On April 1, 2011, the U.S. Department of Labor issued a sixth set of Frequently Asked Questions (FAQs)1 implementing certain features of the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (together, the Act). While nominally issued by the Department of Labor, the FAQs are a collaborative effort among the Departments of Health and Human Services, Labor, and the Treasury (collectively, the Agencies). This advisory summarizes the FAQs, which speak to issues arising under the Act's grandfather rules and preventative care requirements.

GRANDFATHER RULES

Plans in existence on March 23, 2010 benefit from a series of "grandfather" provisions, under which a plan may continue to provide the coverage in effect on March 23, 2010 without regard to certain of the Act's requirements. Grandfather status is not affected by renewals or the addition of new participants after March 23, 2010. Similarly, family members may be added provided that the plan otherwise offered family coverage as of March 23, 2010. An interim final regulation issued in June of 2010 interprets the Act's grandfather provisions narrowly. For a summary of these rules, please see our Health Care Reform Advisory of June 16, 2010.

Q&A 1: Transfers among plans—"bona fide employment-based reason"

Under the interim final rules interpreting the Act's Grandfather provisions, transferring employees from one grandfathered plan or benefit package (transferor plan) to another (transferee plan) will generally cause the transferor plan to cease to be a grandfathered plan if, treating the transferee plan as an amendment of the transferor plan, the transferee plan would fail to satisfy the substantive rules—relating to the elimination of benefits, changes in cost-sharing requirements, co-pays, deductibles, etc.—governing the maintenance of grandfather status. But there is an exception to this rule in instances where there is a "bona fide employment-based reason" for the transfer (e.g., the closing of a plant or division accompanied by the transfer of affected employees to another of the employer's grandfathered group health plans). As a consequence, where this exception is available, the transferor plan need not replicate the material terms of the transferee plan in order to retain grandfathered status.

In Q&A 1, the Agencies interpret the term "bona fide employment-based reason" to include any of the following (not an exhaustive list):

  • When a benefit package is being eliminated because the issuer is exiting the market;
  • When a benefit package is being eliminated because the issuer no longer offers the product to the employer (for example, because the employer no longer satisfies the issuer's minimum participation requirement);
  • When low or declining participation by plan participants in the benefit package makes it impractical for the plan sponsor to continue to offer the benefit package;
  • When a benefit package is eliminated from a multiemployer plan as agreed upon as part of the collective bargaining process; or
  • When a benefit package is eliminated for any reason and multiple benefit packages covering a significant portion of other employees remain available to the employees being transferred.

Q&A 2: Rx benefit cost-sharing

A plan that increases cost-sharing over the thresholds prescribed by the interim final grandfather rule will cease to be a grandfathered plan. This Q&A addresses a narrow issue relating to pharmacy benefits in a plan with one level of cost-sharing for brand-name prescription drugs with generic alternatives and another level of cost-sharing for brand-name prescription drugs without generic alternatives. A question arose concerning the classification of a drug that previously had no generic alternative once a generic alternative becomes available, thereby increasing the cost-sharing amount for the brand-name drug. The Agencies opined that the movement of the brand-name drug into a higher cost-sharing tier does not cause the plan to relinquish grandfather status.

Q&As 4 and 5: Timing of loss of grandfather status

These Q&As posit a plan amendment that will result in the loss of grandfather status. In one case the amendment is effective as of the first day of the following plan year, in the other the amendment is effective immediately, i.e., mid-year. In each case, the question is at what point grandfather status is lost. Sensibly, in each case, grandfather status is forfeited as of the effective date of the amendment.

Q&A 6: Cost of living increases

In this Q&A, a plan sponsor of a plan that covers both active employees and retirees provides for contributions on behalf of retirees of $300 per year multiplied by the individual's years of service with the employer, capped at $10,000 per year. The Agencies refer to this as a "formula" provision. According to the Agencies, the plan will cease to be a grandfathered health plan if the employer decreases its contribution rate towards the cost of coverage by more than 5% below the contribution rate on March 23, 2010. But if the formula does not change, the employer is not considered to have reduced its contribution rate, regardless of any increase in the total cost of coverage.

The Q&A clarifies that if (1) the dollar amount that is multiplied by years of service decreases by more than 5% or (2) if the $10,000 maximum employer contribution cap decreases by more than 5%, the plan will cease to be a grandfathered health plan. Presumably, the purpose of this Q&A is to assure plan sponsors that plan formula provisions will cause the loss of grandfather status only where the application of the formula causes the plan to exceed the limits prescribed by the provisions of interim final grandfather rule governing cost increases.

PREVENTATIVE SERVICES

The Act requires group health plans to cover, without cost-sharing, certain preventive services, child preventive services, and additional preventive care screenings, based on recommendations of the U.S. Preventive Services Task Force. An interim final rule implementing this requirement was issued July 19, 2010, under which the bar on cost-sharing for preventative services was generally limited to in-network services. Since then, the focus of compliance with this rule has shifted to medical management techniques, including "value-based insurance designs" (VBIDs). The premise behind VBID is that health care expenditures should be based on the value to individual patients. VBID endeavors to tailor copayments to the evidence-based value of specific services for targeted groups of patients.

Q&A 3: Value-Based Insurance Design (VBID)

The issue of VBIDs in the context of preventative services first surfaced in the Department of Labor's previous FAQs, which involved a group health plan that did not impose a copayment for colorectal cancer preventive services when performed at an in-network ambulatory surgery center. But the same preventive services provided at an in-network outpatient hospital setting generally required a $250 copayment, although the copayment was waived for individuals for whom it would be medically inappropriate to have the preventive services provided in the ambulatory setting. The Agencies determined that this VBID did not cause the plan to fail to comply with the no cost-sharing preventive care requirements.

This Q&A posits a different situation, under which a group health plan that makes preventive services available at an in-network ambulatory surgery center and at an in-network outpatient hospital setting with no copayment in either setting. The plan proposes to impose a $250 copayment for preventive services only when performed in the in-network outpatient hospital setting (i.e., not when performed in an in-network ambulatory surgery center), and with the same waiver of the copayment for any individuals for whom it would be medically inappropriate to have these preventive services provided in the ambulatory setting.

According to the Agencies, the proposed increase in the copayment for preventive services solely in the in-network outpatient hospital setting (subject to the waiver arrangement described above) without any change in the copayment in the in-network ambulatory surgery center setting would not cause the plan to relinquish grandfather status.

Footnotes

1. All of these FAQs can be accessed on the Department of Labor's website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.