The Patient Protection and Affordable Care Act (“ACA”) affords protections to patients and out-of-network providers to ensure that, when a patient is experiencing an emergency, he or she can seek treatment without hesitation or fear that he or she cannot pay. Further, these protections encourage out-of-network providers to accept patients without proof of payment, knowing that they will be reimbursed at an amount at least equal to an in-network rate by the patient’s insurer.

However, the ACA provides an exemption from certain protections—such as cost-sharing requirements and reimbursement guarantees under what is commonly known as the “Rule of Three Regulation”—if an insurance plan meets certain “grandfathering” requirements under the Act. Such plans include any group health plan (both insured and self-funded) and any health insurance coverage in which an individual was enrolled on March 23, 2010, the effective date of the ACA.

A plan’s grandfathered status may easily be lost, however, entitling out-of-network providers to significantly higher reimbursement rates. This article explores the ACA’s reimbursement scheme, the effect that grandfathering has and has had on reimbursement to providers, and the circumstances under which a plan may lose its grandfathered status.

Cost Sharing Requirements

The ACA requires that non-grandfathered group health plans cover “essential health benefits,” which are defined to include, among other things, “emergency services” and “hospitalization.” For such emergency services, the ACA further requires that any cost-sharing imposed under a non-grandfathered group health plan must not exceed certain statutory limitations. This ensures that providers of emergency services are reimbursed at least at the in-network coverage rates.

Cost-sharing protections under the ACA can have a significant impact on the amount that an out-of-network provider is reimbursed under the plan. In certain instances where an insurer is exempt from such cost-sharing protections, a provider’s recovery could be effectively eliminated, as the burden of payment would be shifted to patients who are often unable to pay. Thus, if a patient experiences an emergency and seeks treatment at an out-of-network hospital, unless state laws provide patient protections against balance billing, the patient could be balance billed for any amount above what the insurer reimburses the provider.

For example, Patient 1 presents at Hospital A with a broken arm. The hospital accepts her, sets the arm, puts it in a cast and discharges her. The provider bills $1,000 for these services. However, Patient 1’s insurance only reimburses at the Medicare rate for out-of-network hospital services, amounting to only $500. In this instance, in order for the provider to recover the full billed amount, it would have to bill Patient 1 for the $500 not reimbursed by her insurer.

Most health plans provide that a patient who seeks treatment from an out-of-network provider may be balance billed for the difference between the charged rate and reimbursement rate under their insurance plan. In the above example, without the cost-sharing protections afforded by the Act, Patient 1 would be required to pay 50% of the charged amount for the services rendered. Often, patients cannot afford to pay the balance billed, which requires providers to either incur collection agency costs to recover the balance from patients, or write-off the loss. Both options are less than ideal.

The “Rule of Three Regulation”

To avoid this balance billing scenario discussed for emergency services, the U.S. Department of Health and Human Services enacted regulations under the ACA to limit patient responsibility and ensure that a patient’s insurance plan reimburse the provider, at a minimum, the in-network coverage rate for an emergency service. These requirements were intended to allow patients experiencing an emergency to seek treatment regardless of whether the provider hospital is in or out-of-network, and to allow the hospital provider to treat the patient without first requiring proof of payment. The ACA regulation requires, therefore, that an insurance plan must provide benefits for out-of-network emergency services in the amount equal to the greatest of the following three possible amounts:

  • 1. the median amounts negotiated with in-network providers for the emergency service furnished, excluding any in-network copayment or coinsurance imposed with respect to the participant or beneficiary;
  • 2. the amount for the emergency service calculated using the same method the plan generally uses to determine payments for out-of-network services (such as the usual, customary, and reasonable amount), excluding any in-network copayment or coinsurance imposed with respect to the participant or beneficiary; or
  • 3. the amount that would be paid under Medicare, excluding any in-network copayment or coinsurance imposed with respect to the participant or beneficiary.

This rule is commonly known as the “Rule of Three Regulation.”

Example

In the scenario with Patient 1 above, her group health plan covers individuals who receive emergency services with respect to an emergency medical condition from an out-of-network provider. The plan has agreements with in-network providers with respect to charges for treatment of a broken arm. The median in-network rate negotiated for this service is $800.

Meanwhile, the out-of-network provider charges $1,000 for the service. With respect to these services provided by out-of-network providers, the plan generally reimburses covered individuals 100% of billed charges for such emergency medical services. For the emergency service received by the individual, the amount payable under the plan is $1000.

The amount that would be paid under Medicare for the emergency service, excluding any copayment or coinsurance for the service, is $500.

Thus, in this example, the plan would have to pay the provider $1,000 under the second option of the Rule of Three Regulation. Here, the provider is paid its charged rate and the patient has no responsibility to pay a balance bill.

How does a plan lose its “grandfathered” status?

Plans in effect prior to March 23, 2010, were exempt from certain ACA requirements, including the cost-sharing requirements under the Rule of Three Regulation, as long as they complied with several restrictions. ERISA also requires that an ACA exempt plan include a statement explaining its grandfathered status in the Plan documents. Merely because the Plan includes that statement, however, does not necessarily mean the plan is grandfathered. A plan’s grandfathered status can easily be lost if the plan makes certain changes. These changes include if the plan or its sponsor:

  • 1. changes insurance companies;
  • 2. eliminates all, or substantially all, benefits to diagnose or treat a particular condition;
  • 3. reduces the employer contribution rate by more than 5 percent below the rate in effect on March 23, 2010;
  • 4. increases cost-sharing amounts (such as copayments and coinsurance) above certain thresholds;
  • 5. lowers annual or lifetime limits on the dollar value of benefits below certain thresholds;
  • 6. conducts a merger or acquisition, the principal purpose of which is to cover new individuals under a grandfathered plan; or
  • 7. transfers employees from one plan to another to reduce benefits without a legitimate, employment-based reason for the transfer.

Examples

If Patient 1’s plan, which originally required her to pay twenty percent of the negotiated rate, on March 23, 2010, increased her cost-sharing obligation to thirty percent in any year subsequent to 2010, the plan would lose its grandfathered status.

Under another common example, if a plan previously covered counseling and prescription drugs to treat certain mental and nervous disorders, but subsequently eliminates coverage for counseling, the plan would lose grandfathered status.

Loss of grandfathered status after collective bargaining agreements terminate

Another way plans may be grandfathered under the ACA is through a provision relating to collective bargaining agreements (CBAs). That provision provides that, for health insurance coverage maintained by one or more collective bargaining agreements between employer representatives and employers that was ratified before March 23, 2010, the plan is grandfathered until the date on which the last of the CBAs ratified prior to March 23, 2010, is revised or terminates.

Therefore, if a provider suspects that a plan under a CBA may no longer be grandfathered the provider must must discover the following information: 1) when the CBA was ratified; and 2) whether the CBA was revised, or 3) whether it is still in effect. If the CBA was not ratified before March 23, 2010, has been revised, or is no longer in effect, the plan has lost its grandfathered status.

Conclusion

As time passes, the percentage of grandfathered plans decreases as compliance with exemption requirements becomes more difficult. Providers with large claims who believe they have been underpaid by their patients’ plans should consult with an attorney to carefully review plan documents to determine whether a plan has lost its grandfathered status. The provider should seek the maximum reimbursement from the plan, which, where grandfathered status is lost, requires that the plan reimburse providers under the ACA’s Rule of Three Regulation.

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Anthony P. La Rocco is the Managing Partner of K&L Gates’ Newark office. He leads a national health care team involved in significant reimbursement litigation matters on behalf of health care providers against various insurance companies’ health benefits plans and their third party administrators related to under-payment and non-payment of claims for a variety of covered medical testing procedures conducted across the United States. Tony can be reached at anthony.larocco@klgates.com.

George P. Barbatsuly is a Partner in K&L Gates’ Newark office. His health care and ERISA disputes experience includes representing health care providers in disputes with payer insurance companies, health benefits plans, and third party administrators. George can be reached at george.barbatsuly@klgates.com.

Stacey A. Hyman is an Associate in K&L Gates’ Newark office. She focuses her practice on commercial disputes and insurance coverage, specifically insurance reimbursement recovery. Stacey can be reached at stacey.hyman@klgates.com.

Alyssa F. Conn is an Associate in K&L Gates’ Newark office. She focuses her practice on a range of complex commercial litigation and insurance coverage disputes in federal and state courts, including health care and ERISA disputes. Alyssa can be reached at alyssa.conn@klgates.com.