Employers and the Decision of Maintaining "Grandfathered" Status

Updated: December 14, 2010

1. What do employers gain by maintaining "grandfathered" status?

If possible, employers that maintain "grandfathered" status benefit more so than employers who do not or cannot. The primary advantage that "grandfathered" health plans have over "non-grandfathered" health plans is the compliance with some of the new rules, which can be costly. "Grandfathered" plans are exempt from some of the law's immediate requirements, such as covering specified preventive services without cost sharing. Furthermore, the savings for some grandfathered plans could be even greater if an employer is able to retain their status after 2014 - this is when many of the more restrictive rules begin to apply to all other "non-grandfathered" health plans. Many of the larger employers may choose to maintain "grandfathered" plans so they will not be required to meet the new Appeals Process requirements, whereas "non-grandfathered" plans will be subject to these new parameters.

The following reform requirements will not apply to "grandfathered" group health plans so long as the status is maintained:

  • Cover immunizations and certain preventive care without cost sharing
  • Allow member choice of participating primary care physicians and pediatricians (applies to certain plans)
  • Allow direct access (no referral) to OB/GYN services (applies to certain plans)
  • Cover emergency services without pre-authorization or increased cost sharing if out-of-network (applies to certain plans)
  • Provide internal and external review processes for certain denied claims (applies to certain plans)
  • Eliminate discrimination in favor of highly compensated individuals
  • Prohibit discrimination based on participation in a clinical trial
  • Apply certain federal rating limitations in 2014 for small group plans (state rating rules will still apply)

2. Is it possible an employer might believe they have successfully maintained their "grandfathered" status, only to learn that they failed? What kind of mistakes might they make?
It is definitely possible for an HR department to mistakenly think they have maintained "grandfathered" status due to the strict guidelines. Prior to November 17th 2010, the health care reform bill indicated that any of the following changes to a plan would force it to lose "grandfathered" status:

  • Obtaining a new policy, certificate, or contract of insurance sold after March 23, 2010;
  • Significantly cutting or reducing benefits;
  • Raising coinsurance charges;
  • Significantly raising copay charges for any service by more than the annual rate of medical inflation (plus a one-time-only 15% or $5 increase, whichever is greater);
  • Significantly raising deductibles or out-of-pocket expenses by more than medical inflation (plus a one-time-only 15% increase);
  • Significantly lowering employer contributions by more than 5%;
  • Adding or tightening an annual limit on what the insurer pays;
  • Eliminating benefits for a particular condition;
  • Restructuring the company;
  • Moving employees to a plan with lesser benefits; or,
  • Switching carriers under a fully-insured plan***

Just a couple of weeks ago, the IRS, the Department of Labor's Employee Benefits Security Administration (EBSA) and the Office of Consumer Information and Insurance Oversight in the Department of Health and Human Services (HHS) issued an amendment to interim final rules on grandfathered health plans under the Patient Protection and Affordable Care Act (PPACA). The new amendment "allows all group health plans to switch insurance companies and shop for the same coverage at a lower cost while maintaining their grandfathered status, so long as the structure of the coverage doesn't violate one of the other rules for maintaining grandfathered plan status." The amendment only applies to fully-insured group health plans - a switch of health insurance carriers and change of policy in the individual market would still result in the loss of grandfathered status.

The HHS website states further "the purpose of the grandfather regulation is to help people keep existing health plans that are working for them. This amendment furthers that goal by allowing employers to offer the same level of coverage through a new issuer and remain grandfathered, as long as the change in issuer does not result in significant cost increases, a reduction in benefits, or other changes described in the original grandfather rule." HHS notes that "the original regulation only allowed self-funded plans to change third-party administrators without necessarily losing their grandfathered plan status." The revised regulation impacts "insured group health plans" but not the "individual market." HHS elaborates that "(u)nder this amendment, all employers have the flexibility to keep their grandfathered plan but change insurance company or third-party administrator." The regulation was motivated in part to allow employers to shop around for better-priced insurance.

Due to the stringent rules (and lack of ample time provided to employers) associated with maintaining "grandfathered" status, it is likely that employers that made a plan change between March 23 and June 14, 2010, will be allowed (upon renewal) to change back to their original plan if they want to retain grandfathered status.

The amendment is was published November 17th, in the Federal Register.

An employer making the following benefit changes would not cause loss of grandfathered status:

  • Adding employees to a plan;
  • Complying with federal or state law;
  • Increasing employee contributions by 5% or less; or,
  • Voluntarily changing benefits to comply with healthcare reform

3. Are there disadvantages associated to maintaining "grandfathered" status?

One of the major disadvantages of maintaining "grandfathered" status directly relates to the lack of flexibility an employer has in modifying their existing plan(s) or adopting some short-term measures to control costs. Prior to the announcement of the newest amendment (to be published November 17th), most employers appreciated the opportunity to change insurance carriers, arguing that their ability to "shop" for a more cost effective plan is one important way to curb rising health insurance premiums.

4. Is it worth the effort to maintain "grandfathered" status?

What it really comes down to is whether or not an employer is willing and able to work within the specified limits. An employer may not be able to maintain a "grandfathered" plan if they receive a 30-40% rate increase on their group health insurance plan. It is unlikely that an employer would be willing and able to absorb the entire increase without cost shifting, without making any significant benefit modifications such as increasing deductibles and/or copays, or without the option of introducing a new type of plan such as a CDHP (consumer-driven health plan) typically tied with an HSA (Health Savings Account).

Conversely, if an employer receives a relatively small rate increase on its group health insurance plan, and are willing and able to not make significant changes to their current plan, maintaining "grandfathered" status is unquestionably something to strongly consider. The decision on whether or not to maintain "grandfathered" status should not be taken lightly because of the associated long-term ramifications. Employers should consider the benefits and burdens of grandfathering, keeping in mind that "grandfathered "plans will be subject to severe ongoing restrictions on future benefit changes. Many of those restrictions are cumulative, meaning that grandfathered plans will be substantially locked into benefits in effect on March 23, 2010.

There are some employers that should give the decision on whether or not to maintain "grandfathered" status even additional consideration. Employers that currently have "carve-out" plans, meaning the employer might provide medical insurance coverage to a select class of employees such as salaried, executives, managerial, etc., need to diligently weigh their options. Generally, if an employer maintains "grandfathered" status, they can avoid some of the non-discrimination testing and enforcement related to "carve-out" designs that will apply to "non-grandfathered" plans. Plans that are deemed discriminatory may potentially be fined up to $100 per day per employee (until the employer becomes compliant). Similar to the amendment published on November 17th, many of us are waiting on additional guidance and clarification in this particular area. There will most likely be several additional updates and amendments that occur from now until December 31st 2010.

5. Is it only a matter of time before all employers lose "grandfathered" status?

I am not sure if anyone, including the President, could provide an accurate answer to this question due to the exponentially increasing number of variables related to PPACA, the 2,000+ page health care reform bill, now commonly referred to as "Obamacare." It will certainly be more difficult for smaller employers (which the administration defines as employers with 3-99 employees) to maintain "grandfathered" status. The Obama administration has projected that between 39-69% of small and large employer group plans will relinquish their "grandfathered" status by 2013. More specifically, it is projected that up to 80% of small employers will not maintain "grandfathered" status by 2013. Some recent surveys indicate that, although 52% of employers that sponsored a health plan expected to have at least one grandfathered plan in 2011, only 35% expected to have a grandfathered plan in force in 2013.

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