Rules Would Restrict Employer Changes to Health Care Plans

U.S. agencies clarify limits on 'grandfathered' plans

By Bill Leonard and Stephen Miller Jun 15, 2010

Update: Amendment Lets Employers Switch Carriers, Stay 'Grandfathered'
In November 2010, federal departments issued an amendment to the interim final regulation discussed below that allows group health plans to switch insurance companies 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. (See the SHRM Online article, "Switching Insurers Doesn’t Doom Grandfather Status.")

The Obama administration has released a set of final interim regulations for “grandfathering” health care plans that existed when the health care reform legislation became law on March 23, 2010.

The regulations (published in the June 17, 2010, Federal Register) would allow plan sponsors to make modest adjustments and changes to adhere to state and federal laws. However, the rules would prohibit existing health care plans from making changes to premiums, co-pays and deductibles that would increase plan participants’ out-of-pocket expenses substantially.

Department of Health and Human Services (HHS) Secretary Kathleen Sebelius told reporters during a media briefing on June 14, 2010, that the rules were crafted to ensure that “grandfathered plans still have the flexibility they need to make reasonable changes”but also to make sure that insurance companies “don’t use this additional flexibility to take advantage of their customers.”

The regulations were released by the Department of Labor, the Treasury Department and HHS and have been awaited by employers and plan sponsors that need to determine if their health care plans comply with the health care reform law. The interim rules were set to appear in the Federal Register on June 17, 2010. HHS has placed a fact sheet on the interim rules online.

“The rule we are announcing today will allow employers to make routine and modest adjustments to co-payments, deductibles and employer contributions to their employees’ premiums without forfeiting grandfather status,” said Labor Secretary Hilda Solis during the media briefing. “This flexibility will encourage employers to continue offering health coverage to their employees and help to ensure coverage for all Americans.”

Sebelius and Solis told reporters that the new regulations stuck to President Barack Obama’s promise that people who liked their health care plans could keep their coverage. However, opponents to the president’s health care reform plan say that the interim rules will force most existing health care plans to alter coverage for their participants.

“The new rules from the federal government on ‘grandfathering,’ which were crafted without any opportunity for public input, are just more proof that despite all of the promises made by the president and other supporters, you actually can’t keep what you like under the new partisan health reform law,” said Sen. Chuck Grassley, R-Iowa, “Change is coming for a lot of people, whether they want it or not.”

Business groups weighed in on the new regulations, with several warning that they could prove to be onerous for plan sponsors.

“Under the regulations, a plan could lose grandfathered status by changing a co-pay more than $5, or seeking to implement a more value-driven design,” said Randel K. Johnson, senior vice president of labor, immigration and employee benefits for the U.S. Chamber of Commerce. “Once grandfathered status is lost, employers will be forced to follow a number of expensive new insurance rules, which will increase costs for employers and employees, threatening the coverage Americans currently have.”

According to Susan Eckerly, senior vice president of the National Federation of Independent Business, the “latest rules on grandfathered plans mean small businesses will be left with even less choice and flexibility. Instead, they will be faced with the difficult choice of paying more to maintain grandfathered coverage, shopping for a new (and more expensive) plan or possibly dropping it entirely.”

What Are ‘Grandfathered’ Plans?

Employer-provided health plans that existed as of March 23, 2010, are grandfathered and do not have to comply with the new requirements to offer preventive health without cost-sharing, establish external review procedures for the claims appeal process, cover clinical trials, and comply with certain quality of care reporting requirements, among other health reform mandates.

However, even grandfathered plans are subject to some new rules for plan years starting after Sept. 23, 2010, including no lifetime limits, no “restricted” annual limits (e.g., annual dollar-amount limits on coverage below standards to be set in future regulations), no pre-existing condition-exclusion requirements, and the requirement to cover adult children until they reach age 26.

‘Routine’ Changes Permitted

The grandfather rule clarifies that plans will lose their grandfather status if they choose to cut benefits or increase out-of-pocket spending for consumers significantly. Grandfathered health plans will be able to make routine changes to their policies and maintain their status. These routine changes include:

  • Cost adjustments to keep pace with medical inflation.

  • Adding benefits.

  • Making modest adjustments to existing benefits.

  • Adopting new consumer protections voluntarily under the new law.

  • Making changes to comply with state or other federal laws.

‘Significant’ Changes Could Threaten Exemption

Plans will lose their grandfathered status, however, if they choose to make significant changes that reduce benefits or increase costs to employees. Details about what routine changes insurers and employers can make without losing their grandfathered status, and the projected impact on large and small employer plans, can be found in the HHS fact sheet.

A health insurance plan can lose its grandfathered status if it eliminates all benefits for a particular condition or if it increases deductibles or co-payments by more than the rate of medical inflation plus 15 percentage points, according to the HHS.



Allowable percent change in co-payments from 2010

Medical inflation* (4%) + 15% = 19%

Medical inflation* (4% x 3 years = 12%) + 15% = 27%

Deductibles or co-payments can increase 15 percentage points above medical inflation over time

* Assumes annual medical inflation at 4%.

Source: U.S. Department of Health and Human Services

In addition, a health plan would lose its grandfathered status if an employer reduces its contribution so that its share of the total cost of coverage declines by more than 5 percentage points below its contribution rate on March 23, 2010, for any tier of coverage affecting any class of similarly situated individuals.

The HHS fact sheet provides further details on these and other restrictions under the interim final rules. According to the fact sheet, compared to policies in effect on March 23, 2010, grandfathered plans:

  • Cannot cut or reduce benefits significantly. For example, if a plan sponsor decides to no longer cover care for people with diabetes, cystic fibrosis or HIV/AIDS.

  • Cannot raise co-insurance charges. Typically, co-insurance requires a patient to pay a fixed percentage of a charge (for example, 20 percent of a hospital bill). Grandfathered plans cannot increase this percentage.

  • Cannot raise co-payment charges significantly. Frequently, plans require patients to pay a fixed-dollar amount for doctor’s office visits and other services. Compared with the co-payments in effect on March 23, 2010, grandfathered plans will be able to increase those co-pays by no more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation plus 15 percentage points. For example, if a plan raises its co-payment from $30 to $50 over two years, it will lose its grandfathered status.

  • Cannot raise deductibles significantly. Compared with the deductible required as of March 23, 2010, grandfathered plans can increase these deductibles only by a percentage equal to medical inflation plus 15 percentage points. In recent years, medical costs have risen an average of 4 percent to 5 percent, so this formula would allow deductibles to go up, for example, by 19 percent to 20 percent between 2010 and 2011, or by 23 percent to 25 percent between 2010 and 2012. For a family with a $1,000 annual deductible, this would mean that if they had an increase of $190 or $200 from 2010 to 2011, their plan could then increase the deductible again by another $50 the following year.

  • Cannot lower employer contributions significantly. Many employers pay a portion of their employees’ premiums for insurance, and this is usually deducted from their paychecks. Grandfathered plans cannot decrease the percent of premiums the employer pays by more than 5 percentage points.

  • Cannot add or tighten an annual limit on what the insurer pays. Some insurers cap the amount that they will pay for covered services each year. If they want to retain their status as grandfathered plans, plans cannot tighten any annual dollar limit in place as of March 23, 2010. Moreover, plans that do not have an annual dollar limit cannot add a new one unless they are replacing a lifetime dollar limit with an annual dollar limit that is at least as high as the lifetime limit (which is more protective of high-cost enrollees).

  • Cannot change insurance companies. If an employer decides to buy insurance for its workers from a different insurance company, this new insurer will not be considered a grandfathered plan. This does not apply when self-insured employers switch plan administrators, or to collective bargaining agreements.

Notification and Other Requirements

In addition, the interim final rules provide for:

  • Promoting transparency by requiring a plan to disclose to consumers every time it distributes materials.

  • Revoking a plan’s grandfathered statusif it forces consumers to switch to another grandfathered plan that, compared to the current plan, has fewer benefits or higher cost sharing, as a means of avoiding new coverage requirements.

  • Revoking a plan’s grandfathered status if it is bought by or merges with another plan to avoid complying with the law.

Good Faith Compliance

Recognizing that group health plans may have made design changes since the grandfather date, the preamble to the interim final rules states that changes made in good faith compliance with the health care reform grandfathering requirements prior to the date of the interim final rules release may be disregarded by regulators for enforcement purposes if the changes only modestly exceed the permitted changes described above.

Next Steps for Plan Sponsors

An alert from law firm McDermott Will & Emery LLP advises employers to review their current benefit plan offerings to determine whether the benefits of maintaining grandfathered health plan coverage outweighs the restrictions on plan design and cost-sharing changes imposed by the interim final rules. Employers who decide to retain the grandfathered status of their group health plan should carefully document the plan or policy terms in effect on the grandfather date and include the model grandfather statement in plan materials distributed to participants and beneficiaries.

Employer sponsors of insured group health plans should be aware that their insurance carriers may not continue to offer certain products as grandfathered health plan coverage because of the need to separately track and administer grandfathered policies and non-grandfathered policies.

Bill Leonard is senior writer for SHRM 
and Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Amendment Lets Employers Switch Carriers, Stay 'Grandfathered,' SHRM Online Benefits Discipline, November 2010

Switching Insurers Doesn’t Doom Grandfather Status, SHRM Online Legal Issues, November 2010

New FAQs on Health Care Reform Released, SHRM Online Legal Issues, September 2010

Nine Out of 10 Big Companies Anticipate Losing Grandfather Status, SHRM Online Benefits Discipline, August 2010

SHRM Seeks Changes to Grandfathered Status Rule, SHRM Online Legal Issues, August 2010

Grandfathered Status Rule’s Impact on Group Health Care Weighed, SHRM Online Legal Issues, June 2010

Special 'Grandfathered' Rules for Insured Collectively Bargained Plans, SHRM Online Benefits Discipline, June 2010

Grandfathered’ Plans Spared Some Reform Mandates, SHRM Online Benefits Discipline, April 2010​

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Health Care Reform web page


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