The interim final rules on grandfathered plans had a surprise for many management attorneys: a rule that grandfathered status would be lost if a health plan policy switches insurers.
Otherwise, the interim final rules are a “very broad interpretation” of grandfathered status, according to Jean Hemphill, an attorney with Ballard Spahr in Philadelphia. “My understanding of the rules is that they are negative rules,” she remarked in a June 16, 2010 interview. That means that to maintain grandfathered status, plan sponsors “cannot do what’s expressly prohibited, but other changes can be made.”
Hemphill said that prior to the release of the interim final rules, there was concern that the U.S. Department of Health and Human Services, U.S. Department of Labor and Treasury Department would issue very restrictive guidance and not allow any changes, but the final rule does allow plan sponsors to make some changes.
Antoinette Pilzner, an attorney with McDonald Hopkins in Bloomfield Hills, Mich., told SHRM Online that “the guidance is a little broader than expected because it does allow for some limited changes to the benefits and the cost-sharing structure and doesn’t prohibit all changes in those areas.” She added that “changes to the groups of employees eligible to participate do not cause a loss of grandfathered status. This enables employers to expand or reduce the number of employees who are eligible to participate in the plan in response to changing costs or changing business conditions.”
Pilzner explained that “this could be especially important for employers whose insurers impose significant premium increases, but the employer cannot significantly shift those increases to employees. In those situations, the employer appears to be able to eliminate some employee groups from eligibility for coverage but still maintain the plan’s grandfathered status for all employees who remain eligible.”
But Ilyse Schuman, an attorney with Littler Mendelson in Washington, D.C., said in a June 18, 2010, interview that the rules are “narrower than some had hoped for,” providing only limited flexibility to make some plan policy changes without jeopardizing grandfathered status. Schuman expressed disappointment that there isn’t more flexibility in the rules. She noted that the way the regulations are written, “even collectively bargained plans have to comply with new market reforms that apply to grandfathered plans.”
Switching Insurers Discouraged
Hemphill was surprised that switching health insurers for a plan policy would result in a loss of grandfathered status. “So many health insurers have plans that are identical in design,” she remarked. Moreover, switching insurers is similar to switching plan administrators for self-funded plans, and the guidance permits self-funded plans to change administrators without jeopardizing grandfathered status. Hemphill said there will be less switching of insurers as a result of the rules.
Frank Palmieri, an attorney with Palmieri & Eisenberg in Princeton, N.J., and Alexandria, Va., said grandfathered status is generally desired, among other reasons, to:
Allow employers to exclude dependents up to age 26 from coverage if other employer coverage is available.
Avoid the need to have independent review of claims for self-insured medical plans (i.e., mandatory internal and external claims appeal procedures are avoided).
Avoid the nondiscrimination rules applicable to non-grandfathered plans.
Avoid no cost sharing for preventive services.
Palmieri thought that it was “extremely restrictive” for the regulations to provide that grandfathered status will be lost if employers switch health insurers.
“A typical employer has a fully insured medical plan. If it receives premium increases of 15 percent to 20 percent, the employer will look to ‘shop’ coverage to achieve savings,” he noted. “Even if an identical medical plan is obtained with another insurance carrier, the mere change from ABC insurance carrier to XYZ insurance carrier with an identical plan will result in loss of grandfathered status.”
Companies that have more than one policy might find that they lose grandfathered status if they change insurers for one policy but retain grandfathered status for other policies where the insurer was not changed, according to Melissa Kurtzman, an attorney with Littler Mendelson in Philadelphia. She added that this is a “very anxious time” for HR as it tries to “determine what the guidance means.” But at least some changes are allowed, and the guidance did make clear that adding better benefits will not jeopardize grandfathered status, she added.
Amanda Layton, an attorney with Duane Morris in Philadelphia, told SHRM Online that when she saw an advance copy of the interim final rule and told her colleagues grandfathered plans could not switch insurers without losing grandfathered status, her colleagues reacted with disbelief.
Limits on Increasing Co-Pays
In addition, keeping co-payments and other fixed cost-sharing requirements within the guidelines “will be a real challenge,” Layton said.
Palmieri agreed that it will be difficult for employers to ensure that co-pays increase no more than the greater of $5 or a percentage equal to medical inflation plus 15 percentage points. “Limiting the increases in co-pays will cause some employers to lose grandfathered status,” he predicted.
Pilzner said that the restrictions on co-pay increases “will have the biggest impact on prescription drug co-payments, especially for non-formulary and brand name drugs, which in the past have been increased in larger amounts as a method of encouraging generic drug use.”
As for the bar on grandfathered plans increasing coinsurance percentages, she thought that this would be the “least oppressive” of the limits imposed by the interim regulations. “It’s my experience that coinsurance percentages usually don’t change from year to year as a matter of course,” she remarked.
Pilzner added though that “the most difficult aspect of these rules is that, for an insured group health plan, replacing the insurance policy that was in effect on March 23, 2010, will automatically cause the plan to lose grandfathered status, even if the replacement policy is substantially the same as the original policy.”
Pilzner noted that “in combination with the limits on decreasing employer contributions as a percentage of the costs, this exposes employers who want to maintain grandfathered status for their plans to absorbing substantial premium increases assessed by their current insurers, who know the employer is locked in to that policy if the employer wants the plan to remain a grandfathered plan.”
Palmieri expects that “if the cost of health care coverage increases significantly, employers have no choice but to shop coverage, make design changes and lose the grandfathered status.” He said that “businesses must make business decisions.” So, the maintenance of grandfathered status “will be a secondary issue for most employers.”
Layton agreed, saying that “employers initially will try to stay within the guidelines until it becomes cost prohibitive. At some point employers, particularly smaller employers,” can absorb only so much of the costs, even though losing grandfathered status would mean that plans would become subject to such burdensome requirements as the external appeal process and nondiscrimination testing. Employers will, she concluded, “have to carefully weigh out” the impact of requirements that apply to non-grandfathered plans on plan administration versus the increase in costs of health care and how many of those costs employers would have to shoulder to maintain plans’ grandfathered status.
In addition, “the cost of preserving grandfathered status needs to be weighed against the cost of complying with all of the benefit mandates, the flexibility obtained from not protecting grandfathered status and employees’ perception of the value of those benefits,” Pilzner added. “If employees know that the employer’s competitors are providing all of the mandated benefits, either at the competitor’s election or because the competitor’s plan is not grandfathered, employees may question why those benefits are not being provided by their employer. If employees do not see their cost-sharing maintained or reduced by their employer maintaining a grandfathered plan, the employees may—rightly or wrongly—conclude that the employer is reaping significant benefits from the plan’s grandfathered status at employees’ expense.”
However, David Weiner, an attorney at Seyfarth Shaw, said that “the employee relations issue shouldn’t be significant, as employees only know what they have, not the legal reasons that their coverage may be worse than an employee’s coverage at another company. Of course, the interim final rule is designed to help them understand the legal reasons, because it requires that a special grandfathered plan notice be included in plan descriptions, but it’s still unlikely that they’ll be focused on what grandfathering is costing them.”
Allen Smith, J.D., is SHRM’s manager of workplace law content.