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Weighing the Cost of Maintaining a Grandfathered Plan Under Health Care Reform

"Grandfathered" health plans (plans in existence on 3/23/2010, the enactment date of the Patient Protection and Affordable Care Act) enjoy exemption from some of the provisions of the health care reform law. However, in order to maintain grandfathered status, a plan must refrain from making certain changes, including those involving significant changes in plan design, cost-sharing or insurance carriers. Plan sponsors are attempting to balance the value of remaining grandfathered against the need to modify plan provisions in response to rising plan costs. Many are questioning whether the advantages of making changes to their plans outweigh the benefits of avoiding some reform mandates.

Bill Hartz, CEO of Banyan Consulting indicated, “We have been counseling employers to consider their organization’s financial needs closely when making benefit decisions for their upcoming renewal. Many of the key provisions in health care reform apply to both Grandfathered plans and non-Grandfathered plans, which will increase employer costs regardless of their status.”

In a recent Mercer survey, employers were asked to estimate what it would cost to meet the law's requirements for 2011, and the response was, on average, and addition of 2.3% to plan costs. Employers were also asked to predict how much their plan costs would rise if they made no cost-saving changes, and the response was an addition of 10.1%. That's the kind of increase that many employers will not be able to absorb. These estimates may indicate that for many employers, the cost-effective decision will be to comply with health care reform's mandates, in order to have the freedom to make plan design and insurer changes that fit into their overall cost-containment strategy.

Among the changes a grandfathered plan cannot make in order to maintain that status are raising coinsurance levels, increasing deductibles or out-of-pocket limits by more than medical inflation plus 15 percentage points, and raising copayment levels by more than the greater of $5 or a percentage equal to medical inflation plus 15 percentage points. For many employers, staying within these limits simply won't be an option. The Mercer survey reflects this: Even though it would mean loss of grandfathered status, 35% said they would consider raising deductibles/out-of-pocket limits, 31% would consider increasing employee coinsurance levels, and 23% would consider raising copays, beyond what's allowed under reform.

Employers also need to consider to what extent their plans might already be in compliance with provisions of health care reform. For example, one of the health care reform provisions that does not apply to grandfathered plans is the requirement that preventive care services, including immunizations and screenings, be covered with no cost-sharing for plan participants. Many plans already provide for this, and an increasing number continue to willingly move in this direction as recognition of the importance of preventive care grows.

In the coming months, employers with grandfathered plans will be examining their current plan design and assessing whether it will continue to meet their business needs, along with employees' health care needs. Based on the current financial strain the economy is in, it remains to be seen how many employers will decide they'd rather have the flexibility to change their benefit programs, rather than be restricted to the limited plan modifications allowed under the new law.

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Weighing the Cost of Maintaining a Grandfathered Plan Under Health Care Reform

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