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Steps to Hold Down Health Reform's Cost Increases
47% of U.S. employers expect to lose grandfathered plan status in 2011

By Stephen Miller  9/15/2010
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For many U.S. employers, the cost advantages of making changes to their health plans outweigh the benefits of avoiding some reform mandates by maintaining grandfathered status, a survey by Mercer reveals.

The health care reform law gives employers a choice: If they avoid making certain changes to their health plans—such as raising employee co-insurance requirements—their plans will be “grandfathered” and thus exempt from a number of new cost-sharing and coverage mandates. Interim regulations released by federal agencies in June 2010 estimated that between 67 percent and 85 percent of employer plans would retain grandfathered status in 2011, but the findings from Mercer's survey, released in September 2010, show that just 53 percent believe they are likely to retain grandfathered status for all their plans.

The Mercer Survey on Health Care Reform—Getting Ready for 2011, was fielded to employers in July 2010, with 1,091 respondents, of which 299 had fewer than 500 employees and 304 had 5,000 or more employees.

Costs Necessitate Changes

The consulting firm asked about the cost impact of meeting the Patient Protection and Affordable Care Act (PPACA) requirements for 2011—specifically, extending dependent eligibility to age 26 and removing annual and lifetime benefit maximums. Employers estimated that making the changes would add 2.3 percent, on average, to their 2011 cost. They predicted that their cost would rise by a total of 10.1 percent—if they made no cost-saving changes.

Employers estimate cost increases of 10.1%—
if they make no changes.


For many employers, absorbing health benefit cost increases of this size is simply not an option, according to Mercer. When asked for their targeted cost increase—the increase they hope to achieve after making such changes as switching plan vendors, raising deductibles and other cost-sharing provisions, or offering a different type of plan—employers estimated that they could hold the cost increase to 5.9 percent, on average. 


Small employers—those with fewer than 500 employees—generally offer fully insured plans and predicted an underlying cost increase of nearly 12 percent, while large employers, which typically self-fund, predicted an increase of about 9 percent if they made no changes other than those required by PPACA. Still, small employers also expect to bring their cost increase down to 6 percent.

“Six percent seems to be employers’ collective comfort level,” said Beth Umland, Mercer’s research director for health and benefits. “For the past five years the actual cost per employee has risen by about 6 percent annually, even as the underlying trend has been running at about 9 percent. Employers have been working hard to keep it at that level, and they’ll have to work a bit harder in 2011 to achieve the same result.”

More Cost-Shifting

Overall, 57 percent of survey respondents will ask employees to pay a greater share of the cost of coverage in 2011. Over half of these will increase the cost of dependent coverage proportionally more than the cost of employee-only coverage. This is likely a response to the expected increase in the number of dependents enrolled once employers must extend coverage to children up to age 26.

But raising employee contribution amounts doesn’t necessarily reduce health care spending; it just changes how cost is apportioned between the employer and employee. Many employers will be looking to reduce health care cost increases by improving workforce health: 44 percent of respondents say they will add health management or wellness programs or services in 2011, and 38 percent say they will add incentives for employees to participate in the health management programs already available to them.

Actions Planned for 2011 to Reduce Health Benefit Cost Increases

Add health management /wellness programs.


Change plan design to increase cost sharing.


Add incentives for employees to participate in health management/wellness programs.


Audit dependents for eligibility.


Put medical plan out to bid.


Put prescription drug benefits out to bid.


Use a special group of providers for specific conditions (e.g., centers of excellence).


Join with other employers to collectively purchase benefits.


Source: Mercer Survey on Health Care Reform—Getting Ready for 2011.


Losing Grandfathered Status

Of the survey respondents that expect to have a grandfathered plan in 2011, about half believe that they will have to forgo grandfathered status before 2014.

“The rules for maintaining grandfathered status were tougher than many employers expected,” said Mercer Partner Tracy Watts.  “As they start to get a clearer picture of projected cost for 2011, many are finding they need more flexibility to get their cost increases down to a level they can handle.”

For the nearly two-thirds of the respondents that expect to lose grandfathered status, it comes down to the numbers. In their view:

It's more cost effective to make changes and lose grandfathered status (63 percent of respondents who expect to lose grandfathered status).

Long-term costs associated with grandfathering exceed its benefits (35 percent).

They're unable to limit plan changes to keep grandfathered status (34 percent).

Complying with rules for nongrandfathered plans not seen as onerous (26 percent).

To maintain grandfathered status, an employer can make only fairly minimal changes to the employee cost-sharing provisions in their plans. They can’t raise deductibles or out-of-pocket limits by more than 15 percentage points beyond the increase in the medical inflation, nor can they raise co-pays by more than that amount, or $5, if that is more. And they can’t increase employee co-insurance percentages. In addition, a health plan or benefit package will lose grandfathered status if the sponsor cuts their contribution rate toward total coverage costs by more than 5 percentage points.

In the effort to manage cost in 2011, many employers are not willing to stay within these limits.

Planned Changes that Will Result in Losing Grandfathered Status

Increase deductible/out-of-pocket maximums by more than allowed amount.


Increase employee co-insurance.


Increase co-payments by more than allowed amount


Change insurer (increases to 34% among the survey respondents with fewer than 500 employees).


Decrease employer contribution by more than allowed amount.


Other changes.


Exclude or limit specific coverage.


Source: Mercer Survey on Health Care Reform—Getting Ready for 2011.

“Putting a plan out to bid is a common cost-savings tactic for small employers,” said Watts. “Large employers are more likely to address cost increases by making plan design changes such as raising deductibles, which are still relatively low compared to those in small-employer plans.”

While the grandfathering rules allow for an increase in deductible, Watts pointed out that, for many employers, staying within the limit set won’t result in significant cost savings. For example, the median in-network preferred provider organization (PPO) deductible for a large employer was $400 in 2009. To retain grandfathered status, an employer could raise this to $450, but not to $500. “But that change would reduce the cost of a typical health plan by less than 1 percent,” she said.

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Family Premiums Up 3% in 2010, But Workers' Share Rose 14%, SHRM Online Benefits Discipline, September 2010

CDH Plan Growth Continued in 2010, SHRM Online Benefits Discipline, September 2010 

Future Bright for Health Savings Accounts, Says Policy Analyst, SHRM Online Benefits Discipline, September 2010

Nine of 10 Big Companies Expect to Lose Grandfathered Status, SHRM Online Benefits Discipline, August 2010

Large Employers Project 2011 Health Plan Costs to Rise 8.9%, SHRM Online Benefits Discipline, August 2010

U.S. Agencies Clarify Restrictions on 'Grandfathered' Plans, SHRM Online Benefits Discipline, June 2010

Increased Health Care Cost-Shifting Expected in 2011, SHRM Online Benefits Discipline, June 2010

Brokers Say Group Health Rates Rising for 2011, SHRM Online Benefits Discipline, June 2010

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Health Care Reform web page


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