Business Perspectives

Know how to keep your health plan's grandfathered status

When health care reform was being debated by Congress, we were promised that, if you liked the coverage you were getting through your employer, you would be able to keep it and your coverage would not change. Like most things connected with health care reform, it turns out it is a little more complicated than that.

The law does provide that existing plans will be grandfathered and therefore will not be required to comply with certain changes in the new law. They also will be given additional time to comply with other changes.

The problem is that, under regulations issued earlier this summer, grandfathered status can easily be lost as a result of any number of common and routine changes to a plan, including changes that have no impact on the coverage that is being offered.

For example, employers routinely request quotes from different insurance companies each year and may change to a different insurance company if coverage is less expensive. On the other hand, under the new regulations, any change in the insurance company providing coverage will result in a loss of grandfathered status, even if the benefits being offered are not any different than before.

For many years, it has also been a common practice, particularly among smaller employers, to increase deductibles and co-pays as a way of slowing down the increase in premiums. For example, an employer might raise the co-pay for a doctor visit from $20 to $30 as a way of reducing what would otherwise be a much larger increase in the annual premium. Under the new regulations, an employer's ability to follow this strategy in the future will be sharply limited.

Co-pays cannot be increased above the co-pays that were in effect on March 23 by the greater of either $5 or 15 percent plus the rate of medical inflation. If co-pays are increased by more than this amount, the plan will lose its grandfathered status, even if nothing else changes. Similar rules will apply if deductibles are raised.

Grandfathered status can also be lost if the employer reduces the share or percentage of the premium that it is paying by more than 5 percent, even if there is no other change to the coverage. For example, suppose that family coverage costs $1,000 per month in 2010 and the employer is paying $600 toward that coverage. If the employer continues to contribute the same $600 in 2011 but the cost of coverage increases to $1,100 per month, the plan will lose its grandfathered status.

Although the employer has not cut back its contribution, the percentage of the total cost being contributed by the employer will have dropped by more than 5 percent because the overall cost of coverage has increased from what it was when the law took effect in 2010.

Losing grandfathered status is not an obscure, technical concern. It has a real world impact on every employer that offers coverage to its employees and every employee who is receiving, or who would like to be receiving, coverage through an employer.

According to government estimates, there are 3 million employers and more than 100 million employees. The government also estimates that, over the next three years, two-thirds of all small-employer plans will lose their grandfathered status. We suspect that many small employers may lose their grandfathered status without realizing what has happened or why it matters.

Employers and their advisers need to make sure that they understand what changes can or cannot be made without losing a plan's grandfathered status. They also need to make sure that they understand all of the requirements they will have to comply with if grandfathered status is lost. If they don't, they could be in for an unpleasant surprise.