The health care legislation signed into law on March 23, 2010 is officially known as the “Patient Protection and Affordable Care Act.” Gaining widespread usage is the abbreviated “Affordable Care Act,” and when used in context, simply “The Act.” (1)
The Act is immense in scope and complexity, affecting every aspect of the delivery and financing of health care in the United States. Many of its provisions took effect the day the bill was signed, while hundreds more will be implemented in the coming years, most notably in 2014 with the establishment of state-based insurance exchanges, coverage mandates for individuals, and penalties for employers who do not provide their employees with proscribed levels of health care benefits.
In helping our clients understand and comply with the provisions of The Act – and owing to its complexity and multi-year implementation – we’ve found it most effective to address The Act in chapters, as it were, with advance learning and planning periods of three to six months – three to six months, that is, with the major exception of planning for “grandfathering” – in particular, the advantages of grandfathering as it relates to the new non-discrimination rules that will apply to all health plans, including fully-insured plans, on the policy anniversary first following September 23, 2010, unless the plan is grandfathered. For this provision, planning should be accomplished as soon as possible.
Under The Act, health plans that have been in continuous effect since March 23, 2010 can avoid several costly requirements of the legislation by adhering to strict guidelines that allow them to continue under current regulations, i.e., to remain “grandfathered.”
Grandfathered status does not exempt a health plan from existing federal and state law, e.g., COBRA, Cal-COBRA, and FMLA, nor does it exempt it from all of The Act’s provisions; however, avoidance of The Act’s requirements as they pertain to the nonâ€‘discrimination rules of Internal Revenue Code Section 105(h) may be of paramount importance to the financial well-being of the employer.
Moreover, grandfathered status exempts employers from yet-to-be-defined requirements for the establishment of “internal claims appeal and external review processes,” as well as new “modified community rating” provisions.
New Requirements for Health Plans
Effective with the first policy anniversary after September 23, 2010, all health plans, whether grandfathered or not, must comply with the following new requirements:
– No limit on lifetime benefits
– No limit on annual benefits (except as permitted by The Act)
– Extension of dependent coverage to age 26 (or older if required by state law) (2)
– No exclusions for treatment of pre-existing conditions for persons under age 19
– Designation of Primary Care Providers and direct access to OB-GYN providers and emergency services as needed
Health plans in effect on March 23, 2010 that do not remain grandfathered must also comply with the following new requirements, both at renewal and in perpetuity:
– Provide first-dollar coverage for in-network preventative care
– Establish internal claims appeal and external review processes (3)
– Conform to the non-discrimination rules under IRC Section 105(h) (4)
And it’s this last requirement – conformity to the stringent non-discrimination rules of IRC Section 105(h) – that can present an employer with the greatest cost increase under the entire sweep of The Act. The rules for non-discrimination under Section 105(h) are extraordinarily complex, and the penalties for non-compliance extraordinarily punitive. (5) Indeed, $100 per day for each individual “to whom the failure relates” to the lesser of 10% of the plan’s costs or $500,000.
Changes after March 23, 2010 that Will Not Cause a Loss of Grandfathered Status
– Changing premiums (payable to the carrier).
– Complying with federal and state law.
– Increasing benefits.
– Voluntarily complying with The Act.
– Changing plan structure, e.g., switching from a Health Reimbursement Arrangement to a traditional plan, if benefits are not reduced per the rules on page three herewith.
– Changing provider networks.
– Changing a prescription drug formulary.
– Making changes to accommodate a merger or acquisition, as long as the merger or acquisition is not performed solely to allow a group to move from one grandfathered plan to another with impermissible reductions in benefits or increases in cost sharing.
– Changing administrators for ASO (Administrative Services Only) groups.
Changes after March 23, 2010 that Will Cause a Loss of Grandfathered Status
– Changing from one insurance carrier to another.
– Increasing the co-insurance or percentage of any other cost-sharing feature above the levels at which they were set on March 23, 2010.
– Increasing any fixed-amount cost-sharing, e.g., deductibles and out-of-pocket limits, above the level in effect on March 23, 2010 by a percentage that exceeds the sum of medical inflation plus 15%. (6)
– Increasing co-payments above the levels in effect on March 23, 2010 by an amount that exceeds the greater of: a). the sum of medical inflation plus 15%; or, b). $5, increased by medical inflation.
– Reducing employer contributions toward any tier of group health insurance coverage or group health plan by more than 5% below the contribution rate on March 23, 2010.
– Eliminating all (or substantially all) benefits to diagnose or treat a specific condition.
– Imposing an annual or lifetime limit on benefits if an annual or lifetime limit had not been previously imposed on all benefits; or, for plans that previously imposed a lifetime limit on all benefits, imposing an annual limit that is lower than the lifetime limit; or, for plans that previously imposed an annual limit on all benefits, decreasing the dollar value of that annual limit.
Employers should preserve their rights under The Act by planning now – well in advance of their renewal – to determine if it’s in their best interest to retain grandfathered status for their health plans, and if so, then to manage them with extreme care.
(1) The health care legislation is actually comprised of two new laws: The Patient Protection and Affordable Care Act (H.R. 3590) as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (H.R. 4872).
(2) Grandfathered plans may exclude <26 dependents if coverage is available through their employer.
(3) Per the requirements of IRC Section 503.
(4) The Act does not actually extend IRC Section105(h) to fully-insured health plans; rather, it adds Section 2716 to the Public Health Services Act which, for the most part, mirrors IRC Section 105(h).
(5) Penalties are imposed in the form of an excise tax under the provisions of IRC Section 4980D.
(6) The Department of Health and Human Services currently assumes an annual medical inflation rate of 4% for 2011â€‘2013 (simple interest), so that to retain grandfathered status, copayments, deductibles, and out-of-pocket limits may not be increased by more than 19% above 3/23/10 levels at the first post 9/23/10 renewal, nor by more than 23% above 3/23/10 levels at the second renewal, nor by more than 27% above 3/23/10 levels at the third renewal, etc.