"Insurance Market Reforms"

  • General Information

Many of the changes requiring plan amendments are grouped together as "insurance market reforms," and build on the "portability" provisions in the Health Insurance Portability and Accountability Act of 1986 (HIPAA), which were added to ERISA and the Code as well as the Public Health Services Act. They will be enforced in the same way that the HIPAA provisions are enforced, i.e., by giving participants a right to sue under ERISA to enforce their rights and by allowing the IRS to impose a $100 per participant per day excise tax on each violation. In 2009, the IRS issued a form (Form 8928) for paying this tax and made it self-assessed.

Separate dental and vision plans, long-term care plans, and other limited-scope benefits, and plans that cover fewer than two active employees (for example separate retiree health plans), which are exempt from the HIPAA portability provisions, also appear to be exempt from the new requirements, although the way the changes are worded creates some ambiguities. Until guidance is issued, employers should be cautious and might wish to consult with counsel regarding how the changes apply to such plans.

Generally speaking, these new requirements apply to both insured and self-insured employer health plans in the same way, although there are a few exceptions, noted below.

The Departments of Treasury, Health and Human Services (HHS), and Labor (the Departments) generally share interpretive and enforcement authority over the new requirements, and are likely to coordinate any guidance they issue or issue it jointly.

  • Important Information on Effective Dates and Grandfathering

The new requirements begin to go into effect in plan years beginning on or after September 23, 2010, i.e., six months after the date of enactment. For calendar year plans, this means January 1, 2011. (Insurance companies might choose to implement some or all of the changes earlier, to avoid having different effective dates for different group insurance policies. Of course, this would not affect self-insured plans.)

Existing employer health plans (called "grandfathered plans") are exempt from many, but not all, of the new requirements. The grandfather rule generally applies to new enrollees as well as current enrollees, although there is some uncertainty over exactly which new enrollees are covered. It also is not clear when, if ever, a non-union plan loses its grandfather protection. One possibility is that grandfather protection will be lost if the plan is amended in significant ways, although a similar rule appeared in a previous version of the legislation and was dropped. Until these issues are clarified, employers should be cautious about amending their grandfathered plans, unless the amendments are legally required.

  • Changes Listed by Effective Date

Changes that are effective for plan years beginning on or after September 23, 2010, and DO NOT EXEMPT grandfathered plans:

  • Ban on lifetime benefit limits. An employer health plan may not impose any lifetime limit on the dollar value of benefits it chooses to provide that are "essential health benefits." Currently many employer health plans impose limits of $1-2M per person on aggregate benefits. Because a large percentage of the cost of health benefits is attributable to a small number of individuals who need expensive treatments, this ban on lifetime limits, and the ban on annual limits listed below, could significantly increase employer costs.

Lifetime limits on specific benefits are still allowed if the benefits are not "essential health benefits." HHS will issue regulations defining "essential health benefits," but the definition must include at least (1) ambulatory patient services, (2) emergency services, (3) hospitalization, maternity and newborn care, (4) mental health and substance use disorder services, (5) prescription drugs, (6) rehabilitative services and devices, (7) laboratory services, (8) preventive and wellness services and chronic disease management, and (9) pediatric services, including oral and vision care.

  • Ban on annual benefit limits. An employer health plan may not impose any annual limit on the dollar value of its benefits that are "essential health benefits." This restriction is less stringent before 2014, although exactly what will be permitted is not clear yet and will require regulations to be issued by HHS. As with lifetime limits, annual limits on specific benefits are still allowed if the benefits are not "essential health benefits."
  • Limit on rescission and cancellation of coverage. An employer health plan may not rescind coverage unless an individual has committed fraud or made an intentional misrepresentation. It is not yet clear how this will apply if, for example, an individual receives coverage by mistake and is not even eligible to participate in the plan. Perhaps "rescission" will be limited to actions taken in response to a claim for benefits only.

As drafted, the rule appears to allow an employer health plan to cancel a participant's coverage only if it gives advance notice and generally only if the plan is terminated or the participant fails to pay premiums or moves outside the service area. It is not clear whether this rule was intended to apply to employer health plans or only to insurance coverage offered by an insurance company.

  • Requirement to cover older children. An employer health plan that provides dependent coverage to children must continue to make coverage available to a child until the child turns 26. Before 2014, the change applies to a grandfathered employer health plan only if the child is not eligible to enroll in another employer's health plan. Because of changes elsewhere in PPACA, which are described below, the value of this coverage is not taxed to the employee, even if the child is not the employee's tax dependent. It is not clear whether employees may be charged a different (higher) rate for this coverage.

The Departments released interim final rules on May 10 stating that this will mean that a plan may not define a child as a dependent for eligibility purposes "other than in terms of a relationship between a child and the participant," and thus will not be able, for example, to limit coverage based on whether the child is financially dependent on the participant, or the child's residency, student status, employment, or any combination of those factors. The rules also state that a plan will not be allowed to charge more for coverage of a child under age 26 based on the child's age, e.g., charge more once the child reaches age 18.

Because these individuals tend to be healthy, this change is unlikely to increase employer costs significantly. A number of health insurance companies have already announced plans to implement this change immediately for the plans they insure. Employers with self-insured plans might consider doing the same thing.

  • Ban on preexisting condition limitations for children under 19. An employer health plan may not impose any preexisting condition limitation on individuals under age 19. (As noted below, this ban kicks in later for older enrollees.) According to HHS, this ban both prohibits insurers both from denying an uninsured child coverage because of a preexisting condition and from denying an insured child treatments for a preexisting condition.

Changes that are effective for plan years beginning on or after September 23, 2010, and EXEMPT grandfathered plans:

  • Requirement to provide preventive care. An employer health plan must provide a long list of preventive care benefits, and may not impose any cost-sharing requirements on that care.
  • Executive nondiscrimination requirement extended to insured plans. Employers may not discriminate in favor of highly compensated individuals with respect to coverage or benefits under an insured health plan. The Tax Code already imposes the same requirement on self-insured plans. This will prohibit employers from providing special health insurance coverage to their executives, at least on a pre-tax basis. Since this requirement is packaged with the other insurance market reforms, rather than being added to the Tax Code, it appears that it will be enforced by the $100/day excise tax rather than by subjecting the discriminatory coverage to tax.
  • Requirement to provide appeals process. An employer health plan must provide an appeals process that goes somewhat beyond what is required currently for claims procedures under ERISA. In particular, it requires the plan to include an outside review process. In the past, courts have allowed states to impose outside review requirements on insured plans via their insurance laws, but this requirement would extend to all plans, including self-insured plans.
  • Other rights. An employer health plan must provide a number of other rights relating, among other things, to a participant's right to designate a primary care provider for regular and pediatric care and access to emergency and obstetrical and gynecological care. For example, emergency care must be covered without any prior authorization requirement.

Changes that are effective for plan years beginning on or after March 23, 2012, and DO NOT EXEMPT grandfathered plans:

  • Requirement to provide plain-English plan summary. The plan sponsor or administrator (in the case of a self-insured health plan) or the insurance company (in the case of an insured plan) must provide a plain-English explanation of the plan that is somewhat more elaborate than the summary plan descriptions (SPDs) currently required under ERISA but is limited to 4 pages. The exact requirements will be explained in regulations to be issued by HHS. Separately, the Labor Department is supposed to "update and harmonize" the SPD and other disclosure requirements under ERISA with these new disclosure requirements.
  • Requirement to give advance notice of plan changes. Participants must be notified 60 days before any "material modification" of the plan. Current law requires notice within 60 days after any material reduction in covered services or benefits.

Changes that are effective for plan years beginning on or after January 1, 2014, and DO NOT EXEMPT grandfathered plans:

  • Ban on preexisting condition limitations. An employer health plan may not impose any preexisting condition limitations. Current law generally allows preexisting condition limitations to be applied for up to 12 months, subject to reduction for periods of prior creditable coverage. (As noted above, this ban kicks in earlier for enrollees under age 19.)
  • Waiting periods may not exceed 90 days. An employer health plan may not apply a waiting period that exceeds 90 days.

Changes that are effective for plan years beginning on or after January 1, 2014, and EXEMPT grandfathered plans:

  • Expanded ban on discrimination on basis of health conditions. Current law already prohibits employer health plans from discriminating on the basis of a health condition with respect to eligibility and premiums. This rule expands the prohibition to cover discrimination with respect to benefits, and allows HHS to designate other health status-related factors with respect to which discrimination will be prohibited.
  • Limits on cost-sharing. An employer health plan must satisfy the cost-sharing requirements for plans offered on an Exchange. Exchanges are arrangements, described further below, that are established by states to facilitate the purchase of health insurance, mostly by individuals and small employers. Plans sold on an exchange must meet certain requirements, including cost-sharing requirements. In 2014, the cost-sharing requirements prohibit (1) cost-sharing that exceeds the individual and family limits for high-deductible health plans in effect at that time (currently $5,950 and $11,900) and (2) deductibles in excess of $2,000 in the case of individual coverage and $4,000 in the case of family coverage. After 2014, the dollar limits are indexed to the rate of increase in health insurance premiums.
  • Any-willing-provider requirement. An employer health plan may not exclude any health care provider who wants to join its provider network and is willing to abide by the terms and conditions for participation. This requirement appears to apply even if the plan is self-insured and the plan merely contracts with an insurance company for access to its provider network.
  • Limits on charging different premiums (small insured plans only). In the case of an insured employer health plan offered by a small employer (generally 50 or fewer employees), the insurance company may not charge different premiums to different participants, except based on age, premium rating area, family enrollment, or tobacco use, and even then only within limits (no more than 3:1 for adults based on age, and no more than 1.5:1 based on tobacco use). Although this requirement applies to insurance companies, as a practical matter insured employer health plans must comply with it, as well.
  • Mandated benefits (small insured plans only). In the case of an insured employer health plan offered by a small employer (generally 50 or fewer employees), the insurance company must cover in its insurance policy at least the "essential health benefits" described above. Although this requirement applies to insurance companies, as a practical matter insured employer health plans must comply with it, as well.

Changes affecting wellness programs

PPACA makes a number of changes that favor wellness programs, including (1) codifying the existing safe harbor under the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") for wellness programs that provide incentives based on meeting health standards, and increasing the incentive permitted under the safe harbor from 20% to 30% of the cost of coverage, and including "wellness services and chronic disease management" among the essential health benefits that are required for small insured plans and plans offered on an Exchange. However, it does not remove all of the impediments to such programs that exist currently, in particular under the Americans with Disabilities Act ("ADA") and the Genetic Information Nondiscrimination Act ("GINA").

Changes required by revenue provisions

A few of the changes requiring plan amendments are found in the revenue (i.e., tax) provisions of PPACA They will be enforced through the Tax Code, by the loss of tax deductions, etc. There are no exceptions under these rules for "grandfathered plans."

Changes effective in 2011:

  • Non-prescription drugs do not qualify as medical expenses. The cost of a medicine and drug cannot be reimbursed under a health spending account (HSA), Archer Medical Savings Account (MSA), health flexible spending account (FSA) or health reimbursement account (HRA) unless the medicine or drug is insulin or is prescribed by a doctor. Note that a medicine or drug can be prescribed by a doctor, and thus reimbursed, even if it is an over-the-counter drug.

For health FSAs and HRAs, the change applies to costs incurred in 2011 or later. Thus, a health FSA can reimburse an employee for the cost of nonprescription drugs purchased in 2010 even if the reimbursements are paid in 2011. On the other hand, if the FSA allows the employee's unused balance from 2010 to be used to reimburse expenses incurred during the first 2½ months of 2011, those expenses may not include nonprescription drugs other than insulin.

Changes effective in 2013:

  • $2,500 limit on salary reduction contributions to health FSAs. Salary reduction contributions to a health FSA must be limited to $2,500 per year. The limit is adjusted for inflation after 2013.
  • Small employers may adopt "simple" cafeteria plans with fewer requirements. If a cafeteria plan sponsored by a small employer (generally 100 or fewer employees) meets certain minimum coverage and minimum employer contribution requirements, the plan will be deemed to satisfy the nondiscrimination requirements that apply to cafeteria plans, and the nondiscrimination requirements that apply to benefits provided through the plan.