Grandfathered Health Plans Under the Patient Protection and Affordable Care Act (ACA)
Released: 2012-01-23T00:00:00

Introduction

The Patient Protection and Affordable Care Act ( P.L. 111-148 , ACA), as amended, includes provisions for the grandfathering of existing health insurance plans. Given that most Americans had private health insurance coverage on the date of enactment of ACA, most Americans' health coverage was affected by the grandfathering provisions.

This report describes grandfathered plans and summarizes the ACA insurance reforms that will affect such plans, including the requirements concerning medical loss ratios, dependent coverage, and preexisting health condition coverage. It also discusses issues addressed during the regulation promulgation process, including the possible loss of grandfathering status. In addition, the report describes analysis of the potential impact of the grandfathering regulations on existing health plans, and describes a sampling of comments submitted during the public comment period.

Grandfathered Health Plans

A grandfathered health plan is an existing group health plan or health insurance coverage (including coverage from the individual health insurance market) in which a person was enrolled on the date of ACA's enactment. Therefore, as long as a person was enrolled in a health insurance plan on March 23, 2010, that plan has been grandfathered.

Current enrollees in grandfathered health plans are allowed to re-enroll in that plan, even if renewal occurs after the date of ACA enactment. Family members are allowed to enroll in the grandfathered plan, if such enrollment is permitted under the terms of the plan in effect on the date of enactment. For grandfathered group plans, new employees (and their families) may enroll in such plans.

Insurance Reforms Applicable to Grandfathered Health Plans

Grandfathered health plans are exempt from the majority of new insurance reforms under ACA. However, grandfathered plans are subject to a handful of requirements with different effective dates.

Grandfathered health plans must comply, for plan years beginning on or after the date of enactment (March 23, 2010), with the following reforms:

Development of uniform explanation of coverage documents. Reporting of medical loss ratio and other financial information to the Secretary of Health and Human Services (the Secretary), and offering of premium rebates to enrollees if the plan did not meet specified medical loss ratios (rebate offers begin no later than January 1, 2011).

The insurance reforms to which grandfathered health plans must comply for plan years beginning six months on or after date of enactment (September 23, 2010) are the following:

Prohibition on lifetime limits on essential health benefits. Prohibition on health plan rescissions, except in cases of fraud or intentional misrepresentation of material fact. Requirement to extend dependent coverage to children under age 26. Prior to 2014, a grandfathered group plan is not required to make available dependent coverage to a child who is eligible for employment-based health benefits through his or her own employer.

Grandfathered health plans must comply, for plan years beginning on or after January 1, 2014 , with the prohibition on waiting periods that are greater than 90 days.

Grandfathered plans providing group coverage will be required to comply with the following reforms:

Prohibition on annual limits on essential health benefits, effective for plan years beginning on or after 2014. Prior to 2014, only "restricted" annual limits on essential health benefits are allowed, effective for plan years beginning on or after six months from date of enactment (September 23, 2010). Prohibition on coverage exclusions for preexisting health conditions. For most enrollees, this provision will become effective for plan years beginning on or after January 1, 2014. However, for children under age 19, this provision will become effective for plan years beginning on or after six months from date of enactment (September 23, 2010).

Grandfathered Health Plans and the Individual Mandate Requirement

The individual mandate requires most individuals to have health insurance coverage beginning in 2014, or potentially pay a penalty for noncompliance. Individuals will be required to maintain "minimum essential coverage" for themselves and their dependents. ACA defines minimum essential coverage to include many different insurance options, including grandfathered plans.

On a practical level, the question concerning grandfathered plans and complying with the individual mandate is relevant only to plans in the individual market. A person enrolled in any employer plan, whether the plan has been grandfathered or is new, will have met the individual mandate.

Loss and Continuation of Grandfathered Status

ACA is silent on the question about which plan changes would lead to loss of grandfathered status. The statutory language does not specify whether changes to covered benefits, cost-sharing requirements, actuarial value, or other plan features would be allowed under a grandfathered plan (some, but not all, of these plan features are addressed in the regulation on grandfathered plans, as discussed below). Also, ACA does not address instances when there are changes related to the insurance carrier offering the plan (e.g., new corporate owner), so it is not clear from the statutory language whether organizational changes would make grandfathered plans into new plans (a change in issuer is addressed in the regulation, and later in an amendment to the regulation).

The only scenario that the statute specifies loss of grandfathered status is in the case of coverage provided under one or more collective bargaining agreements (CBAs). Health insurance provided under CBAs that were in effect on the date of enactment is grandfathered until the termination date of the last agreement. Any amendment made to such coverage, solely for the purpose of conforming with ACA requirements, will cause neither termination of an agreement nor loss of grandfathered status.

Interim Final Rules on Grandfathered Health Plans

On June 17, 2010, the Departments of Health and Human Services, Labor, and Treasury ("Departments") issued interim final rules with request for comments regarding grandfathered plans. The Departments identified certain changes to benefits, cost-sharing, employer contributions, and access to coverage that would cause the loss of grandfathered status. The rules also clarified the loss of grandfathered status in either of the following instances: a plan did not have continuous enrollment since enactment (does not need to be the same enrollee), and termination of an existing collective bargaining agreement under which grandfathered health coverage was provided. In addition, the rules include transitional rules, a statement regarding federal enforcement, and an estimate of the potential impact of grandfathering rules on group and individual health plans. Comments on the interim final rules were due August 16, 2010.

Overall, the Departments have existing authority (under three relevant federal statutes ) to promulgate regulations with respect to health insurance market reforms, and issue amendments to such regulations. Moreover, the Departments reserved the right to issue administrative guidance (not in the form of regulation) to "clarify or interpret the rules contained in these interim final regulations for maintaining grandfathered health plan status." Nevertheless, the Departments did not specify an exact timeline for either amendments to the interim final rules or administrative guidance.

Changes Related to Benefits, Spending, and Coverage Access

The interim final rules identified certain changes that would cause a plan to lose grandfathered status. Some of the changes that would cause loss of grandfathered status relate to covered benefits, cost-sharing requirements, and employer contribution rates:

"Elimination of all or substantially all benefits to diagnose or treat a particular condition"; "Any increase … in a percentage cost-sharing requirement (such as an individual's coinsurance requirement)"; "Any increase in a fixed-amount cost-sharing requirement other than a copayment (for example, deductible) … [that] exceeds the maximum percentage increase" (defined as medical inflation + 15%); "Any increase in a fixed-amount copayment … [that] exceeds the greater of: (A) An amount equal to $5 increased by medical inflation … (that is, $5 times medical inflation, plus $5), or, (B) The maximum percentage increase"; Any of the following changes regarding an employer's contribution towards premiums: (A) "Employer or employee organization decreases its contribution rate based on cost of coverage … by more than 5 percentage points below the contribution rate for the coverage period that includes March 23, 2010" or (B) "Employer or employee organization decreases its contribution rate based on a formula … by more than 5 percent below the contribution rate for the coverage period that includes March 23, 2010"; and Any of the following changes regarding annual dollar limits: (A) "A group health plan, or group health insurance coverage, that, on March 23, 2010, did not impose an overall annual or lifetime limit … [later] imposes an overall annual limit"; (B) "A group health plan, or group health insurance coverage, that, on March 23, 2010, imposed an overall lifetime limit … but no overall annual limit … [later] adopts an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010"; or (C) "A group health plan, or group health insurance coverage, that, on March 23, 2010, imposed an overall annual limit … [later] decreases the dollar value of the annual limit…."

The regulation also included "anti-abuse" rules that specified instances in which changes to employee access to coverage would cause loss of grandfathered status. The rules specified that plans or coverage would cease to be grandfathered:

"If the principal purpose of a merger, acquisition, or similar business restructuring is to cover new individuals under a grandfathered health plan"; or If the following changes to the eligibility criteria were made: (A) "Employees are transferred into the plan or health insurance coverage (the transferee plan) from a plan under which employees were covered on March 23, 2010 (the transferor plan)"; (B) "Treating the transferee plan as if it were an amendment of the transferor plan"; and C) "There was no bona fide employment-based reason to transfer the employees…." (Changing the cost or terms of coverage does not constitute a bona fide employment-based reason.)

Transitional Rules and Enforcement

The regulation provides some flexibility in allowing changes to be made to the terms of a plan or coverage after enactment which do not cause loss of grandfathered status. Such changes include the following:

"Changes effective after March 23, 2010 pursuant to a legally binding contract entered into on or before March 23, 2010"; "Changes effective after March 23, 2010 pursuant to a filing on or before March 23, 2010 with a State insurance department"; "Changes effective after March 23, 2010 pursuant to written amendments to a plan that were adopted on or before March 23, 2010"; and "After March 23, 2010, a group health plan or health insurance issuer makes changes to the terms of the plan or health insurance coverage and the changes are adopted prior to June 14, 2010, … [but later] the changes are revoked or modified effective as of the first day of the first plan year (in the individual market, policy year) beginning on or after September 23, 2010, and the terms of the plan or health insurance coverage on that date, as modified, would not cause the plan or coverage to cease to be a grandfathered health plan…."

With respect to enforcement of the grandfathering rules, the Departments will consider "good-faith efforts to comply with a reasonable interpretation of the statutory requirements." As part of this consideration process, the Departments may disregard plan and policy changes that only moderately exceed the changes that would lead to loss of grandfathered status, and are adopted before June 14, 2010. Moreover, in the preamble to the interim final rules, HHS stated that it will not enforce ACA insurance reforms with respect to retiree-only coverage (for additional information about the treatment of retiree health plans under ACA, see the Appendix ).

Potential Impact of Grandfathering Rules on Group and Individual Plans

The interim final rules include analysis of the potential impact of grandfathering rules on group health plans and coverage provided through the group and individual health insurance markets.

Using data from an annual employer survey, the Departments analyzed changes to employer-sponsored health insurance from 2008 to 2009. They then calculated the proportion of health plans that would lose grandfathered status if the same changes were made under grandfathering rules. These calculations formed the mid-range estimates.

As indicated in Table 1 , the Departments estimated that half of all employer health plans would lose grandfathered status by 2013, if employers did not change their behavior. There is a notable difference among plans by firm size. For large employer (100 or more employees) plans, nearly half (45%) would lose grandfathered status by 2013, based on these estimates. For small employer (3-99 employees) plans, about two-thirds (66%) would do so.

However, the Departments acknowledged that employers may behave differently under grandfathering rules, either wanting to maintain grandfathered status or having other priorities that outweigh the desire to keep grandfathered status. With these different scenarios in mind, the Departments also calculated low-range and high-range estimates for plans losing grandfathered status.

For the individual health insurance market, the Departments relied on existing studies that estimated 40%-67% of individual policies are in effect for less than a year. Applying these same turnover rates under grandfathering rules, and assuming that some policies maintained for a longer period of time would eventually also lose grandfathered status, the Departments estimated that the proportion of individual health plans losing grandfathered status would exceed the 40%-67% range in a given year.

Submitted Comments

As mentioned previously, the issuance of the interim final rules included a public comment period that ended on August 16, 2010. To date, well over 2,000 submissions have been posted on http://www.regulations.gov in response to this regulation. While it is beyond the scope of this report to review and summarize all submissions, CRS analyzed selected comments that reflect a range of perspectives: health plan, employer, consumer, and regulator. Issues that generated comments across the various perspectives include prescription drug formularies, provider networks, cost-sharing, plan design and funding, and the requirement to disclose certain information to plan participants and beneficiaries.

Overall, the comments from health plans and employers argued for more flexibility in plan changes that would still allow the maintenance of grandfathered status. In contrast, consumers generally supported the rules, but in some instances argued for restricting even further the changes that a grandfathered plan could make. State regulators expressed views and made recommendations that spanned the different perspectives. Notably, across the comments, the assumption was that maintaining grandfathered status is desirable, so the commenter either wanted to be able to make more changes and still be grandfathered, or use the loss of grandfathered status to discourage changes.

Plans and employers recommended that changes to prescription drug formularies and provider networks be allowed, in order for coverage to adopt innovation, promote high-quality care, and keep current with a dynamic health care marketplace. Consumers, however, supported the loss of grandfathered status with changes in formularies and networks that negatively affected access to care. Regulators expressed views on both sides of this issue. For example, one state regulator said that a significant change in the provider network should lead to loss of grandfathered status, while another stated that allowance should be given to a dynamic market where providers enter and exit regularly.

Plans and employers recommended more flexibility with changes to cost-sharing that would be allowed. Some suggested that medical inflation was not an appropriate measure, and suggested a standard based on actuarial value. Plans and employers also argued for greater flexibility in general, whether it was plan options, funding of coverage, issuer of coverage, employer contributions, or other features. Consumers supported the grandfathering rules with respect to cost-sharing and plan structure. In specific instances, consumers identified other cost-sharing changes (e.g., visit limits) that should lead to loss of grandfathering status, as well as recommended further clarification of the cost-sharing rules. In keeping with this perspective, consumers generally supported the regulations regarding changes to issuer, employer contributions, and overall plan design. State regulators, again, expressed different views on these issues; for instance, one state recommended more flexibility in the cost-sharing rules, while another state recommended that prescription drug copayments be added to the rules.

The same range of concerns and recommendations applied to the requirement to provide enrollees with health plan information, including whether their plan has been grandfathered. Health plans and employers uniformly argued that the notice be issued less frequently and the information streamlined, to minimize the burden and cost. Consumers argued for more information to be included in the notice, specifically which insurance reforms do and do not apply to grandfathered plans. Regulators expressed both of these views.

Amendment to Interim Final Rules

On November 17, 2010, the Departments published an amendment to the interim final rules on grandfathered health plans. After review of the comments concerning the link between a change in health insurance coverage to loss of grandfathered status, the Departments amended the rules to allow group health plans to "enter into a new policy, certificate, or contract of insurance" and maintain grandfathered status. This amendment would allow, for example, an employer plan that currently provides health coverage through insurance carrier A to get coverage through insurance carrier B, and still be considered a grandfathered plan (provided that there is no other change to the plan that would cause loss of grandfathered status). This amendment included a comment period that ended on December 17, 2010.

Appendix. Retiree Health Plans and ACA

Whether retiree health benefits are subject to ACA depends, in part, on the population that is eligible for the health benefits. Generally, retiree health benefits may be offered under a plan that is separate from health benefits offered to current employees (retiree-only plans). Or retiree health benefits may be offered through the same plan offered to current employees; an example of this is what is offered through the Federal Employees Health Benefits Plans (FEHBP), which covers both retirees and workers under the same plans.

Plans that cover workers must comply with the relevant ACA provisions that impact employer-provided insurance (such as the dependent coverage requirements). Therefore, if the retiree coverage is offered through the same plan offered to current employees, then those plans, by default, must comply with the same provisions. Alternatively, if the retiree coverage is offered through retiree-only plans, then such plans may (or may not) be subject to ACA's insurance reforms.

Retiree-only plans may not have to comply with ACA's insurance provisions:

The authority to regulate employer-provided health benefits, including retiree health benefits, rests with the federal government. ACA's insurance reforms are examples of the federal regulation of employer-provided health benefits. However, states are the primary enforcers of health insurance requirements, even post-ACA. Therefore, the states have the authority to enforce ACA's insurance reforms on retiree health plans offered through state-licensed insurance companies. (Note: self-insured plans are not offered through state-licensed insurers, so they generally are not subject to state law or regulations. Self-insured plans are subject to federal standards. ) Each state will decide whether it will actively enforce the ACA insurance reforms on retiree plans. For states that do not adequately enforce applicable health insurance requirements, the enforcement responsibility typically falls back to the federal government. However, HHS has stated that it will not enforce ACA insurance reforms with respect to retiree-only coverage. This statement was made in the preamble to the interim final rules regarding grandfathered plans. In other words, at this time, there is no federal role in enforcing the ACA insurance reforms on retiree-only plans. However, given the Administration's aforementioned authority to promulgate regulations and issue administrative guidance relating to federal health insurance standards, it is possible that the Administration may reconsider its position on enforcement.

The federal exemption for retiree-only health plans is not a new exemption. Retiree-only health plans have been exempt from federal health insurance requirements since enactment of the Health Insurance Portability and Accountability Act of 1996. In the preamble to the interim final rules regarding grandfathered plans, HHS indicates that this exemption still applies.