Commencing with plan and policy years beginning on or after January 1, 2014, the Affordable Care Act amends the Public Health Service Act (“PHS Act”) to make three important changes to the rules governing health insurance underwriting practices that apply to the individual and group markets (but not to grandfathered arrangements):

PHS Act Section 2701, Fair Health Insurance Premiums

Under this provision, premium rates in the individual and small group market may only vary on the basis of (i) individual or family enrollment, (ii) geographic area (premium rates can vary by the area of the country), (iii) age (premium rates can be higher for an older applicant than for a younger applicant, but the ratio of premiums cannot exceed 3:1 for adults), and (iv) tobacco use (premium rates can be higher for smokers, but the ratio cannot exceed 1.5:1).

PHS Act Section 2702, Guaranteed Issue

This provision generally requires the guaranteed issuance of health insurance coverage in the individual and group market (small and large) under which insurers that offer coverage in the individual or group market generally must accept all applicants for that coverage in that market.

PHS Act Section 2703, Guaranteed Renewability

Small and large group and individual health insurance coverage must be guaranteed renewable at the option of the plan sponsor or individual, subject to specified exceptions.

This post addresses the last two items—guaranteed issue and guaranteed renewability. Though these two requirements are often referred to collectively as “guaranteed issue and renewability,” they arise under two separate and distinct statutory requirements, which differ from one another in ways critically important as they affect minimum participation and employer contribution requirements. (“Minimum participation” refers to the percentage of employees that must elect coverage for a carrier to agree to issue or renew the coverage; and “employer contribution” refers to the minimum employer contribution that is acceptable to the carrier. Both rules are intended to curb adverse selection.)

NOTE: Because self-funded plans are unaffected by the modified community rating, guaranteed issue and guaranteed renewability requirements, stop-loss issuers are free to impose minimum participation and employer contribution requirements at will, subject only to constraints imposed by the market.

The role of the guaranteed issue and guaranteed renewability rules was highlighted in the final regulations issued February 12 under the ACA’s employer shared responsibility rules. Brushing aside concerns that an applicable large employer would be penalized for failure to “obtain or maintain coverage” because of its inability to satisfy a health insurance issuer’s minimum participation requirements, the regulators opined:

“In the large group market, a minimum participation requirement cannot be used to deny guaranteed issue. For small employers, such as relatively small applicable large employers, final regulations issued by HHS provide that an issuer must guarantee issue coverage to a small employer during an annual, month-long open enrollment period regardless of whether the small employer satisfies any minimum participation requirement. See 45 CFR 147.104(b)(1).” [79 Fed. Reg. at p. 8,566] (Emphasis added).

This rational is only partially responsive. The concern raised by the commenters related to both the failure to “obtain”—i.e., guaranteed issue—and “maintain”—i.e., guaranteed renewability—the requisite minimum essential coverage. The response addresses only the former (guaranteed issue), but it is silent as to the latter (guaranteed renewability). To understand what’s missing, a brief detour into the particulars of the implementing regulations is in order. 45 CFR § 147.104(b)(1), to which the preamble to the final employer shared responsibility rules refer, provides, in relevant part:

“A health insurance issuer in the group market must allow an employer to purchase health insurance coverage for a group health plan at any point during the year. In the case of health insurance coverage offered in the small group market, a health insurance issuer may limit the availability of coverage to an annual enrollment period that begins November 15 and extends through December 15 of each year in the case of a plan sponsor that is unable to comply with a material plan provision relating to employer contribution or group participation rules as defined in § 147.106(b)(3) [and] pursuant to applicable state law . . . .” (Emphasis added).

The reference to a “plan provision relating to employer contribution or group participation rules” is both comforting and troubling: Comforting because the import vis-à-vis guaranteed issue is clear. In the large group market, minimum participation and/or employer contribution rules are not allowed; and in the small group market they are allowed other than during a designated open enrollment window (November 15 through December 15). The reference is troubling, however, because is alerts us to the fact that the inquiry may not end here.

The problem is 45 CFR § 147.106(b)(3), which reads (in relevant part):

(a) General rule. Subject to paragraphs (b) through (d) of this section, a health insurance issuer offering health insurance coverage in the individual or group market is required to renew or continue in force the coverage at the option of the plan sponsor or the individual, as applicable.

(b) Exceptions. An issuer may nonrenew or discontinue health insurance coverage offered in the group or individual market based only on one or more of the following:. . .

(3) Violation of participation or contribution rules. In the case of group health insurance coverage, the plan sponsor has failed to comply with a material plan provision relating to employer contribution or group participation rules, pursuant to applicable state law. For purposes of this paragraph the following apply:

(i) The term ‘‘employer contribution rule’’ means a requirement relating to the minimum level or amount of employer contribution toward the premium for enrollment of participants and beneficiaries.

(ii) The term ‘‘group participation rule’’ means a requirement relating to the minimum number of participants or beneficiaries that must be enrolled in relation to a specified percentage or number of eligible individuals or employees of an employer.

What this appears to mean—and it’s difficult to read this any other way—is that, while a carrier must accept an employer’s initial application for group health plan coverage without regard to the carrier’s minimum participation or employer contribution standards, the carrier is free to impose those standards at the next renewal. To say that this rule is troublesome is something of an understatement. Will this cause an employer to change carriers each year in order to avoid having to comply with minimum participation or employer contribution requirements? Or will market forces cause carriers to eliminate or at least loosen these rules?