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Under the new Federal health care reform laws (the Affordable Care Act and the Reconciliation Act), medical plans in existence on March 23, 2010, generally have been "grandfathered" and, as such, are not required to implement certain new provisions until 2014; however, under regulations issued earlier this summer at 26 CFR § 54.9815-1251T, 29 CFR § 2590.715-1251 and 45 CFR § 147.140, if an employer increases employee costs beyond certain permissible limits, a "grandfathered" medical plan will lose its protected status and be required to implement the new provisions at the same time. Therefore, employers who sponsor and want to maintain the "grandfathered" status of their plans need to consider the broader implications of increasing employee costs.

Limits on Employee Cost Increases

The regulations identify four types of employee cost increases that will end "grandfathered" status:

  • A decrease in the rate the employer contributes toward the cost of the plan (i.e. an increase in the rate the employee contributes) for any tier of coverage of more than 5 percent beyond the rate in effect on March 23, 2010. For example, if, as of March 23, 2010, the premium for family coverage was $1,000 per month, with the employer paying $900 and the employee paying $100, the employer's contribution rate was 90 percent. Therefore, if the premium starting January 1, 2011, will be $1,100, the employer must continue to pay at least 85 percent of the cost of that coverage ($935) to preserve the plan's "grandfathered" status.
  • An increase in a percentage cost-sharing requirement (such as coinsurance) beyond the percentage in effect on March 23, 2010. For example, if, as of March 23, 2010, the plan included a 90/10 coinsurance feature, then changing it to an 80/20 coinsurance feature would cause the plan to lose its "grandfathered" status.  
  • An increase in a fixed-amount cost-sharing requirement other than a co-payment (such as a deductible or an out-of-pocket limit) that exceeds the increase in the medical cost component of the Consumer Price Index ("Medical Inflation") plus 15 percent. For example, if a deductible was $250 on March 23, 2010, but it will be $500 on January 1, 2011, and if there was 5 percent Medical Inflation, then the total change would be 100 percent, which would exceed the permissible limit (20 percent) and end the plan's "grandfathered" status.
  • An increase in a fixed amount co-payment that exceeds the greater of (1) $5 (increased by Medical Inflation), or (2) the increase in Medical Inflation plus 15 percent. For example, if a co-payment was $20 on March 23, 2010, but it will be $30 on January 1, 2011, and if there was a 5 percent increase in Medical Inflation, then the change ($10) would be 50 percent; however, the permissible limits would be the greater of $5.25 ( $5 times 105%) or $4 ($20 times 20%).  Therefore, the change would end the plan's "grandfathered" status.

Oftentimes, medical plans have a combination of cost-sharing features (employee contributions/coinsurance/ copayments/deductibles).  Any one change that increases an employee's cost sharing beyond a permissible limit can be enough to end the "grandfathered" status of the plan, or the "grandfathered" status of all benefits offered within one of several tiers of coverage the plan offers.  For instance, if a plan offers two tiers of coverage - PPO and traditional full indemnity - an impermissible increase in the coinsurance percentage for in-network outpatient services only in the PPO tier can be enough to cause the entire PPO tier to lose its "grandfathered" status.

Limits on Other Plan Design Changes

The regulations also identify certain other plan design changes that will cause the plan to lose its "grandfathered" status:

Decreasing or imposing new annual limits

(however, medical plans with an existing lifetime limit are permitted to adopt an overall annual limit at a dollar value that is lower than the dollar value of the plan’s lifetime limit).

The issuance of a new insurance policy for the medical plan (other than a renewal policy).

Changes that eliminate all or substantially all benefits

to diagnose or treat a particular condition or any element needed to diagnose or treat a condition.

Implications of Losing "Grandfathered" Status

If a medical plan loses its "grandfathered" status, then as of now the plan will be subject to the following requirements:

  • All pre-existing condition limits must be removed;
  • Preventative care must be provided without any employee cost-sharing
  • Emergency room coverage must be the same in and out of network;
  • Coverage for dependent children up to age 26 must be provided even if they can secure coverage through their own employer;
  • If it is an insured plan, it will lose its ability to have coverage that discriminates in favor of highly compensated employees;
  • Certain new internal and external appeals procedures for denied claims must be added; and
  • Women must be permitted to select an OB-GYN of their choice without a referral.

Accordingly, employers with "grandfathered" plans who may be considering whether to impose additional medical costs on their employees need to appreciate that certain cost increase could have broader potential implications for their medical plans, and may require a determination of whether the potential cost savings outweighs the loss of "grandfathered" status.