The Department of Health and Human Services (HHS), the Department of Labor (DOL), and the Treasury have released regulations for "grandfathering" health care plans that existed when the health care reform legislation became law on March 23, 2010.

The regulations would allow plan sponsors to make slight adjustments and changes to conform to state and federal laws. However, the rules would prohibit existing health care plans from making any changes to premiums, co-pays and deductibles that would increase members' out-of-pocket expenses substantially.

HHS Secretary, Kathleen Sebelius, told reporters that the rules were crafted to ensure that insurance companies "don't use this additional flexibility to take advantage of their customers."

Employer-provided health plans that existed as of March 23, 2010, are grandfathered and do not have to comply with the new requirements to offer preventive health without cost-sharing, establish external review procedures for the claims appeal process, cover clinical trials, and comply with certain other health reform mandates.

Grandfathered plans are required to follow some new rules for plan years starting after Sept. 23, 2010, including no lifetime limits, no "restricted" annual limits, no pre-existing condition-exclusion requirements, and the requirement to cover adult children until they reach age 26.

Routine Changes
While plans will lose their status if they cut benefits or increase out-of-pocket spending for members significantly, they will be able to make routine changes to their policies and maintain their status. These routine changes include:

• Cost adjustments to keep pace with medical inflation.
• Adding benefits.
• Making modest adjustments to existing benefits.
• Adopting new consumer protections voluntarily under the new law.
• Making changes to comply with state or other federal laws.

‘Significant' Changes Could Threaten Exemption
Plans will lose their grandfathered status if they make changes that reduce benefits or increase costs to employees. Details about the routine changes insurers and employers can make without losing their grandfathered status, and the projected impact on large and small employer plans, can be found in the HHS fact sheet.

Generally speaking, a health insurance plan can lose its grandfathered status if it eliminates all benefits for a particular condition or if it increases deductibles or co-payments by more than the rate of medical inflation plus 15 percentage points. In addition, a health plan would lose its grandfathered status if an employer reduces its contribution so that its share of the total cost of coverage declines by more than 5 percentage points below its contribution rate on March 23, 2010, for any tier of coverage affecting any class of similarly situated individuals.

The HHS fact sheet provides further details on these and other restrictions under the rules. According to the fact sheet, compared to policies in effect on March 23, 2010, grandfathered plans:

Cannot cut or reduce benefits significantly. For example, if a plan sponsor decides to no longer cover care for people with diabetes, cystic fibrosis or HIV/AIDS.
 

Cannot raise co-insurance charges. Typically, co-insurance requires a patient to pay a fixed percentage of a charge (for example, 20 percent of a hospital bill). Grandfathered plans cannot increase this percentage.

Cannot raise co-payment charges significantly. Compared with the co-payments 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. For example, if a plan raises its co-payment from $30 to $50 over two years, it will lose its grandfathered status.

Cannot raise deductibles significantly. Compared with the deductible required as of March 23, 2010, grandfathered plans can increase these deductibles only by a percentage equal to medical inflation plus 15 percentage points.

Cannot lower employer contributions significantly. Grandfathered plans cannot decrease the percent of premiums the employer pays by more than 5 percentage points.

Cannot add or tighten an annual limit on what the insurer pays. Plans cannot tighten any annual dollar limit in place as of March 23, 2010. Further, 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.

Cannot change insurance companies. If an employer decides to buy insurance for its workers from a different insurance company, this new insurer will not be considered a grandfathered plan. This does not apply when self-insured employers switch plan administrators, or to collective bargaining agreements.

Notification and Revocation. The rules require that plans notify members every time they distribute new materials.

Grandfather status will be revoked if:

• The plan forces members to switch to another grandfathered plan that, compared to the current plan, has fewer benefits or higher cost sharing, as a means of avoiding new coverage requirements.
• The plan is bought by or merges with another plan to avoid complying with the law.

Good Faith Compliance
Recognizing that group health plans may have made design changes since the grandfather date, the rules state that changes made in good faith prior to the date of the rules released may not be subject to enforcement if the changes only modestly exceed the permitted changes described above.