How to determine if grandfathering your health care plan is a smart choice for your company Featured

8:00pm EDT September 25, 2010

As companies approach their open enrollment period, many are facing questions about the new rules under the health care reform act.

One of the biggest decisions they will initially need to make is whether they want their current plan to be grandfathered under the former rules, exempting them from some of the new mandates but locking them into the terms of their current plan, says Toni Pilzner, a member at McDonald Hopkins PLC.

“Employers should evaluate their plans and determine whether they want them to remain grandfathered,” says Pilzner. “It is a balancing act between the constraints of being grandfathered versus the cost of losing that status.”

Smart Business spoke with Pilzner about the benefits and pitfalls of retaining grandfathered status, and about how to determine which option is right for your company.

What does a company need to consider when determining whether it wants its group health plan to remain grandfathered?

If your plan remains grandfathered, you essentially must keep your coverage and your plan exactly as they were on March 23, 2010. You cannot change your insurance company or increase any of your co-insurance percentages. You are limited on how much you can increase co-pays and deductibles and in how much you can decrease the employer contribution and increase the employee contribution. Keeping a plan grandfathered may not make sense from a flexibility and financial management stance.

If your plan is not grandfathered, the plan will have to provide first-dollar coverage for preventive benefits and your plan has to pay emergency care both in and out of network at the same level, and cannot require pre-authorization for emergency care. But, you have the freedom to change your insurance company, your coinsurance percentages and your co-pays and deductibles. Thus, it may pay to give up your plan’s grandfathered status for the financial flexibility.

What are the consequences of losing grandfathered status?

If you have a fully insured plan, the plan becomes subject to nondiscrimination rules. If your plan loses its grandfathered status, you must offer coverage to a broader range of employees, not just to your highly compensated employees. Your plan also becomes subject to more of the new mandates, such as having to provide first-dollar coverage for preventive benefits.

Realistically, I do not see any plans remaining grandfathered after 2014. And companies may end up providing the additional mandated benefits in their plans, whether they want to or not, because insurance companies have already indicated that they are putting all of the mandated benefits in all policies.

How will the new rules impact employer costs?

If you choose for your plan to not remain grandfathered, the additional mandates will likely increase your costs. If your plan does remain grandfathered, there may not be much impact in the first year. In the second and third year, however, the inability to increase employee contributions or deductibles will begin to increase your costs.

If you have a stated percentage of the premium that employees contribute, say 10 percent, that stays in place. If the premium goes up $100, the employee picks up $10 and the employer picks up $90. You cannot shift any additional costs to employees. It will catch up with you, and those additional costs will get fairly severe.

In addition, there is nothing in the reform bill that limits how much insurers can charge in premiums. If your plan remains grandfathered, the insurer knows you cannot leave because your plan will lose its grandfathered status, so in theory it can charge whatever it wants. Thus, keeping your plan grandfathered could lock you into a structure that is probably unworkable. Employers need flexibility to change elements in their health plan structure in response to competitive pressures and the economic situation.

Companies should shop around to see if they can get a lower rate on their group health insurance. Their plans will lose their grandfathered status if they change insurance companies, but the employers could still come out ahead if the cost for providing the additional mandated benefits is less than the increase in cost for their plans to remain grandfathered.

Also, some companies are already looking ahead to 2014, when the penalties for not offering insurance are scheduled to come into play, and realizing that paying the penalty will cost less than they are paying for benefits now. With a penalty of $2,000 per year, per employee at companies with more than 50 full-time-equivalent employees, it may be cheaper for them to just walk away from providing health coverage.

What should employers be doing now to prepare for the upcoming changes?

Most companies with calendar-year plans are in open enrollment planning now and should be looking at the changes they are going to make as of January 1, 2011. You need to be aware that, should you choose to walk away from grandfathered status, there are additional new benefits that you must begin providing as of that date.

If your plan is fully insured, you also need to consider the nondiscrimination requirements and balance the cost impact of giving up the ability to offer coverage to a limited group of employees against the cost of remaining grandfathered.

The changes are forcing companies to review their benefits structure on an ongoing basis, take a closer look at their benefits structure and do a lot more analysis of the benefits they provide. To do that, employers need the expert help of an actuary or broker to help them compare the costs of maintaining their plan’s grandfathered status versus the net cost of adding additional new mandates as offset with any increases in co-pays and deductibles and employee contributions. There will be a lot of balancing going on.

Toni Pilzner is a member at McDonald Hopkins PLC. Reach her at apilzner@mcdonaldhopkins.com or (248) 220-1341.