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Health Care Reform: Grandfathered Health Plan Regulations

July 2010
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Updated November 2010

Interim final regulations regarding the definition of a “grandfathered health plan” have been issued by the U.S. Department of the Treasury, Labor, and Health and Human Services. Under the new Health Care Reform laws, a group health plan in effect on March 23, 2010 is considered to be a grandfathered health plan, and thus is exempt from some of the new law’s provisions (for more information about the Health Care Reform laws and the benefits of maintaining grandfathered health plan status see our Employer’s Guide to Health Care Reform).

In order to preserve grandfathered health plan status, and in comparison to its policies in effect on March 23, 2010, grandfathered health plans cannot:

  • Significantly Cut or Reduce Benefits. For example, if a plan decides to no longer cover care for people with diabetes, cystic fibrosis or HIV/AIDS.
  • Raise Co-Insurance Charges. Typically, co-insurance requires a patient to pay a fixed percentage of a charge (for example, 20% of a hospital bill). Grandfathered plans cannot increase this percentage.
  • Raise Co-Payment Charges. Frequently, plans require patients to pay a fixed-dollar amount for doctor’s office visits and other services. Compared with the copayments in effect on March 23, 2010, grandfathered plans will be able to increase those co-pays by no more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation plus 15 percentage points.
  • Significantly Raise Deductibles. Many plans require patients to pay the first bills they receive each year (for example, the first $500, $1,000, or $1,500 a year). Compared with the deductible required as of March 23, 2010, grandfathered plans can only increase these deductibles by a percentage equal to medical inflation plus 15 percentage points. In recent years, medical costs have risen an average of 4-to-5% so this formula would allow deductibles to go up, for example, by 19-20% between 2010 and 2011, or by 23-25% between 2010 and 2012.
  • Significantly Lower Employer Contributions. Many employers pay a portion of their employees’ premium for insurance and this is usually deducted from their paychecks. Grandfathered plans cannot decrease the percent of premiums the employer pays by more than 5 percentage points (for example, decrease their own share and increase the workers’ share of premium from 15% to 25%).
  • Add or Tighten an Annual Limit on What the Insurer Pays. Some insurers cap the amount that they will pay for covered services each year. If they want to retain their status as grandfathered plans, plans cannot tighten any annual dollar limit in place as of March 23, 2010. Moreover, plans that do not have an annual dollar limit cannot add a new one unless they are replacing a lifetime dollar limit with an annual dollar limit that is at least as high as the lifetime limit (which is more protective of high-cost enrollees).
  • Force Employees to Switch Plans. Employers cannot force its employees to switch to another grandfathered plan that, compared to the current plan, has less benefits or higher cost sharing if there is no bona fide employment-based reason for the switch.
  • Merge with Another Plan. A plan will lose its grandfathered status if the principal purpose of a merger, acquisition, or similar business restructuring is to cover new individuals under a grandfathered plan.
  • Change Current Insurance Company Agreements. If an employer enters into a new policy, certificate, or contract of insurance with the plan’s current insurance issuer and this causes a violation of the previous rules, the plan will not be considered a grandfathered plan.

Any changes that were made to a grandfathered plan after March 23, 2010 and adopted prior to the publication of these regulations (June 17, 2010) will not cause the plan to lose its grandfathered plan status if the changes are revoked or modified effective as of the first day of the first plan year beginning on or after September 23, 2010.

In order to preserve grandfathered health plan status and to promote transparency, grandfathered health plans are required to:

  • Disclose Grandfathered Status. A grandfathered plan must include a statement, in any plan materials provided to a participant or beneficiary describing the benefits provided under the plan, that the plan believes it is a grandfathered plan within the meaning of the Health Care Reform laws and must provide contact information for questions and complaints.
  • Keep Records of the Grandfathered Plan. A grandfathered plan must maintain, and make available upon request, records documenting the terms of the plan in connection with the coverage in effect on March 23, 2010, and any other documents necessary to verify, explain, or clarify its status as a grandfathered plan.

For further analysis of the interim final regulations also see the Fact Sheet and Question and Answers posted by the United States Department of Labor’s Employee Benefits Security Administration.

If you have questions or need additional information about these items or other employee benefit matters, contact one of our attorneys or visit our Employment Law Resource Center.