Small Employer Health Plans Faced with Rising Premiums: Weighing the Decision to Maintain Grandfathered Status Versus Adopting Short-Term Measures to Control Costs
By Julie S. Harada, Gorman & Williams, Baltimore, Maryland
Employer premiums have risen by about six percent annually for the past five years.1 A recent survey by the Kaiser Family Foundation found that premiums for family plans rose nine percent in 2011.2 Small employers with fewer than 500 employees that offer fully-insured plans may be especially hard hit, as it is predicted they’ll incur an increase of nearly 12 percent in premiums if they make no changes other than those now required by the 2010 Patient Protection and Affordable Care Act (“PPACA”), a greater increase than the nine percent predicted for larger employers.3
Some small employers tend to think that maintaining grandfathered status under PPACA is the best option in terms of controlling costs. Others are concerned that the additional costs of searching for, comparing, and choosing plans – grandfathered or not – is too time-consuming and costly of a task when they are already faced with high administrative costs and choose not to weigh their options at all.
This article briefly summarizes the grandfathering rule and highlights those provisions that are most likely to affect a small employer’s costs. Small employers can then familiarize themselves with the grandfathering rule provisions in comparison to the provisions of their plan(s), meet with their health plan broker, and together come up with the most cost-effective plan for them. Ideally, this evaluation will be done on a yearly basis to consider new changes in applicable health law.
THE GRANDFATHERING RULE UNDER PPACA4
All health plans in effect on March 23, 2010, the date of enactment of PPACA, were automatically given grandfathered status, which means plans do not have to comply with certain PPACA reforms that are effective now or in 2014. A grandfathered health plan, however, is very limited in the type of and amount of cost-sharing changes it can make and still remain grandfathered. In light of rising premium costs, many employers will have to decide whether to (1) maintain grandfathered status of health plans to avoid the additional costs of complying with certain reforms of PPACA that are not applicable to grandfathered health plans, or (2) adopt short-term measures to control their share of rising premium costs now, such as increasing deductibles or changing insurers, to an extent that will forfeit a plan’s grandfathered status.
PPACA Provisions Applicable NOW to All Plans Regardless of Grandfathered Status
PPACA requires major reforms in employer health plans. Some reforms are applicable now to all employer health plans regardless of grandfathered status.5 Those reforms prohibit plans from the following: imposing a preexisting condition exclusion on enrollees less than 19 years old; imposing lifetime limits; imposing annual limits less than $1.25 million per person; 6 and rescinding health coverage after coverage begins (except in the case of fraud or intentional misrepresentation). Plans are also required to provide enrollment opportunities for dependent coverage until age 26 if the adult child is not eligible for other employer-sponsored health plan coverage.
PPACA Provisions Applicable to All Plans in 2014
Other reforms are applicable in 2014 to all employer health plans regardless of grandfathered status. Those reforms are: plans may not impose a waiting period for enrollment that exceeds 90 days; plans must provide dependent coverage until age 26 regardless of the adult child’s eligibility to enroll in any other plan; plans may not exclude individuals of any age due to a preexisting condition, and plans may not impose any annual limits.
PPACA Provisions NOT Applicable to Grandfathered Plans – Now and in 2014
There are two groups of reforms in which cost saving can be realized by an employer health plan that maintains its grandfathered status: reforms effective now and reforms effective January 1, 2014. Reforms effective now that are not applicable to grandfathered plans are: plans must provide general patient protections, such as guaranteed access to OB-GYNs and pediatricians; plans must not increase enrollee cost-sharing for out-of-network emergency services; and plans must cover certain preventive services, immunizations, and screenings without any cost to the enrollee.
Reforms effective January 1, 2014 that will not be applicable to grandfathered plans are: plans must guarantee renewal of coverage regardless of health status, prior utilization of health services, or any other related factor; and plans must provide comprehensive health insurance coverage that includes essential benefits that have yet to be defined. 7
EVALUATION OF A PLAN – STEPS TO TAKE, TOOLS AVAILABLE, OTHER CONSIDERATIONS
If an employer health plan loses grandfathered status now, the plan will have to comply with all reforms, including those not applicable to grandfathered plans until 2014. Employers will want to learn the various reforms and their applicability to grandfathered plans, the effective date of each reform, and with which reforms the plans are already in compliance. The employer’s health plan broker can help determine whether maintaining grandfathered status is most cost effective.8 Tools may be available to make this premium cost comparison. For example, the Maryland Health Care Commission’s VIRTUAL COMPARE web portal allows employers to compare the costs of new plans.9 Other states’ department of insurance websites may offer similar tools, as may the federal government’s website at www.healthcare.gov .
Some employer health plans may find that the reforms effective in 2014 will impose the greatest increase in premium costs, requiring a difficult choice of whether to maintain grandfathered status until 2014 and beyond to avoid those future increased costs altogether, or whether to implement cost control measures now and lose grandfathered status. The effects of the various PPACA provisions on premiums and offer rates for small firms will vary based on the size and risk profile of the individual firms, as well as on their pre-reform insurance status and health plan offerings.
HOW TO MAINTAIN GRANDFATHERED STATUS IF DETERMINED TO BE THE BEST OPTION FOR EMPLOYER
There is no requirement for an employer to apply for grandfathered status if an employer chooses to maintain grandfathered status. For as long as the employer takes the position that a health plan is grandfathered, it must maintain records documenting the terms of the health plan in effect on March 23, 2010 for comparison with later health plans, and the employer must make such records available for examination upon request. Any plan materials provided to participants or beneficiaries must include a statement that the employer believes it is a grandfathered health plan within the meaning of PPACA, and provide contact information for questions and complaints.10 To maintain grandfathered status, the plan may not increase any deductibles in place on March 23, 2010 by more than 15 percentage points beyond medical inflation, the plan may not increase any copays in place on March 23, 2010 by the greater of $5 or 15 percentage points beyond medical inflation, and the plan may not increase any percentage cost-sharing requirements in place on March 23, 2010, e.g., an individual’s coinsurance requirement of 20 percent for inpatient surgery, by any amount. In addition, the plan may not eliminate coverage to diagnose or treat a particular condition such as asthma or diabetes, the employer may not decrease its contribution rate by more than five percentage points below the contribution rate in place on March 23, 2010, and the plan may not impose a new or lower annual or lifetime limit.
As long as the above requirements are met, an employer health plan does not lose grandfathered status by making changes necessary for compliance with federal or state laws, including voluntary compliance with provisions of PPACA not applicable to grandfathered plans. In addition, an employer may make changes to its health plan that occur in the ordinary course of business such as (1) ceasing to cover the same individuals that it did on March 23, 2010 as long as at least one person (not necessarily the same person) was covered under the plan at all times since March 23, 2010, and (2) enrolling new employees (whether newly hired or newly enrolled) and their families in a grandfathered group health plan after March 23, 2010. An employer may enter a new health plan effective on or after November 15, 2010.11
Employers faced with significant increases to premiums need to determine whether the benefits of maintaining grandfathered status outweigh the need to adopt short-term measures to control their share of rising premium costs. Each benefit package offered under a group health plan must be evaluated independently. For employers that offer more than one health plan, it may be beneficial to maintain grandfathered status for only some plans. These decisions may impact small employers more significantly than larger ones. Eventually, as years continue to pass, most small employers will have to make changes that will end the grandfathered status of their plans, but it may be beneficial for some employers to delay that day.
Mercer, Even as Reform Pushes Up Benefit Cost, Employers Will Take Steps to Hold 2011 Increase to 5.9% (Sept. 8, 2010), http://www.mercer.com/press-releases/1391585 (last visited Sept. 29, 2011).
|2 ||The Kaiser Family Foundation and Health Research & Educational Trust, Employer Health Benefits 2011 Annual Survey, http://ehbs.kff.org/pdf/2011/8225.pdf (last visited Nov. 21, 2011).|
See Mercer, supra note 1. PPACA can be found at Public Law 111-148.
A complete list of new health reform provisions of Part A of Title XXVII of the Public Health Service (“PHS”) Act and their applicability to grandfathered plans is available at www.dol.gov/ebsa/pdf/grandfatheringtable.pdf (last visited Sept. 28, 2011).
Grandfathered health plans are required to comply with PHS Act section 2711 under which plans are prohibited from imposing annual limits less than: (1) $750,000 per person for plan years beginning between September 23, 2010 and September 22, 2011; (2) $1.25 million between September 23, 2011 and September 22, 2012; and (3) $2 million between September 23, 2012 and December 31, 2013. In 2014, plans are prohibited from imposing any lifetime or annual limits on the dollar value of benefits.
The following reform is not yet implemented due to government delay in providing guidance and is not applicable to grandfathered plans: plans may not discriminate in favor of highly compensated individuals with respect to eligibility requirements and benefits covered.
Of note, small businesses may be eligible for a healthcare tax credit of up to 35% of the premiums it pays to cover its workers, particularly small businesses having less than 25 full-time workers, paying annual wages below $50,000, and covering at least 50% of the cost of healthcare coverage for their workers. In 2014, the tax credit coverage rate will increase from 35% to 50% of the premiums.
75 Fed. Reg. at 34588, 34562, 34566-67.
Under the interim final regulation published June 17, 2010, to maintain grandfathered status, plans were not allowed to enter a new policy, certificate, or contract of insurance. 75 Fed. Reg. 34538. An amendment to the interim final regulation effective November 15, 2010 allows this change; however, the amendment is not retroactive. 75 Fed. Reg. 70114 (Nov. 17, 2010). Consequently, if a group health plan entered into a new policy, certificate, or contract after March 23, 2010 and before November 15, 2010, the plan lost its grandfathered status. Id.
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