Final Rule Gives Boost to Grandfathered Health Plans

Plans are given greater leeway to raise premiums and out-of-pocket expense limits

Stephen Miller, CEBS By Stephen Miller, CEBS December 15, 2020
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Final Rule Gives Boost to Grandfathered Health Plans

Employers with health plan designs that predate the Affordable Care Act (ACA) will find it easier to preserve the grandfathered status of their plans under a final rule published Dec. 15 by the U.S. Departments of Labor (DOL), Health and Human Services (HHS) and Treasury.

An employer must have established a grandfathered group plan before March 23, 2010. These plans are subject to some of the ACA's requirements, such as the prohibition on pre-existing condition exclusions, but are exempt from other requirements. They need not cover preventive care at no cost to employees, for instance, or impose out-of-pocket spending limits for in-network care. To stay grandfathered, these plans cannot significantly raise co-payment charges or deductibles, or make other kinds of cost and coverage changes.

Employers with grandfathered health plans are allowed to enroll new employees in the plan, and employers must inform enrollees that the plan is grandfathered.

"This final rule promotes choice and competition in health coverage," said U.S. Secretary of Labor Eugene Scalia. "The flexibility the final rule provides allows employers to continue to provide American workers with the health coverage that they prefer during this critical time."

Added Jeanne Klinefelter Wilson, acting assistant secretary for the DOL's Employee Benefits Security Administration: "Employers are now better positioned to continue to offer affordable health care options that best meet their employees' needs."

Keeping Both HDHP and Grandfathered Statuses

The final rule provides greater flexibility for grandfathered group health coverage in two ways:

  • By clarifying that grandfathered group health coverage offered through a high-deductible health plan (HDHP) may increase fixed-amount cost-sharing requirements—such as co-payments, deductibles and out-of-pocket maximums—to the extent necessary to maintain HDHP status without losing grandfathered status.

This change lets participants and beneficiaries enrolled in that coverage remain eligible to contribute to a health savings account (HSA). To reflect U.S. inflation, the IRS annually adjusts HSA contribution limits and the minimum required deductible and maximum out-of-pocket expenses for the HDHPs with which HSAs are paired. Plans that do not adopt the higher minimum deductible and out-of-pocket expense limits lose their HDHP status, meaning they can no longer be paired with HSAs. The new rule allows grandfathered HDHPs that incorporate these annual changes to keep both their HDHP and grandfathered plan statuses.

  • By providing an alternative way to measure permitted increases in fixed-amount cost-sharing that would allow plans to better account for changes in the costs of health coverage over time. The rule lets plan sponsors make cost-sharing increases using either the consumer price index measure of medical inflation under final regulations issued in 2015 or the premium-adjustment percentage that HHS publishes in its annual notice of benefit and payment parameters, whichever is greater.

Many believe that the notice is a more appropriate measurement of changes in health care costs over time than medical inflation based on the consumer price index.

"While it might appear that the new rule is allowing grandfathered plans to effectively change their cost-sharing, it is merely allowing grandfathered plans to continue to meet the definition of high-deductible plans as that threshold changes, which in turn will maintain participants' ability to contribute to an HSA," said Kim Buckey, vice president of client services at DirectPath, a benefits education, enrollment and health care transparency firm.

"The second part of the rule has a similar effect—merely moving grandfathered plans in lockstep with health care cost inflation to be consistent with other plans," she noted.

Keeping Grandfathered Plans Alive

Last year, 22 percent of U.S. employers offered at least one grandfathered health plan, according to research by the nonprofit Kaiser Family Foundation. "Quick action on the part of the [federal] departments might stabilize the number of employer plans that retain grandfathered status," Jay Kirschbaum, vice president of compliance services at Lockton Benefit Group in Kansas City, Mo., wrote last year. Keeping plans grandfathered isn't easy, he noted, and among employers that desired to keep grandfathered status, "many may have inadvertently lost that status over the years."

[SHRM members-only toolkit: Complying with and Leveraging the Affordable Care Act]

Grandfather Plan Trade-Offs

Because grandfathered plans provide employers with flexibility to exclude certain services from coverage—such as any of the essential health benefits—they may lower plan premiums. However, "there are some distinct disadvantages," Buckey said. For instance, "There may be a negative impact on attracting and retaining talent if the plan has not adopted some of the key provisions of the ACA, such as 100 percent coverage of preventive care."

When a draft of the proposal was released in July, health care writer Louise Norris tweeted, "I often hear from people who wonder why their health plan doesn't cover checkups, vaccines, birth control, etc., at no cost... the answer is because the plan is grandfathered."

Grandfathered plans also could be missing out on an important tool to control future health care costs, Buckey noted, as "individuals who don't have to pay for an annual checkup or regular vaccines are more likely to obtain that care, and such visits often identify existing or potential health issues before they become acute, chronic and expensive."

[Need help with legal questions? Check out the new SHRM LegalNetwork.]


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