New Guidance Puts Grandfathered Health Plans on Life Support

On June 17, 2010, the Department of Labor, the Internal Revenue Service and the Department of Health and Human Services published interim final regulations that answer the most common question we've received since we first published our Health Care Reform Q&A:

"To what extent can an employer change an existing health plan and still have it remain a grandfathered health plan?"

The short answer is that while many types of design and administrative changes will not affect a plan's grandfathered status, the types of changes that are most likely to help plan sponsors control their health plan costs are the very changes that will cause a plan to lose its grandfathered status. Those include changes in insurance carriers, certain reductions in the employer's contribution rate, changes in coinsurance percentages, changes in copayments and other fixed cost-sharing requirements to the extent they exceed certain thresholds, and elimination of certain benefits. As a result, plan sponsors will need to choose in many instances between preserving grandfathered status (which will obviate the need to comply with some of the new health reform requirements) and making design changes that will reduce or control health plan costs (but subject the plan to the new requirements). This will require a careful weighing of the relative costs and advantages of each alternative. While employers' decisions will vary with the circumstances, even the three agencies estimate that, under the new guidance, over half of the plans that qualify for grandfathered status today will lose that status by 2014.

In addition to providing binding interim guidance, the three agencies also asked for comments about whether certain additional types of changes should also cause a plan to surrender grandfathered status, including changes to plan structure (such as changing from an insured plan to a self-insured plan or changing from a health reimbursement arrangement to major medical coverage), changes in provider networks, changes to prescription drug formularies, and other substantial changes to overall benefit design. Depending on the number and substance of the comments and how the agencies respond, it's possible that even more employers will decide to pull the plug on their grandfathered plans.

On the brighter side, the interim final regulations clarify that "excepted benefits" that are exempt from the HIPAA portability rules are also exempt from all of PPACA's new requirements. Exempt plans include limited scope dental and vision plans and retiree-only health plans.

We have updated our Health Reform Q&A for Employers page in light of the new interim final regulations. (Questions and answers affected by this guidance are marked "updated" or "new" in our Q&A.) As we were going to press with this update, the DOL, IRS, and HHS announced that they had issued joint guidance on pre-existing condition limitations, annual and lifetime benefit limits, coverage rescissions, and patient protections. Accordingly, employers can expect additional updates to our Q&A in the near future.