Grandfathered Health Plans and Reform: What You Need To Know

July 23, 2010

This entry is the first of several written by Avalere Health for the Extend Health client base. We will post them here over the coming weeks.

Grandfathered Health Plans and Reform:  What You Need To Know About Benefit Plan Changes Under the Affordable Care Act

 By Carly Kelly and Kelly Brantley
Avalere Health

The Affordable Care Act has created sweeping changes across healthcare.  Many of the changes impact the fundamentals of health insurance, and affect anyone that manages the creation and administration of employee benefits. 

As you may know, certain “grandfathered” health plans are exempt from some of the new requirements in the Affordable Care Act (ACA).  The Department of Health and Human Services (HHS) recently released interim regulations to clarify how a health plan can qualify for—or lose— grandfathered status. 

In the preamble to the interim regulations, HHS encourages States not to apply the ACA requirements to retiree-only plans.  Even with this clarification,  the grandfathered health plan regulations are likely to raise questions from employer groups that offer both retiree and non-retiree coverage.

A health plan may be eligible for “grandfathered” status if it was already in effect on March 23, 2010, the date of the ACA’s enactment.  However, health plans can lose grandfathered status by making fundamental plan changes, such as by reducing plan benefits or increasing cost-sharing requirements.  Bottom line: health plans that want to maintain grandfathered status need to pay attention to the new regulations, and employers should know what the ACA will allow in terms of benefit re-design. 

The new HHS grandfathered health plan regulations clearly state that health plans cannot make any changes that will result in a substantial loss of benefits or that will significantly increase costs to consumers.  Changes that will result in a loss of grandfathered status include:

  • Switching to a different insurance issuer for fully-insured plans.  (Self-insured plans may change their third party administrator without losing grandfathered status)
  • Entering into a merger, acquisition, or similar business restructuring if the principal purpose of the action is to cover new individuals under the grandfathered plan
  • Eliminating all (or substantially all) benefits to treat a particular condition
  • Increasing cost-sharing percentage requirements, such as coinsurance
  • Increasing copayments by an amount that exceeds the greater of: (1) the sum of medical inflation (measured from March 2010) plus 15 percentage points; or (2) the dollar amount that results from increasing $5 by the medical inflation rate (measured from March 2010)
  • Increasing other fixed-amount cost-sharing requirements (e.g., deductibles and out-of-pocket maximums) by more than medical inflation (measured from March 2010) plus 15 percentage points
  • Decreasing the employer contribution rate by more than 5 percentage points when the contribution is based on the cost of coverage
  • Decreasing the employer contribution by more than 5 percent when contribution rates are based on a formula, such as hours worked
  • Adding a new–or decreasing an existing–annual dollar limit on benefits (exception: plans that had an overall lifetime limit in place on March 23, 2010, but no annual limit, can replace the previous lifetime limit with a new annual limit as long as the dollar value of the annual limit is at least as generous as the previous lifetime limit—i.e., if a plan’s previous lifetime benefit limit was $500,000, the new annual benefit limit cannot be less than $500,000).

 Bottom line:  the restrictions on benefit changes and cost-sharing requirements could limit the flexibility health plans and employers have to control costs on grandfathered plans. 

HHS is accepting comments on this interim final rule until August 16. Visit this page  to submit comments about whether changes to plan structure, provider networks, or prescription drug formularies should trigger a loss of grandfathered status, as well as to register support for HHS’ interpretation that the ACA should not be applied to retiree-only plans. 

 Avalere is an advisory services company whose core purpose is to create innovative solutions to complex healthcare problems. Based in Washington DC, the firm delivers research, analysis, insight, and strategy for leaders in healthcare business and policy.  The firm offers deep substance in areas ranging from healthcare coverage and financing to the changing role of evidence in healthcare decision-making. Its focus on strategy is supported by a rigorous, in-house analytic research group that uses public and private data to generate quantitative insight. Through events, publications, and interactive programs, Avalere also translates real-time healthcare developments into actionable information.


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