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Thursday,

June 17, 2010

Part II

Department of the Treasury

Internal Revenue Service26 CFR Parts 54 and 602

Department of LaborEmployee Benefits Security

Administration

29 CFR Part 2590

Department of Health andHuman Services45 CFR Part 147

Group Health Plans and Health InsuranceCoverage Relating to Status as aGrandfathered Health Plan Under thePatient Protection and Affordable Care

Act; Interim Final Rule and ProposedRule

VerDate Mar2010 19:39 Jun 16, 2010 Jkt 220001 PO 00000 Frm 00001 Fmt 4737 Sfmt 4737 E:\FR\FM\17JNR2.SGM 17JNR2


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34538 Federal Register / Vol. 75, No. 116 / Thursday, June 17, 2010/ Rules and Regulations

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 54 and 602

[TD 9489]

RIN 1545BJ51

DEPARTMENT OF LABOR

Employee Benefits SecurityAdministration

29 CFR Part 2590

RIN 1210AB42

DEPARTMENT OF HEALTH ANDHUMAN SERVICES

[OCIIO9991IFC]

45 CFR Part 147

RIN 0991AB68

Interim Final Rules for Group HealthPlans and Health Insurance CoverageRelating to Status as a GrandfatheredHealth Plan Under the PatientProtection and Affordable Care Act

AGENCY: Internal Revenue Service,Department of the Treasury; EmployeeBenefits Security Administration,Department of Labor; Office ofConsumer Information and InsuranceOversight, Department of Health andHuman Services.

ACTION: Interim final rules with requestfor comments.

SUMMARY: This document containsinterim final regulations implementingthe rules for group health plans andhealth insurance coverage in the groupand individual markets underprovisions of the Patient Protection andAffordable Care Act regarding status asa grandfathered health plan.

DATES: Effective date. These interimfinal regulations are effective on June14, 2010, except that the amendments to26 CFR 54.98152714T, 29 CFR2590.7152714, and 45 CFR 147.120 areeffective July 12, 2010.

Comment date. Comments are due onor before August 16, 2010.ADDRESSES: Written comments may besubmitted to any of the addressesspecified below. Any comment that issubmitted to any Department will beshared with the other Departments.Please do not submit duplicates.

All comments will be made availableto the public. Warning: Do not includeany personally identifiable information(such as name, address, or other contactinformation) or confidential businessinformation that you do not want

publicly disclosed. All comments areposted on the Internet exactly asreceived, and can be retrieved by mostInternet search engines. No deletions,modifications, or redactions will bemade to the comments received, as theyare public records. Comments may besubmitted anonymously.

Department of Labor. Comments to

the Department of Labor, identified byRIN 1210AB42, by one of the followingmethods:

Federal eRulemaking Portal: http://www.regulations.gov. Follow theinstructions for submitting comments.

E-mail: [email protected].

Mail or Hand Delivery: Office ofHealth Plan Standards and ComplianceAssistance, Employee Benefits SecurityAdministration, Room N5653, U.S.Department of Labor, 200 ConstitutionAvenue, NW., Washington, DC 20210,Attention: RIN 1210AB42.

Comments received by theDepartment of Labor will be postedwithout change to http://www.regulations.gov and http://www.dol.gov/ebsa, and available forpublic inspection at the PublicDisclosure Room, N1513, EmployeeBenefits Security Administration, 200Constitution Avenue, NW., Washington,DC 20210.

Department of Health and HumanServices. In commenting, please refer tofile code OCIIO9991IFC. Because ofstaff and resource limitations, theDepartments cannot accept comments

by facsimile (FAX) transmission.You may submit comments in one offour ways (please choose only one of theways listed):

1. Electronically. You may submitelectronic comments on this regulationto http://www.regulations.gov. Followthe instructions under the More SearchOptions tab.

2. By regular mail. You may mailwritten comments to the followingaddress ONLY: Office of ConsumerInformation and Insurance Oversight,Department of Health and HumanServices, Attention: OCIIO9991IFC,P.O. Box 8016, Baltimore, MD 212441850.

Please allow sufficient time for mailedcomments to be received before theclose of the comment period.

3. By express or overnight mail. Youmay send written comments to thefollowing address ONLY: Office ofConsumer Information and InsuranceOversight, Department of Health andHuman Services, Attention: OCIIO9991IFC, Mail Stop C42605, 7500Security Boulevard, Baltimore, MD212441850.

4. By hand or courier. If you prefer,you may deliver (by hand or courier)your written comments before the closeof the comment period to either of thefollowing addresses:

a. For delivery in Washington, DCOffice of Consumer Information andInsurance Oversight, Department ofHealth and Human Services, Room 445

G, Hubert H. Humphrey Building, 200Independence Avenue, SW.,Washington, DC 20201.

(Because access to the interior of theHubert H. Humphrey Building is notreadily available to persons withoutFederal government identification,commenters are encouraged to leavetheir comments in the OCIIO drop slotslocated in the main lobby of the

building. A stamp-in clock is availablefor persons wishing to retain a proof offiling by stamping in and retaining anextra copy of the comments being filed.)

b. For delivery in Baltimore, MD

Centers for Medicare & MedicaidServices, Department of Health andHuman Services, 7500 SecurityBoulevard, Baltimore, MD 212441850.

If you intend to deliver yourcomments to the Baltimore address,please call (410) 7867195 in advance toschedule your arrival with one of ourstaff members.

Comments mailed to the addressesindicated as appropriate for hand orcourier delivery may be delayed andreceived after the comment period.

Submission of comments onpaperwork requirements. You may

submit comments on this documentspaperwork requirements by followingthe instructions at the end of theCollection of InformationRequirements section in this document.

Inspection of Public Comments: Allcomments received before the close ofthe comment period are available forviewing by the public, including anypersonally identifiable or confidential

business information that is included ina comment. The Departments post allcomments received before the close ofthe comment period on the followingWeb site as soon as possible after theyhave been received: http://www.regulations.gov. Follow the searchinstructions on that Web site to viewpublic comments.

Comments received timely will alsobe available for public inspection asthey are received, generally beginningapproximately three weeks afterpublication of a document, at theheadquarters of the Centers for Medicare& Medicaid Services, 7500 SecurityBoulevard, Baltimore, Maryland 21244,Monday through Friday of each weekfrom 8:30 a.m. to 4 p.m. EST. To



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34539Federal Register / Vol. 75, No. 116 / Thursday, June 17, 2010/ Rules and Regulations

1The term group health plan is used in titleXXVII of the PHS Act, part 7 of ERISA, and chapter100 of the Code, and is distinct from the termhealth plan, as used in other provisions of title Iof the Affordable Care Act. The term health plandoes not include self-insured group health plans.

2Excepted benefits generally include dental-onlyand vision-only plans, most health flexiblespending arrangements, Medigap policies, andaccidental death and dismemberment coverage. Formore information on excepted benefits, see 26 CFR54.98311, 29 CFR 2590.732, 45 CFR 146.145, and45 CFR 148.220.

3See 64 FR 70164 (December 15, 1999).

schedule an appointment to view publiccomments, phone 18007433951.

Internal Revenue Service. Commentsto the IRS, identified by REG11841210, by one of the following methods:

Federal eRulemaking Portal: http://www.regulations.gov. Follow theinstructions for submitting comments.

Mail: CC:PA:LPD:PR (REG118412

10), room 5205, Internal RevenueService, P.O. Box 7604, Ben FranklinStation, Washington, DC 20044.

Hand or courier delivery: Mondaythrough Friday between the hours of 8a.m. and 4 p.m. to: CC:PA:LPD:PR(REG11841210), Couriers Desk,Internal Revenue Service, 1111Constitution Avenue, NW., Washington,DC 20224.

All submissions to the IRS will beopen to public inspection and copyingin room 1621, 1111 ConstitutionAvenue, NW., Washington, DC from 9a.m. to 4 p.m.

FOR FURTHER INFORMATION CONTACT:Amy Turner or Beth Baum, EmployeeBenefits Security Administration,Department of Labor, at (202) 6938335;Karen Levin, Internal Revenue Service,Department of the Treasury, at (202)6226080; Jim Mayhew, Office ofConsumer Information and InsuranceOversight, Department of Health andHuman Services, at (410) 7861565.

Customer Service Information:Individuals interested in obtaininginformation from the Department ofLabor concerning employment-basedhealth coverage laws may call the EBSA

Toll-Free Hotline at 1866444EBSA(3272) or visit the Department of LaborsWeb site (http://www.dol.gov/ebsa). Inaddition, information from HHS onprivate health insurance for consumerscan be found on the Centers forMedicare & Medicaid Services (CMS)Web site (http://www.cms.hhs.gov/HealthInsReformforConsume/01_Overview.asp) and information onhealth reform can be found at http://www.healthreform.gov.

SUPPLEMENTARY INFORMATION:

I. Background

The Patient Protection and AffordableCare Act (the Affordable Care Act),Public Law 111148, was enacted onMarch 23, 2010; the Health Care andEducation Reconciliation Act (theReconciliation Act), Public Law 111152, was enacted on March 30, 2010.The Affordable Care Act and theReconciliation Act reorganize, amend,and add to the provisions in part A oftitle XXVII of the Public Health ServiceAct (PHS Act) relating to group healthplans and health insurance issuers inthe group and individual markets. The

term group health plan includes bothinsured and self-insured group healthplans.1 The Affordable Care Act addssection 715(a)(1) to the EmployeeRetirement Income Security Act (ERISA)and section 9815(a)(1) to the InternalRevenue Code (the Code) to incorporatethe provisions of part A of title XXVIIof the PHS Act into ERISA and the

Code, and make them applicable togroup health plans, and healthinsurance issuers providing healthinsurance coverage in connection withgroup health plans. The PHS Actsections incorporated by this referenceare sections 2701 through 2728. PHSAct sections 2701 through 2719A aresubstantially new, though theyincorporate some provisions of priorlaw. PHS Act sections 2722 through2728 are sections of prior lawrenumbered, with some, mostly minor,changes. Section 1251 of the AffordableCare Act, as modified by section 10103

of the Affordable Care Act and section2301 of the Reconciliation Act, specifiesthat certain plans or coverage existing asof the date of enactment (that is,grandfathered health plans) are onlysubject to certain provisions.

The Affordable Care Act also addssection 715(a)(2) of ERISA, whichprovides that, to the extent that anyprovision of part 7 of ERISA conflictswith part A of title XXVII of the PHSAct with respect to group health plansor group health insurance coverage, thePHS Act provisions apply. Similarly,the Affordable Care Act adds section9815(a)(2) of the Code, which provides

that, to the extent that any provision ofsubchapter B of chapter 100 of the Codeconflicts with part A of title XXVII ofthe PHS Act with respect to grouphealth plans or group health insurancecoverage, the PHS Act provisions apply.Therefore, although ERISA section715(a)(1) and Code section 9815(a)(1)incorporate by reference newprovisions, they do not affectpreexisting sections of ERISA or theCode unless they cannot be readconsistently with an incorporatedprovision of the PHS Act. For example,ERISA section 732(a) generally provides

that part 7 of ERISAand Code section9831(a) generally provides that chapter100 of the Codedoes not apply toplans with less than two participantswho are current employees (includingretiree-only plans that cover less thantwo participants who are currentemployees). Prior to enactment of the

Affordable Care Act, the PHS Act had aparallel provision at section 2721(a).After the Affordable Care Act amended,reorganized, and renumbered most oftitle XXVII of the PHS Act, thatexception no longer exists. Similarly,ERISA section 732(b) and (c) generallyprovides that the requirements of part 7of ERISAand Code section 9831(b)

and (c) generally provides that therequirements of chapter 100 of theCodedo not apply to excepted

benefits.2 Prior to enactment of theAffordable Care Act, the PHS Act had aparallel section 2721(c) and (d) thatindicated that the provisions of subparts1 through 3 of part A of title XXVII ofthe PHS Act did not apply to excepted

benefits. After the Affordable Care Actamended and renumbered PHS Actsection 2721(c) and (d) as section2722(b) and (c), that exception could beread to be narrowed so that it appliesonly with respect to subpart 2 of part A

of title XXVII of the PHS Act, thus, ineffect requiring excepted benefits tocomply with subparts I and II of part A.

The absence of an express provisionin part A of title XXVII of the PHS Actdoes not create a conflict with therelevant requirements of ERISA and theCode. Accordingly, the exceptions ofERISA section 732 and Code section9831 for very small plans and certainretiree-only health plans, and forexcepted benefits, remain in effect and,thus, ERISA section 715 and Codesection 9815, as added by the AffordableCare Act, do not apply to such plans orexcepted benefits.

Moreover, there is no expressindication in the legislative history of anintent to treat issuers of group healthinsurance coverage or nonfederalgovernmental plans (that are subject tothe PHS Act) any differently in thisrespect from plans subject to ERISA andthe Code. The Departments of Healthand Human Services, Labor, and theTreasury (the Departments) operateunder a Memorandum of Understanding(MOU) 3 that implements section 104 ofthe Health Insurance Portability andAccountability Act of 1996 (HIPAA),enacted on August 21, 1996, and

subsequent amendments, and providesthat requirements over which two ormore Secretaries have responsibility(shared provisions) must beadministered so as to have the sameeffect at all times. HIPAA section 104



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4Code section 9815 incorporates the preemptionprovisions of PHS Act section 2724. Prior to theAffordable Care Act, there were no expresspreemption provisions in chapter 100 of the Code.

also requires the coordination ofpolicies relating to enforcing the sharedprovisions in order to avoid duplicationof enforcement efforts and to assignpriorities in enforcement.

There is no express statement ofintent that nonfederal governmentalretiree-only plans should be treateddifferently from private sector plans or

that excepted benefits offered bynonfederal governmental plans should

be treated differently from exceptedbenefits offered by private sector plans.Because treating nonfederalgovernmental retiree-only plans andexcepted benefits provided bynonfederal governmental plansdifferently would create confusion withrespect to the obligations of issuers thatdo not distinguish whether a grouphealth plan is subject to ERISA or thePHS Act, and in light of the MOU, theDepartment of Health and HumanServices (HHS) does not intend to use

its resources to enforce the requirementsof HIPAA or the Affordable Care Actwith respect to nonfederal governmentalretiree-only plans or with respect toexcepted benefits provided bynonfederal governmental plans.

PHS Act section 2723(a)(2) (formerlysection 2722(a)(2)) gives the Statesprimary authority to enforce the PHSAct group and individual marketprovisions over group and individualhealth insurance issuers. HHS enforcesthese provisions with respect to issuersonly if it determines that the State hasfailed to substantially enforce one ofthe Federal provisions. Furthermore, thePHS Act preemption provisions allowStates to impose requirements onissuers in the group and individualmarkets that are more protective thanthe Federal provisions. However, HHSis encouraging States not to apply theprovisions of title XXVII of the PHS Actto issuers of retiree-only plans or ofexcepted benefits. HHS advises Statesthat if they do not apply theseprovisions to the issuers of retiree-onlyplans or of excepted benefits, HHS willnot cite a State for failing tosubstantially enforce the provisions ofpart A of title XXVII of the PHS Act in

these situations.Subtitles A and C of title I of the

Affordable Care Act amend therequirements of title XXVII of the PHSAct (changes to which are incorporatedinto ERISA section 715). Thepreemption provisions of ERISA section731 and PHS Act section 2724 4(implemented in 29 CFR 2590.731(a)

and 45 CFR 146.143(a)) apply so that therequirements of part 7 of ERISA andtitle XXVII of PHS Act, as amended bythe Affordable Care Act, are not to beconstrued to supersede any provisionof State law which establishes,implements, or continues in effect anystandard or requirement solely relatingto health insurance issuers in

connection with group or individualhealth insurance coverage except to theextent that such standard orrequirement prevents the application ofa requirement of the Affordable CareAct. Accordingly, State laws thatimpose on health insurance issuersrequirements that are stricter than therequirements imposed by the AffordableCare Act will not be superseded by theAffordable Care Act.

The Departments are issuingregulations implementing the revisedPHS Act sections 2701 through 2719Ain several phases. The first publication

in this series was a Request forInformation relating to the medical lossratio provisions of PHS Act section2718, published in the Federal Registeron April 14, 2010 (75 FR 19297). Thesecond publication was interim finalregulations implementing PHS Actsection 2714 (requiring dependentcoverage of children to age 26),published in the Federal Register onMay 13, 2010 (75 FR 27122). Thisdocument contains interim finalregulations implementing section 1251of the Affordable Care Act (relating tograndfathered health plans), as well as

adding a cross-reference to these interimfinal regulations in the regulationsimplementing PHS Act section 2714.The implementation of other provisionsin PHS Act sections 2701 through2719A will be addressed in futureregulations.

II. Overview of the Regulations: Section1251 of the Affordable Care Act,Preservation of Right To MaintainExisting Coverage (26 CFR 54.98151251T, 29 CFR 2590.7151251, and 45CFR 147.140)

A. Introduction

Section 1251 of the Affordable CareAct, as modified by section 10103 of theAffordable Care Act and section 2301 ofthe Reconciliation Act, provides thatcertain group health plans and healthinsurance coverage existing as of March23, 2010 (the date of enactment of theAffordable Care Act), are subject only tocertain provisions of the Affordable CareAct. The statute and these interim finalregulations refer to these plans andhealth insurance coverage asgrandfathered health plans.

The Affordable Care Act balances theobjective of preserving the ability ofindividuals to maintain their existingcoverage with the goals of ensuringaccess to affordable essential coverageand improving the quality of coverage.Section 1251 provides that nothing inthe Affordable Care Act requires anindividual to terminate the coverage in

which the individual was enrolled onMarch 23, 2010. It also generallyprovides that, with respect to grouphealth plans or health insurancecoverage in which an individual wasenrolled on March 23, 2010, variousrequirements of the Act shall not applyto such plan or coverage, regardless ofwhether the individual renews suchcoverage after March 23, 2010. However,to ensure access to coverage with certainparticularly significant protections,Congress required grandfathered healthplans to comply with a subset of theAffordable Care Acts health reform

provisions. Thus, for example,grandfathered health plans must complywith the prohibition on rescissions ofcoverage except in the case of fraud orintentional misrepresentation and theelimination of lifetime limits (both ofwhich apply for plan years, or in theindividual market, policy years,

beginning on or after September 23,2010). On the other hand, grandfatheredhealth plans are not required to complywith certain other requirements of theAffordable Care Act; for example, therequirement that preventive healthservices be covered without any costsharing (which otherwise becomes

generally applicable for plan years, or inthe individual market, policy years,

beginning on or after September 23,2010).

A number of additional reforms applyfor plan years (in the individual market,policy years) beginning on or after

January 1, 2014. As with therequirements effective for plan years (inthe individual market, policy years)

beginning on or after September 23,2010, grandfathered health plans mustthen comply with some, but not all ofthese reforms. See Table 1 in sectionII.D of this preamble for a list of various

requirements that apply tograndfathered health plans.In making grandfathered health plans

subject to some but not all of the healthreforms contained in the AffordableCare Act, the statute balances itsobjective of preserving the ability tomaintain existing coverage with thegoals of expanding access to andimproving the quality of healthcoverage. The statute does not, however,address at what point changes to agroup health plan or health insurancecoverage in which an individual was



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enrolled on March 23, 2010 aresignificant enough to cause the plan orhealth insurance coverage to cease to bea grandfathered health plan, leaving thatquestion to be addressed by regulatoryguidance.

These interim final regulations aredesigned to ease the transition of thehealthcare industry into the reforms

established by the Affordable Care Actby allowing for gradual implementationof reforms through a reasonablegrandfathering rule. A more detaileddescription of the basis for these interimfinal regulations and other regulatoryalternatives considered is included insection IV.B later in this preamble.

B. Definition of Grandfathered HealthPlan Coverage in Paragraph (a) of 26CFR 54.98151251T, 29 CFR 2590.7151251, and 45 CFR 147.140 of TheseInterim Final Regulations

Under the statute and these interimfinal regulations, a group health plan orgroup or individual health insurancecoverage is a grandfathered health planwith respect to individuals enrolled onMarch 23, 2010. Paragraph (a)(1) of 26CFR 54.98151251T, 29 CFR 2590.7151251, and 45 CFR 147.140 of theseinterim final regulations provides that agroup health plan or group healthinsurance coverage does not cease to begrandfathered health plan coveragemerely because one or more (or even all)individuals enrolled on March 23, 2010cease to be covered, provided that theplan or group health insurance coveragehas continuously covered someone

since March 23, 2010 (not necessarilythe same person, but at all times at leastone person). The determination underthe rules of these interim finalregulations is made separately withrespect to each benefit package madeavailable under a group health plan orhealth insurance coverage.

Moreover, these interim finalregulations provide that, subject to therules of paragraph (f) of 26 CFR54.98151251T, 29 CFR 2590.7151251,and 45 CFR 147.140 for collectively

bargained plans, if an employer oremployee organization enters into a new

policy, certificate, or contract ofinsurance after March 23, 2010(because, for example, any previouspolicy, certificate, or contract ofinsurance is not being renewed), thenthat policy, certificate, or contract ofinsurance is not a grandfathered healthplan with respect to the individuals inthe group health plan. Any policies soldin the group and individual healthinsurance markets to new entities orindividuals after March 23, 2010 willnot be grandfathered health plans evenif the health insurance products sold to

those subscribers were offered in thegroup or individual market beforeMarch 23, 2010.

To maintain status as a grandfatheredhealth plan, a plan or health insurancecoverage (1) must include a statement,in any plan materials provided toparticipants or beneficiaries (in theindividual market, primary subscribers)

describing the benefits provided underthe plan or health insurance coverage,that the plan or health insurancecoverage believes that it is agrandfathered health plan within themeaning of section 1251 of theAffordable Care Act and (2) mustprovide contact information forquestions and complaints.

Model language is provided in theseinterim final regulations that can beused to satisfy this disclosurerequirement. Comments are invited onpossible improvements to the modellanguage of grandfathered health planstatus. Some have suggested, forexample, that each grandfathered healthplan be required to list and describe thevarious consumer protections that donot apply to the plan or healthinsurance coverage because it isgrandfathered, together with theireffective dates. The Departments intendto consider any comments regardingpossible improvements to the modellanguage in the near term; any changesto the model language that may resultfrom such comments could bepublished in additional administrativeguidance other than in the form ofregulations.

Similarly, under these interim finalregulations, to maintain status as agrandfathered health plan, a plan orissuer must also maintain recordsdocumenting the terms of the plan orhealth insurance coverage that were ineffect on March 23, 2010, and any otherdocuments necessary to verify, explain,or clarify its status as a grandfatheredhealth plan. Such documents couldinclude intervening and current plandocuments, health insurance policies,certificates or contracts of insurance,summary plan descriptions,documentation of premiums or the cost

of coverage, and documentation ofrequired employee contribution rates. Inaddition, the plan or issuer must makesuch records available for examination.Accordingly, a participant, beneficiary,individual policy subscriber, or State orFederal agency official would be able toinspect such documents to verify thestatus of the plan or health insurancecoverage as a grandfathered health plan.The plan or issuer must maintain suchrecords and make them available forexamination for as long as the plan orissuer takes the position that the plan or

health insurance coverage is agrandfathered health plan.

Under the statute and these interimfinal regulations, if family members ofan individual who is enrolled in agrandfathered health plan as of March23, 2010 enroll in the plan after March23, 2010, the plan or health insurance

coverage is also a grandfathered healthplan with respect to the familymembers.

C. Adding New Employees in Paragraph(b) of 26 CFR 54.98151251T, 29 CFR2590.7151251, and 45 CFR 147.140 ofThese Interim Final Regulations

These interim final regulations at 26CFR 54.98151251T, 29 CFR 2590.7151251, and 45 CFR 147.140 provide thata group health plan that providedcoverage on March 23, 2010 generally isalso a grandfathered health plan withrespect to new employees (whether

newly hired or newly enrolled) andtheir families who enroll in thegrandfathered health plan after March23, 2010. These interim final regulationsclarify that in such cases, any healthinsurance coverage provided under thegroup health plan in which anindividual was enrolled on March 23,2010 is also a grandfathered health plan.To prevent abuse, these interim finalregulations provide that if the principalpurpose of a merger, acquisition, orsimilar business restructuring is to covernew individuals under a grandfathered

health plan, the plan ceases to be agrandfathered health plan. The goal ofthis rule is to prevent grandfather statusfrom being bought and sold as acommodity in commercial transactions.These interim final regulations alsocontain a second anti-abuse ruledesigned to prevent a plan or issuerfrom circumventing the limits onchanges that cause a plan or healthinsurance coverage to cease to be agrandfathered health plan underparagraph (g) (described more fully insection II.F of this preamble). This rulein paragraph (b)(2)(ii) addresses a

situation under which employees whopreviously were covered by agrandfathered health plan aretransferred to another grandfatheredhealth plan. This rule is intended toprevent efforts to retain grandfatherstatus by indirectly making changes thatwould result in loss of that status ifthose changes were made directly.



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D. Applicability of Part A of Title XXVIIof the PHS Act to Grandfathered HealthPlans Paragraphs (c), (d), and (e) of 26CFR 54.98151251T, 29 CFR 2590.7151251, and 45 CFR 147.140 of TheseInterim Final Regulations

A grandfathered health plan generallyis not subject to subtitles A and C of title

I of the Affordable Care Act, except asspecifically provided by the statute andthese interim final regulations. Thestatute and these interim finalregulations provide that someprovisions of subtitles A and C of titleI of the Affordable Care Act continue to

apply to all grandfathered health plansand some provisions continue to applyonly to grandfathered health plans thatare group health plans. These interimfinal regulations clarify that agrandfathered health plan mustcontinue to comply with therequirements of the PHS Act, ERISA,and the Code that were applicable prior

to the changes enacted by the AffordableCare Act, except to the extentsupplanted by changes made by theAffordable Care Act. Therefore, theHIPAA portability andnondiscrimination requirements and theGenetic Information Nondiscrimination

Act requirements applicable prior to theeffective date of the Affordable Care Actcontinue to apply to grandfatheredhealth plans. In addition, the mentalhealth parity provisions, the Newbornsand Mothers Health Protection Actprovisions, the Womens Health andCancer Rights Act, and Michelles Lawcontinue to apply to grandfatheredhealth plans. The following table liststhe new health coverage reforms in partA of title XXVII of the PHS Act (asamended by the Affordable Care Act)that apply to grandfathered healthplans:

TABLE 1LIST OF THE NEW HEALTH REFORM PROVISIONS OF PART A OF TITLE XXVII OF THE PHS ACT THAT APPLY TOGRANDFATHERED HEALTH PLANS

PHS Act statutory provisions Application to grandfathered health plans

2704 Prohibition of preexisting condition exclusion or other discrimi-nation based on health status.

Applicable to grandfathered group health plans and group health insur-ance coverage.

Not applicable to grandfathered individual health insurance coverage.

2708 Prohibition on excessive waiting periods ..................................... Applicable. 2711 No lifetime or annual limits ........................................................... Lifetime limits: Applicable.

Annual limits: Applicable to grandfathered group health plans andgroup health insurance coverage; not applicable to grandfathered in-dividual health insurance coverage.

2712 Prohibition on rescissions ............................................................. Applicable. 2714 Extension of dependent coverage until age 26 ............................ Applicable5. 2715 Development and utilization of uniform explanation of coverage

documents and standardized definitions.Applicable.

2718 Bringing down cost of health care coverage (for insured cov-erage).

Applicable to insured grandfathered health plans.

5For a group health plan or group health insurance coverage that is a grandfathered health plan for plan years beginning before January 1,2014, PHS Act section 2714 is applicable in the case of an adult child only if the adult child is not eligible for other employer-sponsored healthplan coverage. The interim final regulations relating to PHS Act section 2714, published in 75 FR 27122 (May 13, 2010), and these interim finalregulations clarify that, in the case of an adult child who is eligible for coverage under the employer-sponsored plans of both parents, neither par-ents plan may exclude the adult child from coverage based on the fact that the adult child is eligible to enroll in the other parents employer-sponsored plan.

E. Health Insurance CoverageMaintained Pursuant to a CollectiveBargaining Agreement of Paragraph (f)of 26 CFR 54.98151251T, 29 CFR2590.7151251, and 45 CFR 147.140 ofThese Interim Final Regulations

In paragraph (f) of 26 CFR 54.98151251T, 29 CFR 2590.7151251, and 45CFR 147.140, these interim finalregulations provide that in the case ofhealth insurance coverage maintainedpursuant to one or more collective

bargaining agreements ratified beforeMarch 23, 2010, the coverage is agrandfathered health plan at least untilthe date on which the last agreementrelating to the coverage that was ineffect on March 23, 2010 terminates.Thus, before the last of the applicablecollective bargaining agreementterminates, any health insurancecoverage provided pursuant to thecollective bargaining agreements is agrandfathered health plan, even if thereis a change in issuers (or any otherchange described in paragraph (g)(1) of

26 CFR 54.98151251T, 29 CFR2590.7151251, and 45 CFR 147.140 ofthese interim final regulations) duringthe period of the agreement. Thestatutory language of the provisionrefers solely to health insurancecoverage and does not refer to a grouphealth plan; therefore, these interimfinal regulations apply this provisiononly to insured plans maintainedpursuant to a collective bargainingagreement and not to self-insured plans.After the date on which the last of the

collective bargaining agreementsterminates, the determination ofwhether health insurance coveragemaintained pursuant to a collective

bargaining agreement is grandfatheredhealth plan coverage is made under therules of paragraph (g). Thisdetermination is made by comparing theterms of the coverage on the date ofdetermination with the terms of thecoverage that were in effect on March23, 2010. A change in issuers during theperiod of the agreement, by itself, wouldnot cause the plan to cease to be a

grandfathered health plan at thetermination of the agreement. However,for a change in issuers after thetermination of the agreement, the rulesof paragraph (a)(1)(ii) of 26 CFR54.98151251T, 29 CFR 2590.7151251,and 45 CFR 147.140 of these interimfinal regulations apply.

Similar language to section 1251(d) inrelated bills that were not enactedwould have provided a delayed effectivedate for collectively bargained planswith respect to the Affordable Care Act

requirements. Questions have arisen asto whether section 1251(d) as enacted inthe Affordable Care Act similarlyoperated to delay the application of theAffordable Care Acts requirements tocollectively bargained plansspecifically, whether the provision ofsection 1251(d) that exemptscollectively bargained plans fromrequirements for the duration of theagreement effectively provides the planswith a delayed effective date withrespect to all new PHS Act requirements(in contrast to the rules for



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6Similarly situated individuals are described inthe HIPAA nondiscrimination regulations at 26 CFR54.98021(d), 29 CFR 2590.702(d), and 45 CFR146.121(d).

grandfathered health plans whichprovide that specified PHS Actprovisions apply to all plans, includinggrandfathered health plans). However,the statutory language that applies onlyto collectively bargained plans, assigned into law as part of the AffordableCare Act, provides that insuredcollectively bargained plans in which

individuals were enrolled on the date ofenactment are included in the definitionof a grandfathered health plan.Therefore, collectively bargained plans(both insured and self-insured) that aregrandfathered health plans are subject tothe same requirements as othergrandfathered health plans, and are notprovided with a delayed effective datefor PHS Act provisions with whichother grandfathered health plans mustcomply. Thus, the provisions that applyto grandfathered health plans apply tocollectively bargained plans before andafter termination of the last of the

applicable collective bargainingagreement.

F. Maintenance of Grandfather Status ofParagraph (g) of 26 CFR 54.98151251T,29 CFR 2590.7151251, and 45 CFR147.140 of These Interim FinalRegulations)

Questions have arisen regarding theextent to which changes can be made toa plan or health insurance coverage andstill have the plan or coverageconsidered the same as that in existenceon March 23, 2010, so as to maintainstatus as a grandfathered health plan.Some have suggested that any change

would cause a plan or health insurancecoverage to be considered different andthus cease to be a grandfathered healthplan. Others have suggested that anydegree of change, no matter how large,is irrelevant provided the plan or healthinsurance coverage can trace somecontinuous legal relationship to the planor health insurance coverage that was inexistence on March 23, 2010.

In paragraph (g)(1) of 26 CFR54.98151251T, 29 CFR 2590.7151251,and 45 CFR 147.140 of these interimfinal regulations, coordinated rules areset forth for determining when changes

to the terms of a plan or healthinsurance coverage cause the plan orcoverage to cease to be a grandfatheredhealth plan. The first of those rules (inparagraph (g)(1)(i)) constrains the extentto which the scope of benefits can bereduced. It provides that the eliminationof all or substantially all benefits todiagnose or treat a particular conditioncauses a plan or health insurancecoverage to cease to be a grandfatheredhealth plan. If, for example, a planeliminates all benefits for cystic fibrosis,the plan ceases to be a grandfathered

health plan (even though this conditionmay affect relatively few individualscovered under the plan). Moreover, forpurposes of paragraph (g)(1)(i), theelimination of benefits for any necessaryelement to diagnose or treat a conditionis considered the elimination of all orsubstantially all benefits to diagnose ortreat a particular condition. An example

in these interim final regulationsillustrates that if a plan provides

benefits for a particular mental healthcondition, the treatment for which is acombination of counseling andprescription drugs, and subsequentlyeliminates benefits for counseling, theplan is treated as having eliminated allor substantially all benefits for thatmental health condition.

A second set of rules (in paragraphs(g)(1)(ii) through (g)(1)(iv)) limits theextent to which plans and issuers canincrease the fixed-amount and thepercentage cost-sharing requirements

that are imposed with respect toindividuals for covered items andservices. Plans and issuers can choose tomake larger increases to fixed-amount orpercentage cost-sharing requirementsthan permissible under these interimfinal regulations, but at that point theindividuals plan or health insurancecoverage would cease to begrandfathered health plan coverage. Amore detailed description of the basisfor the cost-sharing requirements inthese interim final regulations isincluded in section IV.B later in thispreamble.

These interim final regulations

provide different standards with respectto coinsurance and fixed-amount costsharing. Coinsurance automatically riseswith medical inflation. Therefore,changes to the level of coinsurance(such as moving from a requirement thatthe patient pay 20 percent to arequirement that the patient pay 30percent of inpatient surgery costs)would significantly alter the level of

benefits provided. On the other hand,fixed-amount cost-sharing requirements(such as copayments and deductibles)do not take into account medicalinflation. Therefore, changes to fixed-

amount cost-sharing requirements (forexample, moving from a $35 copaymentto a $40 copayment for outpatientdoctor visits) may be reasonable to keepup with the rising cost of medical itemsand services. Accordingly, paragraph(g)(1)(ii) provides that any increase in apercentage cost-sharing requirement(such as coinsurance) causes a plan orhealth insurance coverage to cease to bea grandfathered health plan.

With respect to fixed-amount cost-sharing requirements, paragraph(g)(1)(iii) provides two rules: a rule for

cost-sharing requirements other thancopayments and a rule for copayments.Fixed-amount cost-sharing requirementsinclude, for example, a $500 deductible,a $30 copayment, or a $2,500 out-of-pocket limit. With respect to fixed-amount cost-sharing requirements otherthan copayments, a plan or healthinsurance coverage ceases to be a

grandfathered health plan if there is anincrease, since March 23, 2010, in afixed-amount cost-sharing requirementthat is greater than the maximumpercentage increase. The maximumpercentage increase is defined asmedical inflation (from March 23, 2010)plus 15 percentage points. For thispurpose, medical inflation is defined inthese interim final regulations byreference to the overall medical carecomponent of the Consumer Price Indexfor All Urban Consumers, unadjusted(CPI), published by the Department ofLabor. For fixed-amount copayments, a

plan or health insurance coverage ceasesto be a grandfathered health plan ifthere is an increase since March 23,2010 in the copayment that exceeds thegreater of (A) the maximum percentageincrease or (B) five dollars increased bymedical inflation. A more detaileddescription of the basis for these rulesrelating to cost-sharing requirements isincluded in section IV.B later in thispreamble.

With respect to employercontributions, these interim finalregulations include a standard forchanges that would result in cessationof grandfather status. Specifically,paragraph (g)(1)(v) limits the ability ofan employer or employee organizationto decrease its contribution rate forcoverage under a group health plan orgroup health insurance coverage. Twodifferent situations are addressed. First,if the contribution rate is based on thecost of coverage, a group health plan orgroup health insurance coverage ceasesto be a grandfathered health plan if theemployer or employee organizationdecreases its contribution rate towardsthe cost of any tier of coverage for anyclass of similarly situated individuals 6

by more than 5 percentage points below

the contribution rate on March 23, 2010.For this purpose, contribution rate isdefined as the amount of contributionsmade by an employer or employeeorganization compared to the total costof coverage, expressed as a percentage.These interim final regulations providethat total cost of coverage is determinedin the same manner as the applicable



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7 Independent of these rules regarding the impacton grandfather status of newly adopted or reducedannual limits, group health plans and group orindividual health insurance coverage (other thanindividual health insurance policies that aregrandfathered health plans) are required to complywith PHS Act section 2711, which permitsrestricted annual limits (as defined in regulations)until 2014. The Departments expect to publishregulations regarding restricted annual limits in thevery near future.

premium is calculated under theCOBRA continuation provisions ofsection 604 of ERISA, section4980B(f)(4) of the Code, and section2204 of the PHS Act. In the case of aself-insured plan, contributions by anemployer or employee organization arecalculated by subtracting the employeecontributions towards the total cost of

coverage from the total cost of coverage.Second, if the contribution rate is basedon a formula, such as hours worked ortons of coal mined, a group health planor group health insurance coverageceases to be a grandfathered health planif the employer or employeeorganization decreases its contributionrate towards the cost of any tier ofcoverage for any class of similarlysituated individuals by more than 5percent below the contribution rate onMarch 23, 2010.

Finally, paragraph (g)(1)(vi) addressesthe imposition of a new or modified

annual limit by a plan, or group orindividual health insurance coverage.7Three different situations are addressed:

A plan or health insurance coveragethat, on March 23, 2010, did not imposean overall annual or lifetime limit onthe dollar value of all benefits ceases to

be a grandfathered health plan if theplan or health insurance coverageimposes an overall annual limit on thedollar value of benefits.

A plan or health insurancecoverage, that, on March 23, 2010,imposed an overall lifetime limit on thedollar value of all benefits but no overallannual limit on the dollar value of all

benefits ceases to be a grandfatheredhealth plan if the plan or healthinsurance coverage adopts an overallannual limit at a dollar value that islower than the dollar value of thelifetime limit on March 23, 2010.

A plan or health insurance coveragethat, on March 23, 2010, imposed anoverall annual limit on the dollar valueof all benefits ceases to be agrandfathered health plan if the plan orhealth insurance coverage decreases thedollar value of the annual limit(regardless of whether the plan or healthinsurance coverage also imposed an

overall lifetime limit on March 23, 2010on the dollar value of all benefits).Under these interim final regulations,

changes other than the changes

described in 26 CFR 54.98151251T(g)(1), 29 CFR 2590.7151251(g)(1), and 45 CFR 147.140(g)(1)will not cause a plan or coverage tocease to be a grandfathered health plan.Examples include changes to premiums,changes to comply with Federal or Statelegal requirements, changes tovoluntarily comply with provisions of

the Affordable Care Act, and changingthird party administrators, providedthese changes are made withoutexceeding the standards established byparagraph (g)(1).

These interim final regulationsprovide transitional rules for plans andissuers that made changes after theenactment of the Affordable Care Actpursuant to a legally binding contractentered into prior to enactment, madechanges to the terms of health insurancecoverage pursuant to a filing beforeMarch 23, 2010 with a State insurancedepartment, or made changes pursuant

to written amendments to a plan thatwere adopted prior to March 23, 2010.If a plan or issuer makes changes in anyof these situations, the changes areeffectively considered part of the planterms on March 23, 2010 even thoughthey are not then effective. Therefore,such changes are not taken into accountin considering whether the plan orhealth insurance coverage remains agrandfathered health plan.

Because status as a grandfatheredhealth plan under section 1251 of theAffordable Care Act is determined inrelation to coverage on March 23, 2010,the date of enactment of the Affordable

Care Act, the Departments consideredwhether they should provide a good-faith compliance period fromDepartmental enforcement untilguidance regarding the standards formaintaining grandfather status wasmade available to the public. Grouphealth plans and health insuranceissuers often make routine changes fromyear to year, and some plans and issuersmay have needed to implement suchchanges prior to the issuance of theseinterim final regulations.

Accordingly, for purposes ofenforcement, the Departments will take

into account good-faith efforts tocomply with a reasonable interpretationof the statutory requirements and maydisregard changes to plan and policyterms that only modestly exceed thosechanges described in paragraph (g)(1) of26 CFR 54.98151251T, 29 CFR2590.7151251, and 45 CFR 147.140and that are adopted before June 14,2010, the date the regulations weremade publicly available.

In addition, these interim finalregulations provide employers andissuers with a grace period within

which to revoke or modify any changesadopted prior to June 14, 2010, wherethe changes might otherwise cause theplan or health insurance coverage tocease to be a grandfathered health plan.Under this rule, grandfather status ispreserved if the changes are revoked,and the plan or health insurancecoverage is modified, effective as of the

first day of the first plan or policy yearbeginning on or after September 23,2010 to bring the terms within the limitsfor retaining grandfather status in theseinterim final regulations. For thispurpose, and for purposes of thereasonable good faith standard changeswill be considered to have been adopted

before these interim final regulations arepublicly available if the changes areeffective before that date, the changesare effective on or after that datepursuant to a legally binding contractentered into before that date, thechanges are effective on or after that

date pursuant to a filing before that datewith a State insurance department, orthe changes are effective on or after thatdate pursuant to written amendments toa plan that were adopted before thatdate.

While the Departments havedetermined that the changes identifiedin paragraph (g)(1) of these interim finalregulations would cause a group healthplan or health insurance coverage tocease to be a grandfathered health plan,the Departments invite comments fromthe public on whether this list ofchanges is appropriate and what other

changes, if any, should be added to thislist. Specifically, the Departments invitecomments on whether the followingchanges should result in cessation ofgrandfathered health plan status for aplan or health insurance coverage: (1)Changes to plan structure (such asswitching from a health reimbursementarrangement to major medical coverageor from an insured product to a self-insured product); (2) changes in anetwork plans provider network, and ifso, what magnitude of changes wouldhave to be made; (3) changes to aprescription drug formulary, and if so,

what magnitude of changes would haveto be made; or (4) any other substantialchange to the overall benefit design. Inaddition, the Departments invitecomments on the specific standardsincluded in these interim finalregulations on benefits, cost sharing,and employer contributions. TheDepartments specifically invitecomments on whether these standardsshould be drawn differently in light ofthe fact that changes made by theAffordable Care Act may alter plan orissuer practices in the next several



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8The Affordable Care Act adds section 715(a)(1)to ERISA and section 9815(a)(1) to the Code toincorporate the provisions of part A of title XXVIIof the PHS Act into ERISA and the Code, and makethem applicable to group health plans, and healthinsurance issuers providing health insurancecoverage in connection with group health plans.The PHS Act sections incorporated by this referenceare sections 2701 through 2728. PHS Act sections2701 through 2719A are substantially new, thoughthey incorporate some provisions of prior law. PHSAct sections 2722 through 2728 are sections of priorlaw renumbered, with some, mostly minor,

changes. Section 1251 of the Affordable Care Act,as modified by section 10103 of the Affordable CareAct and section 2301 of the Reconciliation Act,specifies that certain plans or coverage existing asof the date of enactment (that is, grandfatheredhealth plans) are only subject to certain provisions.

9For individuals who have coverage through aninsured group health plans subject to a collectivebargaining agreement ratified before March 23,2010, an individuals coverage is grandfathered atleast until the date on which the last agreementrelating to the coverage that was in effect on March23, 2010, terminates. These collectively bargainedplans may make any permissible changes to thebenefit structure before the agreement terminatesand remain grandfathered. After the termination

Continued

years. Any new standards published inthe final regulations that are morerestrictive than these interim finalregulations would only applyprospectively to changes to plans orhealth insurance coverage after thepublication of the final rules.

Moreover, the Departments may issue,as appropriate, additional

administrative guidance other than inthe form of regulations to clarify orinterpret the rules contained in theseinterim final regulations for maintaininggrandfathered health plan status prior tothe issuance of final regulations. Theability to issue prompt, clarifyingguidance is especially important giventhe uncertainty as to how plans orissuers will alter their plans or policiesin response to these rules. Thisguidance can address unanticipatedchanges by plans and issuers to ensurethat individuals benefit from theAffordable Care Acts new health care

protections while preserving the abilityto maintain the coverage individualshad on the date of enactment.

III. Interim Final Regulations andRequest for Comments

Section 9833 of the Code, section 734of ERISA, and section 2792 of the PHSAct authorize the Secretaries of theTreasury, Labor, and HHS (collectively,the Secretaries) to promulgate anyinterim final rules that they determineare appropriate to carry out theprovisions of chapter 100 of the Code,part 7 of subtitle B of title I of ERISA,and part A of title XXVII of the PHS Act,

which include PHS Act sections 2701through 2728 and the incorporation ofthose sections into ERISA section 715and Code section 9815. The rules setforth in these interim final regulationsgovern the applicability of therequirements in these sections and aretherefore appropriate to carry them out.Therefore, the foregoing interim finalrule authority applies to these interimfinal regulations.

In addition, under Section 553(b) ofthe Administrative Procedure Act (APA)(5 U.S.C. 551 et seq.) a general notice ofproposed rulemaking is not required

when an agency, for good cause, findsthat notice and public comment thereonare impracticable, unnecessary, orcontrary to the public interest. Theprovisions of the APA that ordinarilyrequire a notice of proposed rulemakingdo not apply here because of thespecific authority granted by section9833 of the Code, section 734 of ERISA,and section 2792 of the PHS Act.However, even if the APA wereapplicable, the Secretaries havedetermined that it would beimpracticable and contrary to the public

interest to delay putting the provisionsin these interim final regulations inplace until a full public notice andcomment process was completed. Asnoted above, numerous provisions ofthe Affordable Care Act are applicablefor plan years (in the individual market,policy years) beginning on or afterSeptember 23, 2010, six months after

date of enactment. Grandfathered healthplans are exempt from many of theseprovisions while group health plans andgroup and individual health insurancecoverage that are not grandfatheredhealth plans must comply with them.The determination of whether a plan orhealth insurance coverage is agrandfathered health plan thereforecould substantially affect the design ofthe plan or health insurance coverage.

The six-month period between theenactment of the Affordable Care Actand the applicability of many of theprovisions affected by grandfather status

would not allow sufficient time for theDepartments to draft and publishproposed regulations, receive andconsider comments, and draft andpublish final regulations. Moreover,regulations are needed well in advanceof the effective date of the requirementsof the Affordable Care Act. Many grouphealth plans and health insurancecoverage that are not grandfatheredhealth plans must make significantchanges in their provisions to complywith the requirements of the AffordableCare Act. Moreover, plans and issuersconsidering other modifications to theirterms need to know whether those

modifications will affect their status asgrandfathered health plans.Accordingly, in order to allow plans andhealth insurance coverage to bedesigned and implemented on a timely

basis, regulations must be publishedand available to the public well inadvance of the effective date of therequirements of the Affordable Care Act.It is not possible to have a full noticeand comment process and to publishfinal regulations in the brief time

between enactment of the AffordableCare Act and the date regulations areneeded.

The Secretaries further find thatissuance of proposed regulations wouldnot be sufficient because the provisionsof the Affordable Care Act protectsignificant rights of plan participantsand beneficiaries and individualscovered by individual health insurancepolicies and it is essential thatparticipants, beneficiaries, insureds,plan sponsors, and issuers havecertainty about their rights andresponsibilities. Proposed regulationsare not binding and cannot provide thenecessary certainty. By contrast, the

interim final regulations provide thepublic with an opportunity forcomment, but without delaying theeffective date of the regulations.

For the foregoing reasons, theDepartments have determined that it isimpracticable and contrary to the publicinterest to engage in full notice andcomment rulemaking before putting

these regulations into effect, and that itis in the public interest to promulgateinterim final regulations.

IV. Economic Impact and PaperworkBurden

A. OverviewDepartment of Labor andDepartment of Health and HumanServices

As stated earlier in this preamble,these interim final regulationsimplement section 1251 of theAffordable Care Act, as modified bysection 10103 of the Affordable Care Actand section 2301 of the Reconciliation

Act. Pursuant to section 1251, certainprovisions of the Affordable Care Act donot apply to a group health plan orhealth insurance coverage in which anindividual was enrolled on March 23,2010 (a grandfathered health plan).8 Thestatute and these interim finalregulations allow family members ofindividuals already enrolled in agrandfathered health plan to enroll inthe plan after March 23, 2010; in suchcases, the plan or coverage is also agrandfathered health plan with respectto the family members. New employees(whether newly hired or newly

enrolled) and their families can enroll ina grandfathered group health plan afterMarch 23, 2010 without affecting statusas a grandfathered health plan.9



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date, grandfather status will be determined bycomparing the plan, as it existed on March 23, 2010to the changes that the plan made beforetermination under the rules established by theseinterim final regulations.

As addressed earlier in this preamble,and further discussed below, theseinterim final regulations include rulesfor determining whether changes to theterms of a grandfathered health planmade by issuers and plan sponsorsallow the plan or health insurancecoverage to remain a grandfatheredhealth plan. These rules are the primaryfocus of this regulatory impact analysis.

The Departments have quantified theeffects where possible and provided aqualitative discussion of the economiceffects and some of the transfers andcosts that may result from these interimfinal regulations.

B. Executive Order 12866Departmentof Labor and Department of Health andHuman Services

Under Executive Order 12866 (58 FR51735), significant regulatory actionsare subject to review by the Office of

Management and Budget (OMB).Section 3(f) of the Executive Orderdefines a significant regulatory actionas an action that is likely to result in arule (1) having an annual effect on theeconomy of $100 million or more in anyone year, or adversely and materiallyaffecting a sector of the economy,productivity, competition, jobs, theenvironment, public health or safety, orState, local or tribal governments orcommunities (also referred to aseconomically significant); (2) creatinga serious inconsistency or otherwiseinterfering with an action taken or

planned by another agency; (3)materially altering the budgetaryimpacts of entitlement grants, user fees,or loan programs or the rights andobligations of recipients thereof; or (4)raising novel legal or policy issuesarising out of legal mandates, thePresidents priorities, or the principlesset forth in the Executive Order. OMBhas determined that this regulation iseconomically significant within themeaning of section 3(f)(1) of theExecutive Order, because it is likely tohave an annual effect on the economyof $100 million in any one year.

Accordingly, OMB has reviewed theserules pursuant to the Executive Order.The Departments provide an assessmentof the potential costs, benefits, andtransfers associated with these interimfinal regulations below. TheDepartments invite comments on thisassessment and its conclusions.

1. Need for Regulatory Action

As discussed earlier in this preamble,Section 1251 of the Affordable Care Act,as modified by section 10103 of theAffordable Care Act and section 2301 ofthe Reconciliation Act, provides thatgrandfathered health plans are subjectonly to certain provisions of the

Affordable Care Act. The statute,however, is silent regarding changesplan sponsors and issuers can make toplans and health insurance coveragewhile retaining grandfather status.These interim final regulations arenecessary in order to provide rules thatplan sponsors and issuers can use todetermine which changes they can maketo the terms of the plan or healthinsurance coverage while retaining theirgrandfather status, thus exempting themfrom certain provisions of theAffordable Care Act and fulfilling a goalof the legislation, which is to allow

those that like their healthcare to keepit. These interim final regulations aredesigned to allow individuals who wishto maintain their current healthinsurance plan to do so, to reduce shortterm disruptions in the market, and toease the transition to market reformsthat phase in over time.

In drafting this rule, the Departmentsattempted to balance a number ofcompeting interests. For example, theDepartments sought to provide adequateflexibility to plan sponsors and issuersto ease transition and mitigate potentialpremium increases while avoiding

excessive flexibility that would conflictwith the goal of permitting individualswho like their healthcare to keep it andmight lead to longer term marketsegmentation as the least costly plansremain grandfathered the longest. Inaddition, the Departments recognizedthat many plan sponsors and issuersmake changes to the terms of plans orhealth insurance coverage on an annual

basis: Premiums fluctuate, providernetworks and drug formularies change,employer and employee contributionsand cost-sharing change, and covereditems and services may vary. Without

some ability to make some adjustmentswhile retaining grandfather status, theability of individuals to maintain theircurrent coverage would be frustrated,

because most plans or health insurancecoverage would quickly cease to beregarded as the same group health planor health insurance coverage inexistence on March 23, 2010. At thesame time, allowing unfettered changeswhile retaining grandfather statuswould also be inconsistent withCongresss intent to preserve coveragethat was in effect on March 23, 2010.

Therefore, as further discussed below,these interim final regulations aredesigned, among other things, to takeinto account reasonable changesroutinely made by plan sponsors orissuers without the plan or healthinsurance coverage relinquishing itsgrandfather status so that individualscan retain the ability to remain enrolled

in the coverage in which they wereenrolled on March 23, 2010. Thus, forexample, these interim final regulationsgenerally permit plan sponsors andissuers to make voluntary changes toincrease benefits, to conform to requiredlegal changes, and to adopt voluntarilyother consumer protections in theAffordable Care Act.

2. Regulatory Alternatives

Section 6(a)(3)(C)(iii) of ExecutiveOrder 12866 requires an economicallysignificant regulation to include anassessment of the costs and benefits ofpotentially effective and reasonablealternatives to the planned regulation,and an explanation of why the plannedregulatory action is preferable to thepotential alternatives. The alternativesconsidered by the Departments fall intotwo general categories: Permissiblechanges to cost sharing and benefits.The discussion below addresses theconsidered alternatives in each category.

The Departments considered allowinglooser cost-sharing requirements, suchas 25 percent plus medical inflation.However, the data analysis led theDepartments to believe that the cost-sharing windows provided in these

interim final regulations permit enoughflexibility to enable a smooth transitionin the group market over time, andfurther widening this window was notnecessary and could conflict with thegoal of allowing those who like theirhealthcare to keep it.

Another alternative the Departmentsconsidered was an annual allowance forcost-sharing increases above medicalinflation, as opposed to the one-timeallowance of 15 percent above medicalinflation. An annual margin of 15percent above medical inflation, forexample, would permit plans to

increase cost sharing by medicalinflation plus 15 percent every year. TheDepartments concluded that the effect ofthe one-time allowance (15 percent ofthe original, date-of-enactment levelplus medical inflation) would diminishover time insofar as it would representa diminishing fraction of the total levelof cost sharing with the cumulativeeffects of medical inflation over time.Accordingly, the one-time allowancewould better reflect (i) the potentialneed of grandfathered health plans tomake adjustments in the near term to



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10Medical inflation is defined in these interimregulations by reference to the overall medical carecomponent of the CPI.

11Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.

reflect the requirement that they complywith the market reforms that apply tograndfathered health plans in the nearterm as well as (ii) the prospect that, formany plans and health insurancecoverage, the need to recover the costsof compliance in other ways willdiminish in the medium term, in part

because of the changes that will become

effective in 2014 and in part because ofthe additional time plan sponsors andissuers will have to make gradualadjustments that take into account themarket reforms that are due to takeeffect in later years.

The Departments consideredestablishing an overall prohibitionagainst changes that, in the aggregate, orcumulatively over time, render the planor coverage substantially different thanthe plan or coverage that existed onMarch 23, 2010, or further delineatingother examples of changes that couldcause a plan to relinquish grandfather

status. This kind of substantiallydifferent standard would have capturedsignificant changes not anticipated inthe interim final regulation. However, itwould rely on a facts andcircumstances analysis in definingsubstantially different or significantchanges, which would be lesstransparent and result in greateruncertainty about the status of a healthplan. That, in turn, could hinder plansponsor or issuer decisions as well asenrollee understanding of whatprotections apply to their coverage.

An actuarial equivalency standard

was another considered option. Such astandard would allow a plan or healthinsurance coverage to retain status as agrandfathered health plan if theactuarial value of the coverage remainsin approximately the same range as itwas on March 23, 2010. However, undersuch a standard, a plan could makefundamental changes to the benefitdesign, potentially conflicting with thegoal of allowing those who like theirhealthcare to keep it, and still retaingrandfather status. Moreover, thecomplexity involved in defining anddetermining actuarial value for these

purposes, the likelihood of varyingmethodologies for determining suchvalue unless the Departmentspromulgated very detailed prescriptiverules, and the costs of administering andensuring compliance with such rulesled the Departments to reject thatapproach.

Another alternative was a requirementthat employers continue to contributethe same dollar amount they werecontributing for the period includingMarch 23, 2010, plus an inflationcomponent. However, the Departmentswere concerned that this approachwould not provide enough flexibility toaccommodate the year-to-year volatility

in premiums that can result fromchanges in some plans coveredpopulations or other factors.

The Departments also consideredwhether a change in third partyadministrator by a self-insured planshould cause the plan to relinquishgrandfather status. The Departmentsdecided that such a change would notnecessarily cause the plan to be sodifferent from the plan in effect onMarch 23, 2010 that it should berequired to relinquish grandfatherstatus.

After careful consideration, the

Departments opted against rules thatwould require a plan sponsor or issuerto relinquish its grandfather status ifonly relatively small changes are madeto the plan. The Departments concludedthat plan sponsors and issuers ofgrandfathered health plans should bepermitted to take steps within the

boundaries of the grandfather definitionto control costs, including limitedincreases in cost-sharing and other planchanges not prohibited by these interimfinal regulations. As noted earlier,deciding to relinquish grandfather statusis a one-way sorting process: after someperiod of time, more plans willrelinquish their grandfather status.These interim final regulations willlikely influence plan sponsorsdecisions to relinquish grandfatherstatus.

3. Discussion of Regulatory Provisions

As discussed earlier in this preamble,these interim final regulations providethat a group health plan or healthinsurance coverage no longer will beconsidered a grandfathered health planif a plan sponsor or an issuer:

Eliminates all or substantially allbenefits to diagnose or treat a particular

condition. The elimination of benefitsfor any necessary element to diagnose ortreat a condition is considered theelimination of all or substantially all

benefits to diagnose or treat a particularcondition;

Increases a percentage cost-sharingrequirement (such as coinsurance)

above the level at which it was onMarch 23, 2010;

Increases fixed-amount cost-sharingrequirements other than copayments,such as a $500 deductible or a $2,500out-of-pocket limit, by a total percentagemeasured from March 23, 2010 that ismore than the sum of medical inflationand 15 percentage points.10

Increases copayments by an amountthat exceeds the greater of: a totalpercentage measured from March 23,2010 that is more than the sum ofmedical inflation plus 15 percentagepoints, or $5 increased by medicalinflation measured from March 23,2010;

For a group health plan or grouphealth insurance coverage, an employeror employee organization decreases itscontribution rate by more than fivepercentage points below thecontribution rate on March 23, 2010; or

With respect to annual limits (1) a

group health plan, or group orindividual health insurance coverage,that, on March 23, 2010, did not imposean overall annual or lifetime limit onthe dollar value of all benefits imposesan overall annual limit on the dollarvalue of benefits; (2) a group healthplan, or group or individual healthinsurance coverage, that, on March 23,2010, imposed an overall lifetime limiton the dollar value of all benefits but nooverall annual limit on the dollar valueof all benefits adopts an overall annuallimit at a dollar value that is lower thanthe dollar value of the lifetime limit on

March 23, 2010; or (3) a group healthplan, or group or individual healthinsurance coverage, that, on March 23,2010, imposed an overall annual limiton the dollar value of all benefitsdecreases the dollar value of the annuallimit (regardless of whether the plan orhealth insurance coverage also imposesan overall lifetime limit on the dollarvalue of all benefits).

Table 1, in section II.D of this preamble,lists the relevant Affordable Care Actprovisions that apply to grandfatheredhealth plans.

In accordance with OMB Circular A

4,11

Table 2 below depicts anaccounting statement showing theDepartments assessment of the benefits,costs, and transfers associated with thisregulatory action. In accordance withExecutive Order 12866, the Departments

believe that the benefits of thisregulatory action justify the costs.



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TABLE 2ACCOUNTING TABLE

Benefits

Qualitative: These interim final regulations provide plans with guidance about the requirements for retaining grandfather status. Non-grand-fathered plans are required to offer coverage with minimum benefit standards and patient protections as required by the Affordable Care Act,while grandfathered plans are required only to comply with certain provisions. The existence of grandfathered health plans will provide individ-uals with the benefits of plan continuity, which may have a high value to some. In addition, grandfathering could potentially slow the rate ofpremium growth, depending on the extent to which their current plan does not include the benefits and protections of the new law. It couldalso provide incentives to employers to continue coverage, potentially reducing new Medicaid enrollment and spending and lowering the num-ber of uninsured individuals. These interim final regulations also provide greater certainty for plans and issuers about what changes they canmake without affecting their grandfather status. As compared with alternative approaches, these regulations provide significant economic andnoneconomic benefits to both issuers and beneficiaries, though these benefits cannot be quantified at this time.

Costs Low-endestimate

Mid-rangeestimate

High-endestimate

Year dollar Discount rate Periodcovered

Annualized ............................................... 22.0 25.6 27.9 2010 7% 20112013

Monetized ($millions/year) ....................... 21.2 24.7 26.9 2010 3% 20112013

Monetized costs are due to a requirement to notify participants and beneficiaries of a plans grandfather status and maintain plan documents toverify compliance with these interim final regulations requirements to retain grandfather status.

Qualitative: Limitations on cost-sharing increases imposed by these interim final regulations could result in the cost of some grandfatheredhealth plans increasing more (or decreasing less) than they otherwise would. This increased cost may encourage some sponsors and issuersto replace their grandfathered health plans with new, non-grandfathered ones. Market segmentation (adverse selection) due to the decision ofhigher risk plans to relinquish grandfathering could cause premiums in the exchanges to be higher than they would have been absentgrandfathering.

TransfersQualitative: Limits on the changes to cost-sharing in grandfathered plans and the elimination of cost-sharing for some services in non-grand-

fathered plans, leads to transfers of wealth from premium payers overall to individuals using covered services. Once pre-existing conditionsare fully prohibited and other insurance reforms take effect, the extent to which individuals are enrolled in grandfathered plans could affect ad-verse selection, as higher risk plans relinquish grandfather status to gain new protections while lower risk grandfathered plans retain theirgrandfather status. This could result in a transfer of wealth from non-grandfathered plans to grandfathered health plans.

4. Discussion of Economic Impacts ofRetaining or Relinquishing GrandfatherStatus

The economic effects of these interimfinal regulations will depend on

decisions by plan sponsors and issuers,as well as by those covered under theseplans and health insurance coverage.The collective decisions of plansponsors and issuers over time can beviewed as a one-way sorting process inwhich these parties decide whether, andwhen, to relinquish status as agrandfathered health plan.

Plan sponsors and issuers can decideto:

1. Continue offering the plan orcoverage in effect on March 23, 2010with limited changes, and thereby retaingrandfather status;

2. Significantly change the terms ofthe plan or coverage and comply withAffordable Care Act provisions fromwhich grandfathered health plans areexcepted; or

3. In the case of a plan sponsor, ceaseto offer any plan.

For a plan sponsor or issuer, thepotential economic impact of theapplication of the provisions in theAffordable Care Act may be oneconsideration in making its decisions.To determine the value of retaining thehealth plans grandfather status, each

plan sponsor or issuer must determinewhether the rules applicable tograndfathered health plans are more orless favorable than the rules applicableto non-grandfathered health plans. This

determination will depend on suchfactors as the respective prices ofgrandfathered and non-grandfatheredhealth plans, as well as on thepreferences of grandfathered healthplans covered populations and theirwillingness to pay for benefits andpatient protections available under non-grandfathered health plans. In makingits decisions about grandfather status, aplan sponsor or issuer is also likely toconsider the market segment (becausedifferent rules apply to the large andsmall group market segments), and theutilization pattern of its coveredpopulation.

In deciding whether to change aplans benefits or cost sharing, a plansponsor or issuer will examine its short-run business requirements. Theserequirements are regularly altered by,among other things, rising costs thatresult from factors such as technologicalchanges, changes in risk status of theenrolled population, and changes inutilization and provider prices. Asshown below, changes in benefits andcost sharing are typical in insurancemarkets. Decisions about the extent of

changes will determine whether a planretains its grandfather status.Ultimately, these decisions will involvea comparison by the plan sponsor orissuer of the long run value of

grandfather status to the short-run needof that plan sponsor or issuer to adjustplan structure in order to controlpremium costs or achieve other businessobjectives.

Decisions by plan sponsors andissuers may be significantly affected bythe preferences and behavior of theenrollees, especially a tendency amongmany towards inertia and resistance tochange. There is limited research thathas directly examined what drives thistendencywhether individuals remainwith health plans because of simpleinertia and procrastination, a lack of

relevant information, or because theywant to avoid risk associated withswitching to new plans. One study thatexamined the extent to which premiumchanges influenced plan switchingdetermined that younger low-riskemployees were the most price-sensitiveto premium changes; older, high-riskemployees were the least price-sensitive. This finding suggests that, inparticular, individuals with substantialhealth needs may be more apt to remainwith a plan because of inertia as suchor uncertainties associated with plan



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12http://www.nber.org/reporter/summer06/buchmueller.html. Consumer Demand for Health

Insurance The National Bureau of EconomicResearch (Buchmueller, 2006).

13http://content.healthaffairs.org/cgi/reprint/19/3/158.pdf. Health Plan Switching: Choice OrCircumstance? (Cunnigham and Kohn, 2000).

14http://www.kaiserhealthnews.org/Stories/2009/December/01/Medicare-Drug-Plan.aspx. SeniorsOften Reluctant To Switch Medicare Drug Plans(2009, Kaiser Health News/Washington Post).

15http://www.ncbi.nlm.nih.gov/pubmed/16704882. The effect of quality information onconsumer health plan switching: evidence from theBuyers Health Care Action Group. (Abraham,Feldman, Carlin, and Christianson, 2006).

16Erika C. Ziller, Andrew F. Coburn, Timothy D.McBride, and Courtney Andrews. Patterns of

Individual Health Insurance Coverage, 19962000.Health Affairs Nov/Dec 2004: 210221.

17Melinda Beeuwkes Bustin, M. Susan Marquis,and Jill M. Yegian. The Role of the IndividualHealth Insurance Market and Prospects for Change.Health Affairs 2004; 23(6): 7990.

18Kaiser Family Foundation State Health Facts(2010), http://www.statehealthfacts.org/comparetable.jsp?ind=351&cat=7.

switching rather than quality per seaphenomenon some behavioraleconomists have called status quo

bias, 12 which can be found whenpeople stick with the status quo eventhough a change would have higherexpected value.

Even when an enrollee could reap aneconomic or other advantage from

changing plans, that enrollee may notmake the change because of inertia, alack of relevant information, or becauseof the cost and effort involved inexamining new options and uncertaintyabout the alternatives. Consistent withwell-known findings in behavioraleconomics, studies of private insurancedemonstrate the substantial effect ofinertia in the behavior of the insured.One survey found that approximately 83percent of privately insured individualsstuck with their plans in the year priorto the survey.13 Among those who didchange plans, well over half sought the

same type of plan they had before.Those who switched plans also tendedto do so for reasons other thanpreferring their new plans. For example,many switched because they changedjobs or their employer changedinsurance offerings, compelling them toswitch.

Medicare beneficiaries display similarplan loyalties. On average, only sevenpercent of the 17 million seniors onMedicare drug plans switch plans eachyear, according to the Centers forMedicare and Medicaid Services.14Researchers have found this

comparatively low rate of switching ismaintained whether or not thoseinsured have higher quality informationabout plan choices, and that switchinghas little effect on the satisfaction of theinsured with their health plans.15

The incentives to change are differentfor people insured in the individualmarket than they are for those covered

by group health plans or group healthinsurance coverage. The median lengthof coverage for people entering theindividual market is eight months.16 In

part, this churn stems from theindividual markets function as astopping place for people between jobswith employer-sponsored or other typesof health insurance, but in part, thechurn is due to the behavior of issuers.Evidence suggests that issuers oftenmake policy changes such as raisingdeductibles as a means of attracting

new, healthy enrollees who have fewmedical costs and so are little-concerned about such deductibles.There is also evidence that issuers usesuch changes to sort out high-costenrollees from low-cost ones.17

Decisions about the value of retainingor relinquishing status as agrandfathered health plan are complex,and the wide array of factors affectingissuers, plan sponsors, and enrolleesposes difficult challenges for theDepartments as they try to estimate howlarge the presence of grandfatheredhealth plans will be in the future and

what the economic effects of theirpresence will be. As one example, theseinterim final regulations limit the extentto which plan sponsors and issuers canincrease cost sharing and still remaingrandfathered. The increases that areallowed provide plans and issuers withsubstantial flexibility in attempting tocontrol expenditure increases. However,there are likely to be some plans andissuers that would, in the absence ofthese regulations, choose to make evenlarger increases in cost sharing than arespecified here. Such plans will need todecide whether the benefits ofmaintaining grandfather status outweigh

those expected from increasing costsharing above the levels permitted inthe interim final regulations.

A similar analysis applies to theprovision that an employers oremployee organizations share of thetotal premium of a group health plancannot be reduced by more than 5percentage points from the share it waspaying on March 23, 2010 without thatplan or health insurance coveragerelinquishing its grandfather status.Employers and employee organizationssponsoring group health plans or healthinsurance coverage may be faced with

economic circumstances that wouldlead them to reduce their premiumcontributions. But reductions of greaterthan 5 percentage points would causethem to relinquish the grandfatherstatus of their plans. These plansponsors must decide whether the

benefit of such premium reductions

outweigh those of retaining grandfatherstatus.

Market dynamics affecting thesedecisions change in 2014, when theAffordable Care Act limits variation inpremium rates for individual and smallgroup policies. Small groups for thispurpose include employers with up to100 employees (States may limit this

threshold to 50 employees until 2016).The Affordable Care Act rating ruleswill not apply to grandfathered healthplans, but such plans will remainsubject to State rating rules, which varywidely and typically apply to employerswith up to 50 employees. Based on thecurrent State rating rules, it is likelythat, in many States, no rating rules willapply to group health insurance policiesthat are grandfathered health planscovering employers with 51 to 100employees.18

The interaction of the Affordable CareAct and State rating rules implies that,

beginning in 2014, premiums can varymore widely for grandfathered plansthan for non-grandfathered plans foremployers with up to 100 employees inmany States. This could encourage bothplan sponsors and issuers to continuegrandfathered health plans that coverlower-risk groups, because these groupswill be isolated from the larger, higher-risk, non-grandfathered risk pool. Onthe other hand, this scenario likely willencourage plan sponsors and issuersthat cover higher-risk groups to endgrandfathered health plans, because thegroup would be folded into the larger,lower-risk non-grandfathered pool.

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