What To Expect Over The Next Four Years From Healthcare Reform's Dramatic Redesign Of The Insurance Industry

June 14, 2010

Unless you have been living under a rock, you are most likely aware that at the end of March this year, President Obama signed into law the Patient Protection and Affordable Care Act (“PPACA”) and the Health Care and Education Reconciliation Act (together the “Act”), which embody one of the largest social reforms this country has seen in over 50 years.

The Act combines a mix of public and private reforms affecting employers, individuals, and medical care providers, but undoubtedly the most significant reforms impact the private insurance industry.

This legislation can be broken down into two phases, those changes taking place in the short term before mandatory state based exchanges become operational in 2014, and those changes taking place after 2014 and beyond. Changes taking place now and until 2014 represent significant modifications to the existing insurance market; whereas changes taking place beginning in 2014 will essentially redefine the insurance market.

Whether or not an insurance policy or group health plan is considered “grandfathered” (in effect prior to the passing of the Act) has implications for application of certain provisions of the Act. Further guidance is needed to determine what might cause an insurance policy or group health plan to lose its grandfathered status.

This article will provide an overview of the more immediate changes the Act will have on insurers, and in some instances group health plans, over the next few years in the following three areas: (1) policy expansions; (2) policy restrictions; and (3) policy reporting. Future articles will address subsequent reforms and changes that will begin to take effect during years 2014 and beyond.

Policy Expansion

Creation of Temporary High Risk Pools

One of the most significant policy expansion measures will allow states to elect whether to establish a temporary high risk pool for individuals who have been denied insurance coverage based upon a pre-existing condition. Michigan is one of many states that has chosen to take part in this program, which is scheduled to become effective July 2010. The high risk pool will be a temporary insurance program with financial assistance for those who have been uninsured for several months and have been denied health care coverage on the basis of a pre-existing condition. Federal funding is capped at $5 billion, and this program will automatically terminate when the state based health exchanges become operational in 2014.

The Act includes sanctions for insurers who discourage currently enrolled individuals from remaining enrolled – thus preventing socalled “dumping” into the high risk pool. Although the Act does not define what might constitute “discouragement”, the Secretary of Health and Human Services (“HHS”) is charged with establishing criteria which must include in part whether the insurer offered compensation in exchange for voluntary dis-enrollment, or whether the insurer informed the individual that the policy is no longer available. An insurer who violates this provision will be required to reimburse the state’s temporary high risk pool for any medical expenses incurred after dis-enrollment.

Entities who wish to take part in the high risk pool program must: (1) be either a state or nonprofit private entity; (2) submit an application containing information yet to be determined by the Secretary; and (3) agree to use any contract funding to establish and provide health insurance to eligible high risk individuals. This provision of the Act is one of many that requires further development and expansion by HHS.

Mandatory Coverage For Children Under 26

Health insurance plans typically limit coverage to dependent children under the age of 19, or often up to the age of 24 for full-time students. Many states required extended coverage of dependent children beyond age 24. However, those state law mandates apply only to fully insured health plans; not to self-funded plans, due to ERISA preemption. As a result, there is a great deal of variation in dependent coverage across state lines. The Act is designed to ensure expanded and more uniform coverage of adult aged children, who have been disproportionately uninsured due to a lack of affordable coverage options.

For plan years beginning after September 23, 2010, insurers of either a group health plan or an individual health insurance policy will be required to provide coverage to all enrollees’ children under age 26, regardless of marital or student status. The Act does not require coverage to be extended to any other family members of the child, such as that child’s spouse or children. Importantly, for grandfathered group health plans or individual policies, insurers must cover only those adult children who are not eligible to enroll in their own employer-sponsored health plan.

Elimination of Exclusions for Pre-existing Conditions in Children Under Age 19

For plan years beginning after September 23, 2010, insurers and group health plans may no longer exclude coverage for children with preexisting conditions who are under the age of 19. In 2014 the law  will extend this prohibition to all covered individuals, children and adult alike. This prohibition applies to both grandfathered and nongrandfathered plans.

However, it does not appear that this provision requires insurers to offer new insurance coverage to children with pre-existing conditions. Rather, the language only seems to require insurers to continue to provide coverage to current enrollees. This has already led to controversy and will likely lead to further developments to more accurately implement the intent of this provision, which was to ensure coverage for all children with pre-existing conditions.

Elimination of Rescissions

Also beginning with plan years starting after September 23, 2010, rescission of coverage will be prohibited except in cases of fraud or intentional misrepresentation, in which case the enrollee must be given notice prior to rescission. This prohibition affects both grandfathered and non-grandfathered plans. As a practical matter, this provision has more application to individual policies issued by insurance companies rather than group plans, which typically offer coverage as a benefit of employment, and not subject to application or underwriting restrictions.

Policy Restrictions

Restrictions on Lifetime and Annual Limits

Lifetime limits on coverage are prohibited by the Act for plan years beginning after September 23, 2010. In addition annual limits are restricted in the short term, but are also fully prohibited after 2014. For plan years beginning after September 23, 2010, annual limits are only permitted with respect to so-called “essential health benefits”, which are outlined but not fully defined by the Act. Categories of essential health benefits include: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance abuse services; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services; and pediatric services. Further guidance is expected from the HHS as to what type of care is included within these categories. The restrictions on lifetime and annual limits apply to grandfathered and non-grandfathered plans alike.

Restrictions on Cost Sharing for Preventive Health Services

For plan years beginning after September 23, 2010, non-grandfathered plans will be required to provide certain preventive services without requiring any cost sharing by the insured or enrollee for services including: (1) preventive care services with a US Preventive Services Task Force rating of A or B; (2) immunizations recommended by the CDC; (3)preventive care and screenings for infants, children and adolescents; and (4) additional preventive care screenings for women including breast cancer screenings and mammography. The Act provides that the preventive services described in this section are considered the minimum standard, and that insurers are free to include additional coverage for other preventive care services.

Choice of Primary Health Care Provider & Emergency Services

The Act contains a “patient protection” provision, which addresses limitations on choice of providers, limitations on coverage for out-ofnetwork emergency services, and requirements to obtain a referral for treatment by certain specialists. The Act requires group health plans and insurers to allow participants, beneficiaries and enrollees to select their primary care provider or pediatrician from any available participating primary care provider. Additionally, the Act precludes prior authorizations for emergency services, as well as limitations on coverage based on whether the emergency provider is considered in-network or out-of-network. Further, female enrollees must be allowed to obtain obstetrical or gynecological care without a referral from a primary care provider. This provision does not apply to grandfathered plans.

Appeals Process

New grievance and appeal procedures will be required for nongrandfathered plans, for plan years beginning after September 23, 2010. These procedures can be divided into internal and external appeal requirements.

First, a group health plan or insurer must have an effective internal process for appealing coverage determinations and claims, which must include the following: (1) notice to enrollees in a “culturally and linguistically appropriate manner” of the availability of the appeals process; (2) availability of customer assistance or an ombudsman; (3) an opportunity to review the enrollee’s own file and present evidence on his or her behalf; and (4) continuation of coverage during the appeals process. For the time being, with respect to group plans and group insurance coverage, this internal process must incorporate the current ERISA claims procedures regulations and must update such process in accordance with Department of Labor guidance. Individual policies will also be governed by standards to be established by HHS.

Second, an external appeals process must be established that meets the National Association of Insurance Commissioners (“NAIC”) Uniform Review Model Act, or if the state has not adopted a standard external review process, then the process must meet the requirements set forth by HHS.

Nondiscrimination on Highly Compensated Individuals

Finally, for plan years beginning after September 23, 2010, an insured group health plan must comply with certain requirements in Internal Revenue Code Section 105(h) which prohibit discrimination in favor of highly compensated employees. Formerly, only self-insured plans were only subject to this non-discrimination requirement. This provision, however, does not apply to a grandfathered plan.

Policy Reporting

Reporting Of Unreasonable Rate Increases

In an effort to curb increases in premiums and to “ensure that consumers get value for their dollars”, the Act creates a number of reporting requirements allowing for more federal and state oversight into the health insurance industry. States are to work in conjunction with HHS to establish a process for annual review of unreasonable increases in premiums for health insurance coverage for the plan year beginning after September 23, 2010. This review process requires health insurance issuers to submit justification for an “unreasonable” premium increase prior to the implementation of the increase, which must be permanently posted on an issuer’s website. No guidance has yet been provided for what might be deemed “unreasonable” – so as to trigger this justification and notice requirement. This provision does not apply to grandfathered plans.

Reporting on Certain Plan Benefits and Structures

By 2012, HHS is required to provide guidance to group health plans and insurers for new reporting requirements concerning plan benefits and provider reimbursement structures that address quality of care issues in the following ways:

• implementing case management, care coordination, chronic disease management, and medication and care compliance activities for treatment or services;
• implementing activities to prevent hospital readmissions;
• improving patient safety and reducing medical errors through best clinical practices, evidence based medicine and health information technology; and
• implementing wellness and health promotion activities.

Reports with this new information must be submitted to HHS annually, and made available to enrollees at open enrollment.

Minimum Loss Ratios and Rebates

Purportedly in an effort to bring down the cost of health care coverage, beginning no later than January 2011, insurers will be required to report the percentage of total premium revenues that their coverage expends on: (1) reimbursement for clinical services; (2) activities that improve health care quality; and (3) all other non-claims costs. For large group coverage – more than 100 enrollees in one plan – if more than 15% of the premium revenue is expended on non-claim costs, then an annual rebate must be paid to each enrollee. For the small group market or individual market, if more than 20% of the premium revenue is expended on non-claim costs, an annual rebate must be paid to each enrollee. This provision will apply to grandfathered plans. By December 31, 2010, the NAIC is required to provide HHS with a method of calculation of these “minimum loss ratios” as well as other applicable definitions and guidance such as which type of activities are to be considered non-claims related, and when and how rebates are to be issued.

Standard Explanation of Coverage

No later than one year after the enactment of the Act, in collaboration with the NAIC and others, HHS is to issue standards for group health plans and insurers to use in drafting summary of benefits and coverage explanation documents. Coverage information must be presented in an uniform format, not to exceed four pages in length, no smaller than 12 point font, and must satisfy the following criteria:

• worded in a “culturally and linguistically appropriate manner” with terminology determined to be understandable by the average health plan enrollee;
• includes an information and definition section for common insurance terms, including the dollar amount for benefits;
• lists exceptions, reductions and limitations on coverage;
• clearly explains cost-sharing provisions;
• explains renewability and continuation of coverage;
• provides examples of common benefit scenarios;
• includes a statement of whether the plan provides minimum essential benefits;
• includes a statement as to whether the plan meets 60% of actuarial value;
• includes a statement that the outline is just a summary of health benefits; and
• includes a contact number or a web link where a copy of the actual individual coverage policy or group certificate of coverage can be reviewed and obtained.

These standards will preempt any standards established by the States regarding a summary of benefits coverage explanation. This provision applies to grandfathered plans. Willful failure to provide this information will result in a fine of $1,000 for each failure.

Federal Website on Affordable Coverage Options

Finally, in an effort to provide enrollees and consumers with more information, starting on July 1, 2010, HHS is charged with establishing an Internet website that will identify affordable health insurance coverage options by State, including the following: (1) insurance considered to be “full health coverage”; (2) Medicaid coverage; (3) Social Security coverage for children; (4) the temporary high risk pool, if available; and (5) coverage within the small group market for small businesses and their employees, including reinsurance for early retirees, tax credits for small business, and other information specifically for small businesses regarding affordable health care options. The format and precise content of the website are yet to be determined, and the website may be hosted by a private entity, in HHS’ discretion.


The reforms discussed here embody some of the major changes affecting insurers and group health plans in the short term. As these provisions are interpreted and new regulations are issued, Dickinson Wright will continue to analyze the potential impact and provide updated guidance. Stay tuned for future Client Alerts on the additional long-term reforms insurers will face for years 2014 and beyond.

For any questions on the immediate impact of the PPACA, please contact:

Kimberly J. Ruppel is a member in the Troy
office. Her expertise is in Insurance & Healthcare and
ERISA Litigation, including defending benefit denial
disputes and breach of fiduciary duty allegations.
She can be reached at 248.433.7291 or kruppel@

Timothy M. Iannettoni is an associate in the
Detroit office. He can be reached at 313.223.3142 or