What Should Employers Do in Response to Health Care Reform?

On March 23, 2010, President Barack Obama signed into law the "Patient Protection and Affordable Care Act." The new law, commonly referred to simply as "Health Care Reform," will have important consequences for employers and their group health plans. This material intends to highlight some of those consequences and provides a brief overview of some of the steps employers can take to prepare for the upcoming changes. The material is divided into two sections: "Immediate Action," which addresses several changes that must be addressed in the near future and "Long-Term Objectives," which addresses several broader issues that should also be considered.

Immediate Action (2010 - 2011)

There are several immediate actions that an employer should take in response to Health Care Reform. Most significantly, an employer must make certain required changes are made to insurance plans and policies. These changes include (among other things):

1. Health plans may not impose pre-existing conditions on dependent children.
2. Health plans must treat children up to 26 years old as eligible dependents.
3. Health plans may not impose lifetime limits on the dollar value of coverage.
4. Insured group health plans may not discriminate in favor of highly compensated employees. "Self funded" plans are already subject to this rule under the Internal Revenue Code.
5. Rescissions are prohibited except for fraud or intentional misrepresentation.
6. Cost sharing obligations for preventive services are prohibited.
7. Both an internal and external appeals process must be established.
8. Coverage for emergency services at in-network cost-sharing level with no prior-authorization is mandated.
9. Health plans must comply with new health plan disclosure and transparency requirements.
10. Health plans must comply with new medical loss ratio ("MLR") regulations (85% for large groups, 80% for small groups).

Grandfathered Plans. In addition, an employer should consider whether or not to "grandfather" its current health plan. Grandfathering a plan simply means that the employer may choose to maintain any health plan that it maintained on March 23, 2010, the date Health Care Reform was enacted. A grandfathered plan will not be subject to all of the reform changes that would otherwise apply. However, grandfathered plans must still (among other things):

1. Prohibit lifetime benefit limits.
2. Prohibit rescissions except for fraud or intentional misrepresentation.
3. Not impose pre-existing conditions on dependent children.
4. Treat children up to 26 years old as eligible dependents.

The Health Care Reform legislation contains little guidance on grandfathered plans. However, on June 14, 2010, the federal agencies responsible for providing guidance issued the "Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Plan under the Patient Protection and Affordable Care Act" (the "Interim Rules").

The Interim Rules answer some of the questions about the changes an employer can make and provides information about the steps that must be taken to maintain grandfathered status. Some of the highlights of the Interim Rules include:

1. Instructions on how to determine grandfathered status. According to the Interim Rules, to qualify for grandfathered status, the group health plan or health insurance coverage must have covered an individual on March 23, 2010 and must have continuously covered someone since that date. The rules for grandfathered status apply separately to each benefit package made available under the group health plan or health insurance coverage.
2. Instructions on adding new employees and dependents. A group health plan or health insurance coverage that has grandfathered status may enroll the dependents of employees who were enrolled on March 23, 2010, and may also provide coverage for new employees, whether newly hired or newly enrolled. There are anti‑abuse rules. For example, a plan can lose its grandfathered status if the principal purpose of a business restructuring was intended to cover employees under a grandfathered plan.
3. Instructions regarding plan funding and administrative changes. An insured plan will lose its grandfathered status if it enters into a new policy, certificate or contract of insurance after March 23, 2010. There are special rules for collectively bargained plans. A self-funded plan will not lose its grandfathered status if it changes third‑party administrators.
4. Instructions regarding plan design changes. A health plan or health insurance coverage will lose its grandfathered status if benefits are eliminated or there are cost increases which fail to comply with the limits contained in the Interim Rules. Changes that will cause the loss of grandfathered status include:
1. The elimination of all or substantially all benefits to diagnose or treat a particular condition.
2. Any increase measured from March 23, 2010 in a percentage cost requirement (such as an individual's coinsurance requirement).
3. Any increase other than a copayment by a total percentage measured from March 23, 2010 that exceeds the maximum percentage increase specified under the Interim Rules.
4. Any increase in a fixed amount copayment determined as of the effective date of the increase, if the total increase in the copayment measured on March 23, 2010, exceeds the amount provided under the formula in the Interim Rules.
5. A decrease in the employer contribution rate by more than 5% below the contribution rate on March 23, 2010.
6. The following changes to the annual limits under a plan will cause the loss of grandfathered status:
   1. If a group health plan or health insurance coverage did not provide an overall annual or lifetime limit on the dollar value of all benefits on March 23, 2010, but now imposes an overall annual limit on the dollar value of benefits.
   2. If group health plan or plan insurance coverage imposed an overall lifetime limit on the dollar value of all benefits, but no dollar limit on annual limit and now adopts an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010.
   3. If, on March 23, 2010, the group health plan or health insurance coverage imposed an overall annual limit on the dollar value of all benefits and it now decreases the dollar value of the annual limit.
5. Instructions regarding disclosures and recordkeeping. Under the Interim Rules, a health plan must provide a statement that it is a grandfathered plan in the materials provided to participants and beneficiaries. The information must also contain contact information for questions and complaints. Also, employers who maintain a grandfathered plan must maintain records documenting the terms of the plan in connection with the coverage in effect on March 23, 2010, and any other document necessary to clarify its status as a grandfathered health plan.

Long-term objectives

In addition to the immediate issues discussed above, an employer should develop a plan to address long-term objectives necessitated, and long-term issues presented, by Health Care Reform. Topics to consider should include:

1. Explore ways to manage/minimize increases in health insurance premiums.
2. Explore available insurance options through groups or associations.
3. Consider changes in insurance coverage, insurance carrier, and/or insurance plans to determine whether such changes may be more cost effective than maintaining a grandfathered plan.
4. Shop insurance to various agents and carriers.
5. Consider a switch from a self-insured plan to a fully insured plan.
6. Make an effort to communicate changes and issues to employees through employee communications and education.
7. Consider the increased use of HSA/FSA accounts as applicable limits are scheduled to decrease.
8. Consider implementing an employee wellness program.
9. Consider health care when voting or participating in political elections.
10. Review policies regarding leave under the Family Medical Leave Act ("FMLA").
11. Examine/revise hiring/retention practices and recruitment/retention issues.
12. Explore ways to avoid/minimize mandatory coverage/penalties.
13. Consider part-time employees, employee leasing, or subcontracting/outsourcing work.
14. Conduct an analysis of the impact caused by dropping health insurance and paying the applicable penalty. This analysis should include "moral/ethical" and recruitment and retention considerations.
15. Plan for increased costs in all aspects of business.