Health Reform – IRS Issues Regulations on Preexisting Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections

As reported in our earlier Advisories (please see our Client Advisories from April 5, 2010, April 9, 2010, April 26, 2010, June 11, 2010 and July 1, 2010), the health care reform laws require significant changes to group health plans effective for plan years beginning on and after September 23, 2010 (January 1, 2011, for calendar plan years).  New interim final regulations recently issued by the Departments of Treasury, Labor, and Health and Human Services provide guidance on the provisions regarding the prohibition of preexisting condition exclusions, lifetime and annual limits, rescissions of coverage, and patient protections.  This Client Advisory will focus on this new guidance. 

Prohibition of Preexisting Condition Exclusions

Health care reform laws prohibit any preexisting condition exclusions for any individual under any group health plan (including a grandfathered plan (see our advisory from July 1, 2010 for information regarding grandfathered plan status)), effective for plan years beginning on and after January 1, 2014.  However, for plan years beginning on and after September 23, 2010, any individual (whether covered as an employee or as a dependent) under age 19 with preexisting conditions may not be denied coverage under any group health plan (including a grandfathered plan).  This rule prohibits not only a denial of enrollment but a denial of specific benefits based on an individual's preexisting condition.  Note that benefits for a particular condition still may be excluded, so long as the exclusion is not dependent upon when the condition arose with respect to the coverage date (and as long as the exclusion would not violate other laws). 

Lifetime and Annual Limits

The prohibition on lifetime limits is effective for plan years beginning on and after September 23, 2010, for all group health plans (including grandfathered plans).  Annual limits are prohibited in non-grandfathered group health plans effective for plan years beginning on and after September 23, 2010. 

Grandfathered group health plans may impose restricted annual limits on essential health benefits in plan years beginning before January 1, 2014.  The regulations define restricted annual limits as annual limits that are not less than the following:

• $750,000 for plan years beginning on and after September 23, 2010, but before September 23, 2011;
• $1.25 million for plan years beginning on and after September 23, 2011, but before September 23, 2012; and
• $2 million for plan years beginning on and after September 23, 2012, but before January 1, 2014.

Only essential health benefits may be considered in applying these restricted limits, which apply on an individual basis only, and not on a family basis.  Note that plans may impose higher limits, or impose no limits at all during this transition period.
Although the health care reform laws prohibit lifetime and annual limits on the dollar amount of health benefits, the new interim final regulations provide that such limits are permitted if:

• The limits are permitted under federal or state law; and
• The limited health benefits are not "essential health benefits".

Regulations have not yet been issued to define "essential health benefits".  However, the preamble to the new interim final regulations indicates that consistent, good faith efforts to comply with a reasonable interpretation of the term "essential health benefits" will be taken into account by the Departments of Treasury, Labor, and Health and Human Services.

The regulations also differentiate between the imposition of lifetime and annual limits, and the exclusion of all health benefits for a particular condition.  Where health benefits are provided for a particular condition, no lifetime or annual limits will be permitted on health benefits for that condition, unless such health benefits are not "essential health benefits".

In addition, the regulations require plans to provide individuals who met the lifetime limit prior to the issuance of the regulations with notice and the opportunity to enroll in benefit packages available to similarly situated individuals who otherwise are eligible to participate in the plan.  Such notice must state that the lifetime limit no longer applies and that the individual has a 30-day special enrollment period in which to enroll in any benefit package available to similarly situated individuals. The notice must be provided no later than the first day of the first plan year beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans), and any coverage elected pursuant to the notice must be retroactive to the first day of the plan year.  The Department of Labor recently issued a model notice that can be used for these purposes, which can be accessed here:  http://www.dol.gov/ebsa/lifetimelimitsmodelnotice.doc

For plan years beginning before January 1, 2014, the regulations allow the Department of Health and Human Services to create a waiver program where compliance with the minimum annual limit requirements could be waived in certain cases if compliance would significantly decrease access to benefits or significantly increase premiums.  This waiver program will provide relief to employers with limited benefit, or "mini-med", plans.  Further guidance on this waiver program is expected to be provided soon by the Department of Health and Human Services.

Finally, the regulations clarify that flexible spending accounts are not subject to the lifetime and annual limit requirements (other than the $2,500 per plan year contribution limit on health flexible spending accounts beginning in 2013).  Nor are medical savings accounts or health savings accounts subject to such requirements, since they are not treated as group health plans.  However, health reimbursement accounts are subject to the lifetime and annual limit requirements.  Provided the health reimbursement accounts are integrated with other coverage as part of a group health plan that otherwise complies with the requirements, the health reimbursement accounts will not fail to meet the requirements.

Prohibition on Rescissions

The new laws prohibit the rescission of coverage by a group health plan (including grandfathered plans) effective for plan years beginning on and after September 23, 2010, except for fraud or an intentional misrepresentation of a material fact.  The regulations define rescission as a retroactive (not prospective) cancellation of an individual's coverage so that, while a prospective cancellation of coverage is permitted in appropriate circumstances, it is only retroactive cancellation that is prohibited except in limited circumstances.  Note that a prohibited rescission does not occur if coverage is canceled retroactively due to a failure to pay required premiums.  To retroactively rescind an individual's coverage, a plan must provide 30 days' written notice to the participant prior to the date the coverage is to be retroactively canceled.  For example, if an individual's coverage is being rescinded on August 1 retroactive to January 1, the plan must provide the individual written notice no later than July 1. The Department of Labor has not issued a model notice for these requirements at this time.   

Patient Protections

The following rules regarding patient protections are effective for plan years beginning on and after September 23, 2010, but do not apply to grandfathered plans.

The regulations require that covered individuals have the following rights:

• The right to choose their own health care professionals in plans utilizing plan provider networks; and
• The right to receive emergency services in plans providing emergency services benefits:
  • without prior authorization; and
  • without regard to whether a provider is in-network or out-of-network.

Plans may not impose any administrative requirement or benefit limitation for out-of-network emergency services that is more restrictive than the requirements or limitations that apply to in-network emergency services.  The regulations prescribe a number of special rules pertaining to the establishment of cost-sharing amounts for out-of-network emergency services in order to ensure that individuals receive meaningful coverage for emergency services before they are subjected to balance billing.

In addition, the regulations provide model language for notices that must be provided to participants no later than the first day of the first plan year beginning on or after September 23, 2010, to inform them of their rights to:

• Choose a primary care provider or pediatrician when the plan requires designation of a primary care provider; and
• Obtain obstetrical and/or gynecological care without prior authorization.

The Department of Labor also has published a model notice here for use by employers:  http://www.dol.gov/ebsa/patientprotectionmodelnotice.doc

Our Employee Benefits Team is available to answer any questions you may have regarding the new health reform laws, or any other employee benefit matter.