On February 23, 2017, the Centers for Medicare and Medicaid Services released an insurance standards bulletin allowing states once again to extend the life of “grandmothered” or transitional health insurance policies to policy years beginning on or before October 1, 2018, as long as the policies do not extend beyond December 31, 2018. These plans will continue to be exempt from most of the ACA’s insurance reform provisions which otherwise became effective on January 1, 2014, including the ban on health status underwriting; the guaranteed availability and renewability requirements; the essential health benefits, annual out-of-pocket limit and actuarial value requirements; the ban on preexisting condition exclusions; and the requirement that all individual and small group market plans of an insurer be part of a single individual or small group risk pool.

Background

To understand the guidance, some background is needed. The Affordable Care Act contained a “grandfather clause” promising, in the words of President Obama, that “if you like your health care plan, you can keep your health care plan.” The promise, however, was very specific:

Nothing in this Act (or an amendment made by this Act) shall be construed to require that an individual terminate coverage under a group health plan or health insurance coverage in which such individual was enrolled on the date of enactment of this Act (March 23, 2010).

It was a standard grandfather clause, such as can be found in many statutes, providing essentially that the statute had prospective operation. It was not a general promise that if, at any point in the future, a consumer found a health plan that he or she liked, it could be kept forever.

Of course, the statue raised the question of what exactly was the coverage that could be kept. The clause was clear that a grandfathered plan would have to conform to some new ACA requirements, such as covering adult children up to age 26 or dropping lifetime limits, but it was also clear that grandfathered coverage could be renewed and that new dependents or employees could be added to the plan.

But it what other ways could coverage change and remain grandfathered? It would seem obvious that if an individual was insured through a health plan, and that plan radically changed its cost-sharing, benefits, or premiums, it would no longer be the same plan. One of the first rules to be promulgated following the enactment of the ACA defined when a plan was grandfathered. It basically allowed grandfathered plans to make moderate changes in cost-sharing or employer premium contributions, but recognized that major changes in cost sharing, premium contributions, or benefits would in fact change the coverage into different coverage, ending grandfathering and subjecting the new coverage to the requirements of the ACA. As of 2016, about one quarter of covered employees remained in grandfathered plan.

However, it became widely believed that the “if you like your health plan, you can keep your health plan,” applied not only to plans in which individuals were enrolled in 2010, but rather plans in which people were enrolled in 2013, or perhaps at any time in the future—in part because President Obama repeated variants of the line during the 2012 campaign. As it became clear that many of the ACA’s insurance reforms would go into effect on January 1, 2014, people began to realize that they would lose the coverage that they had obtained since 2010 but before the end of 2013, and would have to obtain ACA-compliant coverage. In many instances the ACA-compliant coverage would be more comprehensive and have lower cost sharing, and most importantly would cover sick as well as healthy people, and would thus cost more. Many people apparently believed, or were led to believe, that the original promise of the ACA should allow them to keep their 2013 coverage.

On November 14, 2013, facing political pressure from millions of consumers who were receiving cancellation notices for their 2013 coverage, the Obama administration announced in guidance that states could allow insurers to extend noncompliant coverage for policy years beginning before October 1, 2014, free from certain of the ACA reforms. In March of 2014, the administration extended the life of these “grandmothered” or “transitional” plans to coverage renewed by October 1, 2016 and eventually until the end of 2017. About three quarters of the states allowed the transitional plans to continue. (West Virginia sued claiming that delegating to the states the responsibility of enforcing a federal law which the federal government refused to enforce was unconstitutional. The case was dismissed for lack of standing, but is currently pending before the Supreme Court on a certiorari petition.)

While the original transitional decision could perhaps have been justified by the inherent authority in the executive to reasonably delay the implementation of new legal requirements, the extension of the original delay looked increasingly political and was harder to justify legally. It also likely did serious damage to the ACA-compliant individual market. Insurers had set their 2014 premiums in the expectation that the entire non-grandfathered market would transfer to ACA-compliant plans. Instead, healthier individuals likely remained with their earlier, health-status-underwritten coverage, making the pool of consumers that actually bought 2014 coverage less healthy than expected. The transitional policy very likely played a significant role in the large insurer losses in the individual market for 2014, and played a role in raising premiums going forward.

As of today, there are probably a little fewer than a million Americans still in individual market transitional plans, although the percentage of the individual market in transitional plans varies greatly from state to state, and many remain covered in small group transitional plans. It has been thought that consumers and employers prefer transitional plans because they cost less or have lower cost-sharing, but a study recently published in Health Affairs found that small-employer grandfathered and transitional plans cost about the same as ACA-compliant coverage. After four years, the risk profile of the transitional market is also probably similar to that of the ACA-compliant market, however; thus, pushing them into the ACA-compliant market might not significantly improve the risk pool.

Insurers apparently want to keep transitional plans. There is also a concern that if the transitional plans are cancelled, individuals and small groups currently covered by them may drop coverage altogether (or perhaps in the small group market opt for self-insurance with generous stop-loss coverage) rather than turn to the ACA compliant market.

The Guidance

The Trump administration’s guidance states that it is based on a commitment to “smoothly bringing all non-grandfathered coverage in the individual and small group market into compliance with all applicable” ACA requirements. One must wonder, however, why four years will be enough for a smooth transition if three years was not.

The guidance gives states the option of extending the transition for a shorter (but not longer) period of time and also of applying it to both the small group and individual markets or to either market separately. States also have the option of authorizing part-year policies if necessary to ensure that coverage ends at the end of 2018.

Insurers that choose to extend transitional policies are subject to rate review requirements as they existed before 2014. They must also send a notice to their enrollees informing them of the ACA protections that are not available under the transitional coverage and of the opportunity to get ACA compliant coverage through the marketplaces. If the insurer had already sent a cancellation notice, it can send another notice telling consumers that coverage will be extended. Individuals who leave transitional coverage for the marketplace at the end of a policy year qualify for a special enrollment period.