Hanging on to ‘grandfathered’ status may be challenging

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It’s health care renewal time at many companies, and this year the Patient Protection and Affordable Care Act, also known as ObamaCare, has added a new wrinkle into that complex process.

The word being heard in the HR suite this year is “grandfathered.” The bill contains a “grandfather” provision that allows a company to maintain its health plan as it existed previously, and excludes them from making many of the changes the bill calls for, which may raise the costs for both the company and employees.

The Web site for the federal Department of Health and Human Services says that the “purpose of the grandfather regulation is to help people keep existing health plans that are working for them.” Such grandfathered health plans will be able to make routine changes to their policies and still maintain grandfathered their status. But some changes to a plan would revoke that status. Among them, employee plans cannot significantly reduce benefits, cannot introduce hefty raises to co-insurance or co-pay charges or deductibles, cannot make a major reduction in the amount they contribute
to the plan, cannot add or tighten annual limits on what the insurer will pay and
cannot change insurance companies.

What’s the upside to grandfathered status? “The primary advantage is the compliance
with some of the new rules, which can be costly,” said David Goldfarb, founder and principal of Dallas, Texas-based DSG Benefits Group, an independent employee benefits brokerage and consulting firm “Grandfathered plans are exempt from some of the law’s immediate requirements, such as covering specified preventive services without cost sharing.”

Of course, the devil is in the details, and there are a lot of details. “Given the complexity of the new law and the grandfather regulations in particular, we recommend the employer consult a professional advisor to verify their actions to retain grandfathered status are in compliance with the law,” explained Tom Lerche, senior vice president
at Chicago-based Aon Hewitt. “The employer must check and re-check changes
in co-payments, deductibles and other cost sharing to ensure they have followed
the permitted changes in the new law. Changes in cost sharing must fall within
specified limits to retain grandfathered status. There are also provisions related to
merger and acquisition that must be followed to retain grandfathered status.”

Lerche also noted that there may be situations where allowing grandfathered
status to lapse in the best choice: “If medical plan renewal costs for 2011 are
significant, then the employer is limited by grandfathered plan rules as to how
much of that cost can be passed along to employees in the form of higher cost
sharing or higher employee contributions. The employer will in effect be paying
a higher portion of renewal costs in order to retain grandfathered status. The
same process and calculations for retaining grandfathered status must be done in
2012 and 2013.”

Retaining grandfathered status allows a company to avoid some of the new
health reform provisions, Lerche said, “however, maintaining grandfathered status
in the face of an eight to 11 percent renewal increase is difficult for employers
and plan sponsors in today’s economic environment.”

“An employer may not be able to maintain a grandfathered plan if they receive a 30-
to-40 percent rate increase on their group health insurance plan,” Goldfarb agreed.
Some companies, of course, have special issues.

“Employers that currently have ‘carveout’ 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,” Goldfarb noted. “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.”

What about 2012 and beyond?

“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 the health care reform bill,” Goldfarb said. “It will certainly be more difficult for smaller employers -- employers with 3 to 99 employees -- to maintain grandfathered status. The
Obama administration has projected that between 39 and 69 percent of small and large employer group plans will relinquish their grandfathered status by 2013. More specifically, it is projected that up to 80 percent of small employers will not maintain grandfathered status by 2013. Some recent surveys indicate that, although 52 percent of employers that sponsored a health plan expected to have at least one grandfathered plan in 2011, only 35 percent expected to have a grandfathered plan in force in 2013.”
And, of course 2014 , “is when many of the more restrictive rules begin to apply,” Goldfarb noted.