Amendment Lets Employers Switch Carriers, Stay 'Grandfathered'


By Stephen Miller November 16, 2010

The U.S. departments of Labor, Health and Human Services, and Treasury (the departments) issued on Nov. 15, 2010 an amendment to their June 17, 2010, interim final regulations on how employers can maintain grandfathered health plan status. The amendment was published in the Nov. 17, 2010, Federal Register.

Under the health care reform law, health plans can retain a “grandfathered” exemption from certain new coverage mandates and reporting requirements. The June 2010 regulations included a number of rules for determining when changes to a health plan would cause the plan to lose its grandfathered status—for example, if they made certain significant changes that reduced benefits or increased costs to consumers. (To learn more, see the SHRM Online article "Rules Would Restrict Employer Changes to Health Care Plans").

The new amendment modifies one aspect of the original regulations. Previously, one of the ways an employer group health plan could lose its grandfathered status was if the employer switched from one insurance company to another. The original regulations allowed only self-funded plans to change third-party administrators without necessarily losing their grandfathered status.

The amendment allows all group health plans to switch insurance companies and shop for the same coverage at a lower cost and maintain their grandfathered status, so long as the structure of the coverage doesn’t violate one of the other rules for maintaining grandfathered status.

"The purpose of the grandfather regulations is to help people keep existing health plans that are working for them," according to a statement issued by the federal departments. "This amendment furthers that goal by allowing employers to offer the same level of coverage through a new issuer and remain grandfathered, as long as the change in issuer does not result in significant cost increases, a reduction in benefits, or other change described in the original grandfather rule."

The federal departments received many comments on the provision in the initial regulations, which stated that a group health plan would relinquish grandfathered status if it changed issuers or policies. This change was made in response to those comments, the release stated, for the following reasons:

  1. Some employers buy coverage from insurance companies; others “self-insure,” meaning that they pay claims themselves but usually hire a third-party administrator (TPA) to handle the paperwork. Usually only large companies can self-insure. Before this amendment, self-insured plans could change the company hired to handle the paperwork without losing grandfathered status as long as the benefits and costs of the plan stayed the same, while an employer that just changed insurance companies while maintaining the same benefits under their plan could not do so. Under this amendment, all employers have the flexibility to keep their grandfathered plan but change their insurance company or third-party administrator.
  2. If an employer has to stay with the same insurance company to keep the benefits of having a grandfathered plan, the insurance company has undue and unfair leverage in negotiating the price of coverage renewals. Allowing employers to shop around can help keep costs down while ensuring that individuals can keep the coverage they have.
  3. There are circumstances where a group health plan might need to make administrative changes that don’t affect the benefits or costs of a plan. For example, an insurer might stop offering coverage in a market, or a company might change hands. In those cases, the employer can maintain grandfathered status for their employee’s plan under this amendment.

Plans Affected

The amendment affects insured group health plans. A change of issuers in the individual market would still result in the loss of grandfathered status.

The departments expect that this amendment will result in a small increase in the number of plans retaining their grandfathered status relative to the estimates made in the original grandfathering regulations. In the earlier regulations, the departments estimated that 55 percent of small employers in 2010, and 36 percent of large employers, made at least one change in cost-sharing parameters above the thresholds for maintaining grandfathered status.

Effective Date

The amendment does not apply retroactively to changes to group health insurance coverage that took effect before Nov. 15, 2010, the date the amendment to the interim final regulations was made available for public inspection.

For this purpose, the date the new coverage becomes effective is the operative date, not the date a contract for a new policy, certificate or contract of insurance was entered into.

Points to Consider

Employers switching insurers and seeking to maintain grandfathered status should provide to new insurers the prior plan's terms and exactly what form they took, including paid-for benefits, employer contributions and cost-sharing.

Also, employers should be aware that some carriers are no longer offering grandfathered policies.

Comments on the amendment are due Dec. 17, 2010, which is 30 days after the amendment's publication in the Federal Register.

Stephen Miller is an online editor/manager for SHRM.

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