also affects duration of coverage, as insurers increase cost-sharing or reduce benefits to shed high-cost enrollees. The interim regulation preamble states that the median length of coverage in the individual market is 8 months.  The agencies estimate that 40 to 67% of individual policies will turn over, and thus lose grandfathered status, in any given year. 

The regulations, however, are good news for individuals who prefer to stay with a particular insurer because, for example, they have preexisting conditions that would make it difficult for them to purchase a new policy or because they prefer the network of a particular insurer.  Their insurer will have only a limited ability to increase their cost sharing or decrease their benefits.  Because of other provisions of PPACA, like the medical loss ratio provisions, the insurer will be limited in its ability to raise premiums as well.