Health Care Reform: Upcoming Coverage Changes For Employer-Sponsored Plans

Monday, July 5, 2010 - 01:00

The Patient Protection and Affordable Care Act ("PPACA"), signed into law on March 23, 2010, and amended by the Health Care and Education Reconciliation Act of 2010 (the "Reconciliation Act"), signed into law on March 30, 2010 (collectively, the "Affordable Care Act"), mandates several changes in coverage that must be established by employer-sponsored health care benefit plans. Several of these coverage changes may have a significant impact on the cost of employer-sponsored plans, and many are effective for plan years beginning on or after September 23, 2010. In this article we address several of the more notable changes in coverage required by the Affordable Care Act, although the changes discussed below are not an exhaustive list of all requirements under the Affordable Care Act.

Grandfathered Plans

Whether the coverage requirements discussed below must be implemented for any specific plan may turn on whether the health plan has grandfathered status under the Affordable Care Act.1A grandfathered plan is any health plan in which an individual was enrolled as of March 23, 2010 (the effective date of PPACA). In the original Senate bill and as adopted by the House, no changes were required of plans with grandfathered status. However, the Reconciliation Act extended several health care reforms to grandfathered plans, including requirements related to limitations on waiting periods, lifetime and annual limits, rescission of benefits, dependant coverage, and limitations on exclusions based on pre-existing conditions. Other changes, such as mandated preventative care with no cost-sharing and the prohibition on fully insured plans discriminating in favor of highly compensated employees, do not extend to plans with grandfathered status.

While the Affordable Care Act explicitly allows for the addition of family members and new employees to join grandfathered plans without affecting the plan's status as a grandfathered plan, it does not address what additional changes, if any, can be made to grandfathered plans without causing the plan to lose such status. Further, it is unclear how long grandfathered plans will continue to be exempt from any mandates that were not already extended under the Reconciliation Act. In the recently issued interim final rules relating to dependant coverage for children until age 26, discussed in more detail below, the Departments of Treasury, Labor, and Health and Human Services indicated that regulations regarding grandfathered plans are expected shortly, and that it is expected that any changes to plans made to comply with the dependant coverage rules, including voluntary compliance before the start of the plan year, would not cause a plan to lose grandfathered health plan status. Further guidance is needed immediately as to what other changes would not affect grandfathered plan status before employers consider implementing any changes to plans for the upcoming benefit year given the significance of maintaining such status.2

Changes Effective For Plan Years Beginning On Or After September 23, 2010

Prohibition On Annual And Lifetime Benefit Limits

The Affordable Care Act amends the Public Health Service Act ("PHSA") to prohibit group health plans, including grandfathered plans, from establishing lifetime limits on essential health benefits for any participant or beneficiary. Additionally, group health plans, but not grandfathered plans, will be prohibited from establishing annual limits on such benefits. Until 2014, however, group health plans may impose a "restricted annual limit" on essential health benefits. The Affordable Care Act directs the Secretary of Health and Human Services to define "restricted annual limit," and so it is currently unclear what type of annual limit may be permissible.

Note that the Affordable Care Act also provides that the Secretary must define "essential health benefits," but states that at a minimum such benefits shall include services within the following categories: ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services (including behavioral health treatment), prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventative and wellness services and chronic disease management, and pediatric care, including oral and vision care. The Secretary of Labor is instructed to conduct a survey of employer-sponsored coverage to determine the scope of benefits typically covered by employers, and report to the Secretary of Health and Human Services to ensure that the scope of "essential health benefits" is equal to those typically offered by employer-sponsored plans. The Affordable Care Act expressly does not prohibit lifetime or annual limits on those benefits not deemed essential.

No Rescissions Of Coverage

The Affordable Care Act further amends the PHSA to provide that coverage under group health plans, including grandfathered plans, cannot be rescinded unless the insured "has performed an act or practice that constitutes fraud or makes an intentional misrepresentation of material fact as prohibited by the terms of the plan or coverage." Further guidance is needed as to the scope of the "fraud" or "intentional misrepresentation of material fact" that could warrant rescission. It is also unclear what impact this prohibition will have on employees who may be mistakenly enrolled in a plan.

Extension Of Coverage For Children Until Age 26

Under the Affordable Care Act, a group health plan offering dependent coverage must allow an adult child (without regard to marital or student status) to continue dependent coverage until age 26. However, grandfathered health plans are not required to extend coverage to adult children under age 26 who are eligible for other employer-sponsored health coverage. This limited exception expires in 2014.

On May 13, 2010, the Departments of Treasury, Labor, and Health and Human Services jointly issued interim final regulations (the "Regulations") providing guidance on implementing the extension of adult children's health coverage to age 26. The Regulations apply for plan years beginning on or after September 23, 2010.

The Regulations provide that a group health plan that provides coverage for children can only specify the required familial relationship that a child under age 26 must have with the employee to be eligible for coverage (e.g., will eligible children be limited to the employee's children or will it also include stepchildren, foster children, and grandchildren). Consequently, other factors typically taken into account, such as financial dependency on the participant, residency with the participant, student status, employment, eligibility for other coverage, etc., cannot be used for purposes of defining dependent for eligibility (or continued eligibility). Thus, if the child has the required familial relationship to the employee, the plan must cover the child. The Regulations also provide that a group health plan will not have to extend coverage to an employee's grandchildren or to the spouse of the employee's child, although it can voluntarily do so. The Regulations also clarify that the exception regarding grandfathered plans does not allow a plan to deny enrollment merely because the adult child is eligible to enroll in the other parent's plan.

The Regulations further clarify that, except for children age 26 or older, the group health plan may not vary the terms or conditions of coverage to offer (i) separate premiums for covered children, or (ii) various dependent coverage, based, in both instances, solely on the age of a child, e.g., charging more for children over age 21.

The Regulations also provide transitional relief for a child under age 26 who lost coverage, was denied coverage, or was not eligible for coverage under a group health plan because the terms of such plan eliminated dependent coverage of a child prior to age 26. These rules apply to enrollment for the first plan year to which the extension applies. In subsequent years, coverage may be elected for an eligible child under the plan's normal enrollment opportunities.

The Regulations require a plan or issuer to provide such a child with written notice, offering the opportunity to enroll, for an enrollment period of at least 30 days. This enrollment opportunity (including the written notice) must be provided not later than the first day of the first plan year beginning on or after September 23, 2010 and must be provided to the employee on behalf of the employee's child. The notice may be provided along with other enrollment materials. If a child is enrolled under the transitional rule, coverage must begin not later than the first day of the first plan year beginning on or after September 23, 2010, even if the request for enrollment is made after the first day of the plan year.

Under the Affordable Care Act, the employer will be subject to a $100 per day/per affected participant excise tax under Section 4980D of the Internal Revenue Code (the "Code") for a failure to satisfy the requirements regarding the dependent coverage extension to age 26.

Limitations On Cost-Sharing And Emergency Room Coverage

The Affordable Care Act also provides that for insured and self-insured plans, but not for grandfathered plans, certain preventative care and immunizations, as recommended by the United States Preventative Services Task Force and the Health Resources and Services Administration, must be provided without any cost-sharing to the member. "Cost-sharing" is defined to include deductibles, coinsurance, copayments or similar charges. The implication of this requirement on the ability of plans to impose cost-sharing obligations on members seeking such covered preventative care from out-of-network providers is unclear and further guidance is necessary to explain whether this mandate was intended to apply only to those members who seek such care from in-network providers.

It is clear, however, that plans that provide emergency room coverage cannot limit such coverage to in-network providers or facilities. Insured and self-insured plans, but not grandfathered plans, will not be able to impose higher cost-sharing obligations on those members who receive emergency care from out-of-network providers or facilities than they impose on members who seek such coverage from participating providers or facilities. Further, plans will no longer be able to require pre-authorization for emergency services. Importantly, the Affordable Care Act provides definitions for what constitutes both an "emergency medical condition" as well as "emergency services."

Internal And External Appeals Procedures

The Affordable Care Act amends the PHSA to require insured and self-insured plans, but not grandfathered plans, to implement an "effective appeals process" for appeals of coverage determinations that, at a minimum: (1) includes an internal appeals process; (2) provides notice to members in a "culturally and linguistically appropriate manner" of the internal and external processes as well as the availability of any applicable office of health insurance consumer assistance or ombudsman to assist in the appeals process; and (3) allows the member to review his or her file, present evidence, and receive continued coverage during the pendency of the appeal. Compliance with ERISA, and specifically 29 C.F.R. § 2560.503-1, is sufficient to satisfy the required internal appeals process.

Additionally, group health plans must establish external appeals procedures that (1) comply with the applicable state law governing external appeals or (2) meet the minimum standards to be established through guidance if there are no applicable state requirements or if the plan is self-insured and not subject to such state requirements. The Affordable Care Act gives the Secretary of Health and Human Services the authority to deem external review processes as appropriate, but further guidance is certainly needed.

No Discrimination In Favor Of Highly Compensated Employees

Section 105(h) of the Internal Revenue Code generally prohibits a self-insured group health plan from providing an employer's highly compensated individuals3with discriminatory participation or benefits. Excess reimbursements paid to a highly compensated individual under a discriminatory self-insured medical reimbursement plan are taxable to the individual.

Prior to enactment of the Affordable Care Act, this prohibition was limited to self-insured group health plans, but employer-provided health benefits provided through fully insured group health plans were not subject to the Code Section 105(h) nondiscrimination requirements. Thus, an employer could provide more generous health insurance benefits to executives if using an insured group health plan.

This changed with the Affordable Care Act. Effective for plan years beginning after September 23, 2010, nondiscrimination requirements will now apply to employer group health plans that are fully insured. However, grandfathered health plans are exempt from the new non-discrimination requirements. Thus, employer-provided health insurance policies in existence on March 23, 2010 may continue to discriminate in favor of highly compensated employees.

Under the Affordable Care Act, the employer will be subject to a $100 per day/per affected participant excise tax under Code Section 4980D for a failure to satisfy the nondiscrimination requirements for insured group health plans.

Due to the discrimination rules for self-funded plans, some employers have instituted fully insured plans or arrangements to provide executives and key employees with more generous health insurance benefits. The above-specified new prohibitions against discrimination in fully insured group health plans will require employers to significantly amend the coverage provisions of many employer-sponsored group health plans and to use other methods to reward executives.

Additional Changes Effective September 23, 2010

The Affordable Care Act also amends the PHSA to prohibit group health plans, including grandfathered plans, from requiring a waiting period of more than 90 days to join a plan.

Finally, the Affordable Care Act also amends the PHSA to provide that group health plans, including grandfathered plans, cannot exclude children under age 19 based on pre-existing conditions.

Changes Effective In 2011

Limitations on Spending Account Coverage of Medications

A number of changes will come into effect in 2011. Among those changes, the type of medications covered under various spending accounts will be limited to only prescribed pharmaceuticals and insulin. This change affects HSAs, Archer MSAs, health flexible spending arrangements, and health reimbursement arrangements. The language of the Affordable Care Act suggests that these accounts may cover prescribed over-the-counter drugs. Thus, if a doctor prescribes a common over-the-counter medicine, it appears that such a purchase may be covered, where if an individual purchases the same medicine on his or her own initiative, it may not be covered.

Mandated Medical Loss Ratios

Another significant change is the establishment of minimum medical loss ratios. Beginning in January 2011, insurers must spend at least 85 percent of premiums on "clinical services," "activities that improve health care quality," and "all other non-claims costs" for the large group market and at least 80 percent for the small group market. For small group market plans, the Secretary of Health and Human Services may change the ratio in a state if the 80 percent requirement causes a destabilization in the state's individual market. States may increase these ratios by regulations. Notably, the requirements for medical loss ratios apply to grandfathered plans.

Questions remain on exactly what expenditures will count toward satisfying the applicable medical loss ratios. The Affordable Care Act calls upon the National Association of Insurance Commissioners ("NAIC") to define - subject to certification by the Secretary of Health and Human Services - the three areas of activities listed in the Affordable Care Act as comprising the costs to be considered in calculating the medical loss ratio. The statute sets a deadline of December 31, 2010 for the NAIC to submit the definitions. However, the Affordable Care Act provides some specific exclusions of cost, such as federal and state taxes, that are not considered payments as satisfying the medical loss ratio. A failure to meet the respective medical loss ratios results in a rebate paid by the insurance company to the enrollee "on a pro rata basis."

Change Effective In 2012

Effective March 2012, health insurers, plan sponsors, and "designated administrators" of plans must provide participants with a summary of the plan. The summary of the plan differs from what is currently known as the Summary Plan Description required under ERISA. Under the Affordable Care Act, the summary of the plan must be no longer than four pages and have font no larger than 12 point. The content of the summary must include, among other things, "definitions of standard insurance terms and medical terms," "description of the coverage," and "exceptions, reductions, and limitations on coverage." Notably, the Secretary of Health and Human Services will provide standard definitions for the terms that must be included in the summary of the plan. Among such "insurance-related terms" that will be defined by the Secretary of Health and Human Services are "UCR (usual, customary and reasonable) fees" as well as "out-of-network co-payments." If the relevant "entity" fails to provide the summary of the plan, it is subjected a $1,000 fine for each failure. Failures to provide the summary of the plan to different participants are considered independent violations.

Change Effective In 2013

The law also imposes maximum "salary reduction contributions" of $2,500 to flexible spending arrangements. This change applies "if a benefit is provided under a cafeteria plan through employer contributions to a health flexible spending arrangement." If an employee can "elect in a taxable year to have salary reduction contributions in excess of $2,500," then the benefit will "not be treated as a qualified benefit." Beginning in 2014, the maximum contribution will be adjusted for inflation.

Changes Effective In 2014

Beginning in 2014, plans must permit individuals to participate in approved clinical trials. Specifically, the Affordable Care Act prohibits plans from barring an individual from participating in an approved clinical trial, and plans must cover routine costs attendant to such participation. "Routine patient costs" that must be covered include "all items and services consistent with the coverage provided in the plan . . . that is typically covered for a qualified individual who is not enrolled in a clinical trial." The plan may mandate that the participant use an in-network provider performing the trial that is located in the same state. However, where the clinical trial is conducted out of state, the plan may not require that the participant be treated by an in-network provider. Plans must cover only those clinical trials that treat cancer or "other life-threatening disease or condition." The law defines "life-threatening condition" as "any disease or condition from which the likelihood of death is probable unless the course of the disease or condition is interrupted." Additionally, the law also extensively defines what constitutes a clinical trial. In addition, the Affordable Care Act prohibits plans from discriminating against individuals who participate in approved clinical trials.


Under the Affordable Care Act, employer-sponsored group health plans, including grandfathered plans, will be required to implement several changes in coverage over the coming years, beginning as early as September 23, 2010. Several of these changes may lead to significant increases in costs for plans, including the extension of coverage to dependants until age 26, prohibition on lifetime and annual limits on essential health benefits, and limits on cost-sharing for certain preventative care. Notably, the Affordable Care Act blurs the distinction between in-network and out-of-network providers and facilities in several instances, including in the coverage of emergency room services, which could impact negotiated rates and overall costs for plans.

Guidance on implementation of these coverage changes will be forthcoming from the Departments of Health and Human Services, Treasury, and Labor over the next several months, and employers should stay abreast of all rules and regulations as they consider making changes to plans. 1 Additionally, collectively bargained for plans may be exempt from certain provisions of the Affordable Care Act, which provides that collectively bargained for plans ratified before March 23, 2010 do not have to implement health care coverage reforms until the termination date of the last collective bargaining agreement related to coverage.

2 After this article was submitted for publication, the Departments of Health and Human Services, Treasury, and Labor issued 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.The full text of the Interim Final Rules, issued on June 14, 2010, was set for publication in June 17 Federal Register.

3The top highly compensated individuals are (i) the five highest-paid officers, (ii) any 10 percent who owns more than 10 percent in value of the stock of the employer, or (iii) the highest-paid 25 percent of all employees.

Courtney P. Fain and Alex M. Solomon are Associates in the firm's Employment Litigation practice group. Steven M. Margolis is Counsel and Eva Kovacs is an Associate in the firm's Tax practice group.

Please email the authors at,, and with questions about this article.