Will majority of employers lose their grandfather status?

Ever since the Health Reform bill was signed into law, benefit professionals have been concerned about the lack of details found in the plan. Even though the law contained over 2,000 pages of legislation, they left vast amounts of regulations to the Department of Health and Human Services, the IRS and the DOL.

One of the important unanswered questions was “what is a grandfathered plan” and what changes can an employer make yet still retain that status? Maintaining grandfather status would allow an employer to avoid certain mandated benefit plan provisions.

This week some of those questions have been answered in a announcement by HHS. According to the release employers will be able to make modest changes to their plans while still being able to maintain their grandfather status. Compared to an employer’s medical polices in effect on March 23, 2010, grandfathered plans:

Cannot Significantly Cut or Reduce Benefits.  Examples they provided included a prohibition of a plan to no longer cover care for people with certain types of diseases such as diabetes, cystic fibrosis or HIV/AIDS. From a practical perspective, this shouldn’t have much of an impact since most employers don’t do this anyway.

Cannot Raise Co-Insurance Charges.  Typically, co-insurance requires a patient to pay a fixed percentage of a charge (for example, 20% or 30% of a bill).  Grandfathered plans cannot increase this percentage. Recently there has been a trend by employers in some states to include in-network coinsurance. Organizations will have to think twice before allowing for such a change to take place.

Cannot Significantly Raise Co-Payment Charges.  Frequently, plans require patients to pay a fixed-dollar amount for doctor’s office visits and other services. Compared with the copayments in effect on March 23, 2010, grandfathered plans will be able to increase those co-pays by no more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation plus 15 percentage points.  For example, if a plan raises its copayment from $30 to $50 over the next 2 years, it will lose its grandfathered status.

Cannot Significantly Raise Deductibles.  Many plans require patients to pay the first bills they receive each year (for example, the first $500, $1,000, or $1,500 a year). Compared with the deductible required as of March 23, 2010, grandfathered plans can only increase these deductibles by a percentage equal to medical inflation plus 15 percentage points.  In recent years, medical costs have risen an average of 4-to-5% so this formula would allow deductibles to go up, for example, by 19-20% between 2010 and 2011, or by 23-25% between 2010 and 2012.  For a family with a $1,000 annual deductible, this would mean if they had a hike of $190 or $200 from 2010 to 2011, their plan could then increase the deductible again by another $50 the following year. 

Cannot Significantly Lower Employer Contributions.  Many employers pay a portion of their employees’ premium for insurance and this is usually deducted from their paychecks. Grandfathered plans cannot decrease the percent of premiums the employer pays by more than 5 percentage points (for example, decrease their own share and increase the workers’ share of premium from 15% to 25%).

Cannot Add or Tighten an Annual Limit on What the Insurer Pays.  Some insurers cap the amount that they will pay for covered services each year.  If they want to retain their status as grandfathered plans, plans cannot tighten any annual dollar limit in place as of March 23, 2010.  Moreover, plans that do not have an annual dollar limit cannot add a new one unless they are replacing a lifetime dollar limit with an annual dollar limit that is at least as high as the lifetime limit (which is more protective of high-cost enrollees). 

Cannot Change Insurance Companies.  If an employer decides to buy insurance for its workers from a different insurance company, this new insurer will not be considered a grandfathered plan.  This does not apply when employers that self insure their coverage switch plan administrators or to collective bargaining agreements. This last limitation is the most problematic for small businesses as carriers that use community rating models tend to shift their competitiveness from year to year.

Based on the restrictions above, we anticipate that a majority of employers will lose their grandfather status within the next three years.

This post has been provided by Paul Lambert, Principal of 360 Corporate Benefit Advisors

If you would like to keep informed with how health care reform will impact your business please email Paul at: plambert@360cba.com. Resources will also be posted at: www.360cba.com.

Paul has been active in the field of group insurance and employee benefits consulting since 1979. His professional designations include a Certified Employee Benefit Specialist (CEBS) and Chartered Life Underwriter (CLU). Additionally, he is a Certified Insurance Consultant (CIC) in the State of Connecticut.

As a consultant, Paul brings strong skills in carrier premium/fee negotiations, plan benchmarking and problem resolution. He is a seasoned negotiator understanding the financial structure of benefit plans and the balancing of client needs and carrier risk tolerance. He is an avid client advocate bringing years of experience in resolving service and contractual issues.