The primary purpose of the Affordable Care Act was to expand coverage to millions of presently uninsured Americans. Even so, the Affordable Care Act contained a number of market reforms that have already had a significant impact on the individual insurance and employer-sponsored health industry. These include such well-known provisions as the rule allowing kids to stay on their parents’ plan until age 26 and the rule prohibiting insurance companies from discriminating based on pre-existing conditions. There are a number of lesser-known rules though that could significantly impact the way employers structure their group health plans.
I. Gating considerations – What is a group health plan?
Most of the insurance market reforms only apply to “group health plans.” This seemingly straight-forward characterization actually includes a number of complex exceptions. At the outset, the general rule is that most medical welfare benefits are considered group health plans, meaning they are subject to the Affordable Care Act’s market reforms.
Notably though, most healthcare flexible spending accounts are exempt from the law. This is the case unless the employer contributes money to the employee’s FSA and the benefits are not subject to the traditional “use-it-or-lose-it” rules.
Further, plans covering less than two active employees are exempt from most of the requirements. This is more commonly known as the “retiree-only plan exemption,” because retiree plans typically contain no active employees.
Employers should exercise caution though, as a plan that seemingly only covers retirees could be construed to cover active employees as well. There’s no hard-and-fast rule for making this determination, but some relevant factors include:
- Are active employees covered under the same “legal plan” for Form 5500 annual reporting purposes?
- Does the employer represent to employees that both active and retired employees are covered under the same plan?
- Are active and retired employee contributions held in the same trust?
Stand-alone dental and vision plans are also exempt from the Affordable Care Act market reforms. There are two ways a dental or vision benefit would be considered a stand-alone plan:
- The dental or vision benefit is fully-insured and issued under a separate policy than the medical benefit
- Both medical and dental/vision are self-funded, but participants must separately elect dental/vision and pay a separate premium for those benefits
There are a number of other types of welfare benefits that may be exempt from the Affordable Care Act’s market reforms; including workers’ compensation benefits, supplemental liability insurance, and on-site medical coverage (this list is not exhaustive).
Be aware, though, that benefits that are exempt from the Affordable Care Act’s market reforms may not be exempt from the Affordable Care Act entirely. For instance, some of the taxes under the Affordable Care Act (such as the Cadillac tax) still apply to retiree-only plans.
II. Gating Considerations – What is a grandfathered plan?
Once an employer has determined that it sponsors “group health plan” that is subject to the Affordable Care Act’s market reforms, the next step is to determine whether that plan is grandfathered. To be clear, a grandfathered plan is still subject to many of the insurance market reforms.
But, it may avoid certain reforms until it loses grandfathered status. Generally speaking, a grandfathered plan is any plan that was in existence on March 23, 2010 (the date the Affordable Care Act was passed by the U.S. Senate).
Grandfathered plans may remain grandfathered indefinitely, as long as at least one participant remains enrolled at all times, and as long as the plan sponsor doesn’t make any of the following prohibited changes:
Unless a change is specifically listed above as prohibited, the plan sponsor may make the change without causing the plan to lose grandfathered status. Further, grandfathered status is lost on a benefit package-by-benefit package basis.
In other words, each “legal plan” for annual reporting purposes may contain several benefit options. Most often, these include a PPO, an HMO, and possibly a high-deductible health plan. Changes to one of these options will not impact the grandfathered status of the remaining options.
As called out below in the discussion of each market reform, grandfathered plans may be exempt from certain requirements until they lose grandfathered status.
III. Insurance market reforms that apply to all plans (including grandfathered plans).
The following market reforms apply to all group health plans, regardless of whether they remain grandfathered or have lost grandfathered status.
- Adult Child Coverage Requirement. Group health plans that offer dependent coverage must continue to offer coverage to those dependents to age 26, without condition on dependency, residency, student status or marital status. The coverage must be of the same type and the same cost as coverage offered to other dependents. Grandfathered plans may exclude adult children who have other employment-based coverage available (but only until 2014). For purposes of the mandate, “children” include biological children, adopted children (or children who have been placed for adoption), foster children and step-children.
- Prohibition on Lifetime and Annual Dollar Limits. Group health plans are prohibited from imposing lifetime dollar limits on “essential health benefits.” They may only impose restricted annual dollar limits on essential health benefits (no lower than $2 million dollars starting in 2013), and beginning in 2014, plans may not impose any annual dollar limit on essential health benefits.
- The term “essential health benefits” is still subject to regulatory interpretation, but it generally includes such benefits as ambulatory services, emergency services, hospitalization, preventive services, maternity services, prescription drugs, mental health and substance abuse benefits, laboratory services and certain pediatric services. While plans are not permitted to impose dollar limits, visit limits are still permitted under the law.
- Prohibition on Rescissions. Group health plans may not “rescind,” or retroactively cancel coverage. This change was intended to prevent the common situation where an individual incurs medical services assuming that he or she is covered, after which an employer or insurance company discovers an application error and retroactively terminates coverage. A rescission is still permitted, however, in the event of participant fraud or intentional misrepresentation of material fact. Further, a retroactive termination is permitted if the participant failed to pay his or her premium (because the law doesn’t consider this a rescission).
- Prohibition on Pre-existing Condition Exclusions. Group health plans may not impose pre-existing condition exclusions on participants under age 19. Starting in 2014, pre-existing condition exclusions are barred completely, regardless of participant age. In other words, plans must immediately cover participants who are eligible, regardless of whether they already have a medical condition (assuming the plan actually provides benefits to treat that condition).
IV. Insurance market reforms that only apply to non-grandfathered plans.
The following provisions only apply to new group health plans or group health plans that have lost grandfathered status.
- Patient Protections. Non-grandfathered group health plans that require participants to designate a primary care provider must allow those participants to choose among any available provider in-network. Further, women must be permitted to designate an OB/GYN as their primary care provider (or must be permitted to seek OB/GYN services without a referral). Finally, parents must be permitted to designate a pediatrician as their child’s primary care provider.
- Also, non-grandfathered plans may not require pre-authorization for emergency services. Moreover, these plans must apply the same coinsurance/co-pay rates for emergency services, regardless of whether they are provided in-network or out-of-network.
- Revised Claims & Appeals Requirements. Non-grandfathered group health plans must provide participants with additional information on claim denial notices, including information regarding the claim denial code, information regarding applicable state consumer assistance programs, and information regarding the right to seek an independent external review of the claim.
- Further, participants must be afforded the opportunity to seek an independent external review of any claim denied based on medical judgment (as opposed to claims denied based on eligibility or plan interpretation).
- Free Coverage for Preventive Care. Non-grandfathered plans must cover certain agency-recommended preventive services at 100 percent, with no participant cost-sharing. A full list of services required to be covered is available here: http://www.healthcare.gov/news/factsheets/2010/07/preventive-services-list.html#CoveredPreventiveServicesforAdults.
- Nondiscrimination in Fully-Insured Plans. Non-grandfathered fully-insured group health plans (where benefits are paid by an insurance company rather than out of the employer’s general assets), may not discriminate in favor of highly compensated employees. (A parallel rule already existed under the Internal Revenue Code for self-funded plans). This rule isn’t effective until the IRS issues further guidance, which is not expected until 2013 or later.
V. Conclusion
The insurance market reforms make up a small, yet important, part of the Affordable Care Act. Penalties for failure to comply can be substantial (up to $100 per day, per affected participant). So, plan sponsors should be careful to properly determine (1) whether they sponsor a “group health plan,” (2) whether their plan is grandfathered, and (3) whether their plan complies with all of the relevant provisions listed above.
For more information on the insurance market reforms, the Affordable Care Act, or employee benefits generally, please contact Ben Conley, Attorney at Seyfarth Shaw LLP, at bconley@seyfarth.com, or Anne Wilde, Director of HR & Compliance at Elks Rehab System at awilde@elksrehab.org.
About the Authors:
Ben Conley is an attorney in the Chicago office of Seyfarth Shaw LLP. He focuses his practice on employee benefit plans. Mr. Conley has experience counseling clients on qualified retirement plans, health and welfare plans, and executive compensation. Mr. Conley is a member of the firm’s Health Care Reform Team. This cross-departmental team of lawyers was formed to focus on how health care reform will affect our clients. Mr. Conley started closely following health care reform well before it was passed into law. He regularly consults with governmental agencies on health care reform developments and has submitted comments on health care reform interim regulations on behalf of clients. Mr. Conley has presented extensively on health care reform and what it means for businesses, including leading the Healthcare Reform Certification Program offered by the Employer Healthcare Congress.
Anne B. Wilde is an experienced attorney and human resources professional who has advised employers on complex employment-related matters for fifteen years. She has advised private and public employers from a spectrum of industries, a third-party benefit administrator and various plan sponsors of self-funded group health plans. Anne has expertise in federal and state employment laws, ERISA, the Patient Protection and Affordable Care Act (healthcare reform), HIPAA, COBRA, contract negotiation and drafting, benefit plan design and drafting, employee relations, compliance issues, policy drafting and training. She has consistently been recognized by clients as an exceptional communicator and advisor.
