August 16, 2010 

Delivered Via Email

Office of Health Plan Standards and Compliance Assistance 

Employee Benefits Security Administration 

Room N-5653 

U.S. Department of Labor 

200 Constitution Avenue NW 

Washington, DC 20210 

Attention: RIN 1210-AB42 

RE: An Alternative Actuarial Equivalence Model Under Interim Final Rules Regarding 

Grandfathered Health Plans under the Patient Protection and Affordable Care Act 

Dear Sir or Madame: 

HR Policy Association (“HR Policy”) is submitting this comment letter on the Interim Final Rules for 

Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan 

under the Patient Protection and Affordable Care Act (P.L. 111-148). The Interim Final Rules were 

issued by the Departments of Labor, Health and Human Services, and Treasury (the “Agencies”) on June 

17, 2010 (75 Fed. Reg. 34538). HR Policy represents the chief human resource officers of over 300 of 

the largest employers doing business in the United States. Representing every major industrial sector, HR 

Policy's members employ more than 18 million people worldwide and collectively spend more than $75 

billion annually providing health insurance to millions of American employees, their dependents and 

retirees. It is our understanding that these comments will be shared with the Departments of Health and 

Human Services and Treasury. 

Section 1251 of PPACA provides exemptions from some of the mandates under subtitles A and C for 

grandfathered health plans. The statute defines grandfathered health plans as “a group health plan or 

health insurance coverage in which an individual was enrolled on the date of enactment of this Act...” 

The provision regarding grandfathered health plans is drafted very broadly. Yet, the Interim Final Rules 

adopt an unnecessarily restrictive approach and the statute simply does not demand such a narrow 

interpretation. 

HR Policy supports the President’s objective that under health care reform Americans should be able 

to maintain coverage under the health plans they currently have if they so desire. However, the proposed 

regulations will have just the opposite impact. The Agencies’ interpretation will place significant 

restraints on an employer’s ability to make adjustments that contain costs and to maintain the overall

benefit structure and value for plan participants. By imposing strict limitations on discrete elements of 

what employers can do to manage the design of their benefit plans, many employers will likely forego 

grandfathering status all together. 

 Accordingly, HR Policy recommends that the Agencies refine some of the rules in the Interim Final 

Rules regarding the maintenance of grandfathered status. For example, limitations on grandfathered plans 

should only be limited to in-network benefits and plan sponsors should be permitted to provide financial 

incentives for the use of high value and quality benefit designs through co-insurance differentials. 

Moreover, the Agencies should adopt an “actuarial equivalence” approach to permit plan sponsors to 

continue to innovate for use of quality providers of care, promote greater efficiency and better decisionmaking by beneficiaries in employer-sponsored plans. This flexibility for innovation has delivered 

greater value to populations covered by employers in terms of clinical outcomes and affordability for 
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Office of Health Plan Standards and Compliance Assistance 

Page 2 

employees and companies, as well as introduced many new approaches broadly adopted in the healthcare 

marketplace. 

Thus, plan sponsors would have two methods that enable them to maintain grandfathered status – 

actuarial equivalency, or a rules-based approach set forth in the Interim Final Rules which may be more 

appealing to smaller employers in particular. These recommendations are discussed more fully below. 

The Interim Final Rules 

Under the Interim Final Rules, employers lose their grandfathered status if they make any changes 

described below: 

• eliminate benefits for a particular condition or benefits to diagnose or treat a particular condition 

• impose any increase in percentage cost sharing (co-insurance)

• increase fixed amount cost-sharing (e.g., deductible or out-of-pocket limit) exceeding medical 

inflation plus 15 percent 

• increase in fixed-amount copayment that exceeds the greater of $5 or medical inflation plus 15 

percent 

• decrease employer contribution rate (% of total premium) for employee or family coverage by 

more than 5 percent 

• restructure a business with principal purpose to cover more individuals under a grandfathered 

plan 

Application of Grandfathering Limitations to In-network Benefits Only

The Interim Final Rules regarding maintenance of grandfathered status should only apply to "innetwork" benefits, as there should be no limitations on benefits related to providers not under contract. In 

interim final rules relating to coverage of preventive services under PPACA that were released this year, 

the Agencies recognized the principle of value-based insurance design by permitting plans to allow costsharing for recommended preventive services delivered out-of-network. This approach is also consistent 

with existing regulations around HSA-qualified High Deductible Health Plans which do permit 

restrictions on benefits provided out-of-network. Similarly, state regulatory bodies do not mandate levels 

of out-of-network benefits, but rather focus on adequate access to coverage in-network. However, 

emergency room benefits should not be considered "out-of-network" for these purposes. 

The Importance of an Actuarial Equivalence Alternative 

HR Policy recommends that the Agencies adopt an alternate actuarial equivalence approach for 

employers and allow them to choose between such an approach or the rule-based one set forth in the 

Interim Final Rule. In other words, plan sponsors should have the option to maintain grandfathered status 

by adhering to the rules outlined above or by maintaining an actuarial value that is equal to or greater 

than the value that would be allowed under the above rules. The alternate approach enables employers to 

continue to innovate and advance value in terms of clinical outcomes, cost and practices which would not 

be possible under the Interim Final Rules. It imposes no cost to any plan sponsor that is not willing

voluntarily to assume that cost and the actuarial equivalence methods are readily available in the 

marketplace. 

Rather than codifying stagnant benefit designs, this approach would allow for innovations to promote 

usage in medical homes and accountable care organizations, providers of best clinical outcomes, improve 

consumer engagement, and advance the efficient delivery of recommended clinical preventive services, 

chronic care management and care coordination. Indeed, this flexibility is what enabled employers to 

create and adopt the many components of what have become known as "value-based insurance design.” 
August 16, 2010 

Office of Health Plan Standards and Compliance Assistance 

Page 3 

The preamble to the Interim Final Rules noted that the Agencies considered some form of an 

actuarial equivalency approach but rejected it for two reasons: 1) because the Agencies believed such an 

approach would allow “a plan could make fundamental changes to the benefit design, potentially 

conflicting with the goal of allowing those who like their healthcare to keep it, and still retain grandfather 

status;” and 2) because of the Agencies’ concerns about the complexity involved in defining and 

determining actuarial value for these purposes, the need for very detailed prescriptive rules, and the costs 

of administering and ensuring compliance with such rules. However, the Association believes that the

same concerns expressed by the Agencies about an actuarial equivalence approach apply to the approach 

taken in the Interim Final Rules. 

An actuarial equivalence standard has been used successfully for other government regulated medical 

benefits. For example, under the Medicare Modernization Act, the federal government established a 

retiree drug subsidy for employers who continued to offer prescription drug benefits to retirees after

creation of the Medicare Part D program. To be eligible for the subsidy, employers had to demonstrate 

that the drug benefit that they provide to retirees is actuarially equivalent or better than the Medicare Part 

D prescription drug plan. This requires that plans reimburse at least the "same percentage" overall as the 

standard Medicare Part D benefit. The actuarial equivalency standard has been effective at preserving 

private innovation of a highly successful social insurance health benefit and has created no undue burden 

to employers who subsidize Medicare prescription drug coverage and opted for the subsidy approach. In

fact, the flexibility and success of the Medicare Part D approach has enabled employers continue to 

subsidize drug coverage and pursue value-based insurance designs. 

Moreover, the actuarial equivalency approach was adopted by Congress in PPACA for determining 

the different types of plans offered through the state insurance exchanges. PPACA defines plans under 

these exchanges as Platinum, Gold, Silver or Bronze based on their aggregate "value." Without dictating 

specific design elements other than requiring coverage of essential benefits, a bronze level plan provides 

benefits that are actuarially equivalent to 60 percent of the full actuarial value of the benefits provided 

under the plan. Platinum, gold, and silver are similarly defined as actuarially equivalent to 90%, 80% and 

70% coverage, respectively. Therefore, it is difficult to discern why an actuarial equivalence model is not 

suitable for the grandfathering rules under PPACA. 

Most employer-based plans in existence today provide a richer benefit than those provided under a 

bronze plan and employers that preserve at least the same actuarial value of benefits should be able to 

maintain their grandfathering status, while enabling thoughtful redesign and innovation within those 

benefit structures. The actuarial equivalence alternate pathway, allowing for medical inflation, would 

preserve the value intended in the regulations provided that the group health plan offered provides 

coverage that is equal to or greater than the actuarial value of the current plans. 

Application of "Actuarial Equivalence" by Specific Category of Medical Benefits

To avoid substantial changes to any specific category of medical benefits, "actuarial equivalence" 

could be required for each specific medical benefit category as an alternative to a “plan wide” actuarial 

equivalence test. This would ensure no significant reduction in the aggregate value of the benefits for any 

specific category of benefits. There are multiple ways in which categories could be defined, for example 

the category definitions used in the mental health parity regulations. As another example, the categories 

could be: office visits, other medical, inpatient hospital, emergency room, preventive care, and 

prescription drugs. 
August 16, 2010 

Office of Health Plan Standards and Compliance Assistance 

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Example of Proposed Actuarial Equivalence Grandfathering Framework 

The following is an illustration of the proposed actuarial equivalence approach applied to a specific 

plan design. In this example, we are assuming that medical inflation is 5%, so that the allowable limit 

under the current rules for copayment, deductible, and out-of-pocket maximums is a 20% increase 

(=5%+15%).

Current Plan Design - Current Year 

Below are the current benefit provisions of the illustrative plan for the current plan year:

In-Network 

Office Visits - $25 copay per visit (primary care and specialty care) 

Other Medical Services - 80% after $250 deductible 

Hospital Inpatient - 100% after $500 per admission co-pay 

Emergency Room - $100 copay per visit 

Prescription Drugs - Generic Drugs - $10 copay 

 Preferred Brand Drugs - $25 copay 

 Non-Preferred Brand Drugs - $40 copay 

Out-of-pocket maximum (excluding deductible and copays) = $2,000 

Out-of-Network 

All services - 70% after $1,000 deductible 

Out-of-pocket maximum (excluding deductible) = $3,500

"Permitted" Plan Design - Following Year

Below are benefit provisions of the illustrative plan for the following plan year that reflect changes

that are allowable under the grandfathering rules proposed in the IFR: 

In-Network 

Office Visits - $30 copay per visit (primary care and specialty care) 

Other Medical Services - 80% after $300 deductible 

Hospital Inpatient - 100% after $600 copay per admission 

Emergency Room - $120 copay 

Prescription Drugs - Generic Drugs - $15 copay 

 Preferred Brand Drugs - $30 copay 

 Non-Preferred Brand Drugs - $45 copay 

Out-of-pocket maximum (excluding deductible and copays) = $2,400 

Out-of-Network 

All services - 70% after $1,200 deductible 

Out-of-pocket maximum (excluding deductible) = $4,200 
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Office of Health Plan Standards and Compliance Assistance 

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"Actuarially Equivalent" Plan Design - Following Year 

Below are benefit provisions of the illustrative plan for the following plan year that are "actuarially 

equivalent" in each of the major benefit categories to the Permitted Provisions above. Calculations 

demonstrating actuarial equivalence are provided in the next section. 

In-Network 

Office Visits - 15% copay for primary care, 25% for specialty care 

Other Medical Services - 80% after $400 deductible (Health Reimbursement Accounts (HRA) 

Incentives up to $200 for healthy behaviors) 

Hospital Inpatient - 100% (no copay) if utilize high value network, 

 - 100% after $750 copay per admission outside of high value network 

Emergency Room - $120 copay 

Prescription Drugs - Generic Drugs, Preferred Maintenance Drugs - 20% coinsurance 

 Other Preferred Brand Drugs - 30% coinsurance 

 Non-Preferred Brand Drugs - 45% coinsurance 

Out-of-pocket maximum (excluding deductible and copays) = $2,400 

Out-of-Network 

All services - 60% after $1,200 deductible 

Out-of-pocket maximum (excluding deductible) = $5,000

Calculation of Actuarial Equivalence by Benefit Category 

The following provides an illustration of the actuarial equivalence determination for each of the major 

benefit categories. In each case, actuarial equivalence is established by showing that average expected 

member cost sharing is greater than or equal to that under the Permitted plan design, using current 

utilization and cost assumptions. 

Office Visits 

- Specialty Care = 3/5 of office visits based on past history 

- Average Primary Care Visit is $100, $30 copay=30% of in-network charges 

- Average Specialty Care Visit is $150, $30 copay=20% of in-network charges 

- Overall average visit copay expressed as a percentage = 2⁄5 (30%) +3⁄5 (20%) = 24.0% 

- Average visit coinsurance percentage under the "actuarially equivalent" plan design 

= 2⁄5 (20%) + 3⁄5 (25%) = 23.0% √ Actuarially Equivalent

In the above example, because members are on average required to pay less in cost sharing under the 

Actuarially Equivalent plan than under the Permitted plan (23% vs 24%, respectively), the Office Visit

benefits are considered actuarially equivalent. 

Other Medical Services 

- Average value of $200 HRA Incentives based on past history of health behaviors = $110 

- Average value of Deductible under Actuarially Equivalent plan after HRA Incentives = $400-$110= $290

√ Actuarially Equivalent 

In the above example, since the average expected deductible net of HRA incentives is $290, less than 

the $300 under the Permitted plan (which has no HRA incentives), the Other Medical Services benefits 

are considered actuarially equivalent.
August 16, 2010 

Office of Health Plan Standards and Compliance Assistance 

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Hospital Inpatient 

- Admissions in high value network are 1/5 of admissions based on past history 

- Average hospital copay under Actuarially Equivalent plan= 1⁄5 ($0) + 4⁄5 ($750) = $600 

√ Actuarially Equivalent 

In the above example, since the $600 is equal to the $600 required under the Permitted plan, the 

Inpatient Hospital benefits are considered actuarially equivalent. 

Emergency Room 

These benefits are the same under both the Permitted plan and the Actuarially Equivalent plan, so 

they necessarily pass the actuarial equivalence test. 

√ Actuarially Equivalent 

Prescription Drug 

- Costs based on past history are split 1/5 generics, 1/5 preferred maintenance brand, 2/5 other preferred 

brand, 1/5 non-preferred brand 

- Average cost of generic drug = $25; $15 copay=60% of charges 

- Average cost of preferred brand name drug (maintenance & other) = $120; $30 copay=25% of charges 

- Average cost of non-preferred brand name drug = $165; $45 copay= 37% of charges 

- Average prescription copay under Permitted plan as % of cost = 1⁄5(60%)+3⁄5(25%)+1⁄5(37%)=33.4% 

- Average prescription coinsurance percentage under Actuarially Equivalent plan 

= 1⁄5(20%)+1⁄5 (20%)+2⁄5 (30%)+1⁄5(45%)=29% 

√ Actuarially Equivalent 

In the above example, since 29% is less than 33.4%, the prescription drug benefits are considered 

actuarially equivalent. 

Out-of-Network √ No Requirement

Conclusion 

The actuarial equivalence approach described above will allow for continued innovation and design 

encouraging greater personal engagement, and value based activities while helping to preserve the 

generous level of benefits that most employers offer today. We respectfully urge the Agencies to 

consider permitting plan sponsors to maintain grandfathered status under an actuarial equivalence 

alternative to the Interim Final Rules. 

We appreciate the opportunity to comment on the Interim Final Rules. If you have any questions, 

please contact Marisa Milton at mmilton@hrpolicy.org or (202) 789-8671. 

Sincerely, 

Vice President, Health Care Policy 

 & Government Relations 

HR Policy Association