Employer Health Reform Issues Brief: Grandfathered Health Plan Status
Smart first steps
Group health plans that were in effect on March 23, 2010 and have continuously covered at least one individual since that date, are “grandfathered health plans,” meaning they are exempt from certain group health plan mandates imposed by the new health reform law.
Employers can choose whether and when to give up grandfathered health plan status on a plan-by-plan basis, or even just for one or more specific benefit package options within a single plan. The keys to the decision-making process are understanding the advantages and disadvantages of being a grandfathered health plan and knowing what actions will and will not result in losing that status.
The primary advantage to being a grandfathered health plan is being exempt from some — but not all — of the health reform law’s new group health plan mandates. The more significant new rules grandfathered health plans do not have to comply with include the following:
- Mandatory coverage of specific preventive services with no cost sharing
- Mandatory internal claims appeals and external review processes
- Ban on fully insured plans discriminating in favor of highly compensated employees
- Special patient protections with regard to designating a primary care provider, access to OB/GYN care and coverage of out-of-network emergency services
- Maximum annual out-of-pocket and deductible limits
- Mandatory quality reporting requirements
But there are potential disadvantages to being a grandfathered health plan as well. For example, any plan materials describing benefits for participants and beneficiaries must explain the plan is a grandfathered health plan and what that means and provide contact information for questions and complaints. There are recordkeeping requirements as well.
What group health plan mandates apply to grandfathered health plans?
Grandfathered health plans are not exempt from all new mandates imposed by the health reform law. The following apply to all group health plans, including grandfathered health plans:
- Ban on annual and lifetime limits
- Ban on waiting periods exceeding 90 days
- Extending eligibility for employees’ children until age 26
- Ban on preexisting condition exclusions
- Limits on rescissions of coverage
- Use of uniform explanation of coverage and standard definitions
However, probably the most significant potential disadvantage to grandfathered status is the limited flexibility to make certain changes to the plan or the plan sponsor’s premium contribution without causing the plan to lose grandfathered status. The types of changes that will cause a loss of grandfathered status include the following:
- Eliminating all or substantially all benefits to diagnose or treat a particular condition, including eliminating benefits for any necessary element to diagnose or treat a condition
- Increasing a coinsurance percentage rate by any amount
- Increasing a deductible or out-of-pocket limit by more than the “maximum percentage increase” (i.e., cumulative medical inflation plus 15 percentage points)
- Increasing a fixed-amount copayment by more than the greater of (i) $5 increased by medical inflation, or (ii) the maximum percentage increase
- Reducing the employer’s premium contribution rate based on cost of coverage by more than five percentage points for any tier of coverage
- Imposing a new overall annual limit on the dollar value of benefits
- Decreasing the dollar value of an existing annual limit on the dollar value of benefits
Note: medical inflation is currently running approximately 3.8 percent annually. The “maximum percentage increase” as measured from March 23, 2010 to January 1, 2011, is expected to be approximately 18 percent. Thus, for plan sponsors who are considering increases in deductibles or out-of-pocket limits effective January 1, 2011, in order to maintain grandfathered status, any such increases should be kept below this 18 percent. Unfortunately, the exact maximum percentage increase will not be known until after January 1, 2011, so an appropriate margin should be built into this calculation when plan designs are being finalized in the summer/fall of 2010.
Each of these changes is measured against the relevant plan terms or employer contributions in effect on March 23, 2010. Also, all relevant changes implemented after March 23, 2010, are aggregated and the effect is measured on a cumulative basis since March 23, 2010, for purposes of determining if a threshold has been exceeded.
Additionally, it is important to note that any new insurance contract issued after March 23, 2010, is not a grandfathered health plan. Among other things, this means a self-insured plan on March 23, 2010, cannot change to a fully insured arrangement without giving up grandfathered health plan status even if all other plan terms and employer contributions remain the same. However, self-insured plans generally can change third-party administrators without causing a loss of grandfathered health plan status.
Effective date: The grandfathered health plan provision is effective as of March 23, 2010. Special rules apply to plans maintained pursuant to one or more collective bargaining agreements.
Key implication: Cost
Grandfathered health plans do not have to comply with certain group health plan mandates that likely will increase plan costs — e.g., the mandates regarding preventive services coverage and external review processes. However, there are costs to keeping grandfathered status as well — including reduced flexibility for the plan sponsor to manage its costs by eliminating certain benefits or shifting cost increases to participants.
Key implication: Plan design
Sponsors of grandfathered health plans must be careful not to implement changes that will cause the plan to lose that status inadvertently. If or when a grandfathered health plan does lose that status, it will need to be updated to comply with all the group health plan mandates from which it previously was exempt.
Key implication: Communications
Grandfathered health plans must comply with mandatory disclosure requirements. Model language is available. However, these disclosures may encourage questions from participants about what it means to be a grandfathered health plan and how it will affect their rights and benefits.
Smart first steps for employers to consider
Cost: Determine the net benefit of retaining grandfathered health plan status and compare with the cost of giving up that status. If keeping grandfather status indefinitely does not make sense, determine the optimal time to give it up.
Plan design: Make decisions about keeping or losing grandfathered status on a plan-by-plan basis. For example, it might be necessary to retain grandfathered status for certain plans, such as fully insured executive-only plans, that would otherwise violate the health reform law’s new nondiscrimination rules. If and when a plan does lose grandfathered status, it will need to be updated to comply with all relevant group health plan mandates.
Communications: Develop a plan for disclosing grandfathered status, as well as for responding to questions about the effect on participants. Be prepared to explain how being a grandfathered health plan can be beneficial to participants in the form of lower overall plan costs and limits on changes to current cost-sharing arrangements.
As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.