PPACA Compliance Reminder Series - Grandfathered Plan Rules Modified

In our E-Alert of November 11, 2010, entitled "PPACA Compliance Reminder Series - Grandfathered Plans and Adult Dependents," we reported that a fully insured group health plan loses its grandfathered status by entering into a new insurance contract (other than a renewal) after March  23, 2010 even if the benefits and coverage are similar or even identical.  This rule was modified on November 15, 2010 to provide that a new insurance contract would not cause a loss of grandfather status as long as there were no other changes that would result in a loss of such status.

The Amendment

The Department of Labor, Department of Treasury, and Department of Health and Human Services received comments in response to the interim final rules which established this requirement expressing a number of concerns, most notably that the rule terminating grandfather status upon any change in issuer gives issuers undue and unfair leverage in negotiating the price of coverage renewals with the sponsors of grandfathered health plans, and that this interferes with the health care cost containment that tends to result from price competition.

In response to these comments, the Department of Labor, Department of Treasury, and Department of Health and Human Services issued an amendment to the original rule to allow a group health plan to change health insurance coverage (that is, to allow a group health plan to enter into a new policy, certificate, or contract of insurance) without ceasing to be a grandfathered health plan, provided that no other changes occur that cause a loss of grandfather status, which are:

• Elimination of benefits for a particular condition.
• Any increase in a percentage cost sharing requirement.
• Any increase in fixed-amount cost-sharing other than copayments, such as deductibles and out of pocket maximums that are greater than medical inflation + 15 percentage points.
• Any increase in fixed-amount copayments.
• Decrease in employer contribution rate by more than 5% points below the rate in effect as of March 23, 2010.
• Certain changes to annual or lifetime limits.

Effective Date Not Retroactive

The amendment applies to such changes to group health insurance coverage that are effective on or after November 15, 2010.  Unfortunately, the change is not retroactive and any new insurance contract (other than renewals) which occurred after March 23, 2010 but prior to November 15 would not be covered by the amendment and would result in a loss of grandfathered status.  For this purpose, the date the new coverage becomes effective is the operative date of the policy, not the date a contract for a new policy, certificate or contract of insurance is entered into.  Therefore, for example, if a plan enters into an agreement with an issuer on September 28, 2010 for a new policy to be effective on January 1, 2011, then January 1, 2011 is the date the new policy is effective and, therefore, the relevant date for purposes of determining the application of the amendment to the interim final regulations.  If, however, the plan entered into an agreement with an issuer on July 1, 2010 for a new policy to be effective on September 1, 2010, then the amendment would not apply and the plan would cease to be a grandfathered health plan.

Documentation Required to New Issuer

The amendment also provides that, to maintain status as a grandfathered health plan, a group health plan that enters into a new policy, certificate, or contract of insurance must provide to the new health insurance issuer (and the new health insurance issuer must require) documentation of plan terms (including benefits, cost sharing, employer contributions, and annual limits) under the prior health coverage sufficient to determine whether any change causing a loss of grandfathered status has occurred.