The risks of maintaining grandfathered health plan status

For employers fighting to maintain grandfathered status, consultants and benefit managers predict the Affordable Care Act’s ongoing implementation will mean the end of these health plan structures in the near future.

The “grandfather” regulation, as outlined in June 2010 guidance from the Departments of Health and Human Services, Labor and Treasury, allowed individuals and businesses to maintain their current plans with the stipulation that they offer “important consumer protections.” The federal government notes that grandfathered plans would help provide stability for insurers and businesses in anticipation of the national shift to a competitive marketplace in 2014.

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Typically, grandfathered plans are not required to comply with the ACA’s preventative care with no cost-sharing provision, out-of-pocket limits for in-network care, the law’s expanded claims and independent review requirements and varying patient protections.

But, according to Beatrice Newbury, senior program manager in the benefits department of the International Brotherhood of Teamsters, a slew of its member plans will likely be affected.

“My view is eventually everyone will lose grandfathered status,” Newbury told attendees at International Foundation of Employee Benefit Plans’ 60th Annual Employee Benefits Conference. “You can only maintain those cost increase limits for so long. Health care will change and plans need to be able to change with it.”

Past studies have shown that employers and plan sponsors have elected to abandon grandfathered approach due to the long-term effect of the ACA. Today, the Kaiser Family Foundation paints a different employer picture than what was seen prior to the landmark health care law. Thirty-seven percent of the more than 2,000 small and large employers surveyed offer at least one health plan that is grandfathered, which is down from 54% in 2013 and 58% in 2012. One year after the ACA passed, approximately 72% of organizations offered at least one grandfathered plan, according to KFF’s 2014 Employer Health Benefits Survey.

“There’s still a significant group of plans out there that really think there is value in maintaining grandfather status but it’s worth keeping in mind that some of these plan structures have been in place for decades,” explained Cindy Lapoff, an ERISA benefits consultant with Manning & Napier Advisors. “Looking ahead for the next 30, 40 years, it’s important to remember that there are changes that are possible that might address the needs of a newer generation of workers. And it’s [also] important to balance what’s good from the past and innovating [and] changing before you’re forced to.”

According to federal officials, should a grandfathered plan want to reduce benefits or push costs to their plan participants, this shift could force many employers and multiemployer plans to lose their grandfathered status. Meanwhile, many employers may be forced to make changes because of 2018’s excise tax. Effective in 2018, the excise tax is a 40% tax on employers that provide high-cost health benefits to their employees. Thresholds are $10,200 for individual coverage and $27,500 for family coverage.

See also: Public and union employers’ attack plan for ACA excise tax

“We have a lot of plans that are grandfathered for various reasons, some just because of a bit of inertia – they don’t want to make changes they don’t have to make,” said Newbury. She added that the union’s better, more established plans already offer coverage that surpasses the ACA’s minimum required benefits.

But she disclosed that some plan members feel their benefits are unfair because they may have to pay a $40 co-pay for preventative care testing. Under the ACA, health plans are required to cover recommended services without cost sharing to participants. And in 2011 and 2012, the federal government said that 71 million Americans with private health insurance were able to attain preventive services due to the mandate.

“They feel they are cheated, and the reality of course, as much of us know, the benefit they are receiving is far better than the minimum required benefit under the Affordable Care Act,” Newbury said, while noting that most of its plans fall in the gold and platinum levels of the ACA’s four metal tiers of benefits.

Over the next five years, Newbury stated that plans hoping to maintain current benefits in order to maintain grandfathered status could likely come into direct conflict with the excise tax.

“A lot of our plans are already so generous and we’re likely to be [subject to] paying the Cadillac tax,” Newbury said. “Sadly, the ACA is effectively forcing this to happen; we’re going to see a lot of our employers pushing really hard to cut benefits to make sure to keep us below that Cadillac tax.”

Meanwhile, despite the inevitable excise tax penalty that awaits many grandfathered and non-grandfathered plans, Lapoff, who provides guidance to single-employer and multiemployer plans, asked conference attendees to review what’s driving their plan’s design. “It’s important – if you’re considering whether or not it’s worth it to maintain grandfathered status – to assess your own plan’s objectives,” she said.

“I try to discourage people from setting their objectives based on what the government is going to do because the government is always going to do something that will annoy or upset our plans,” explained Lapoff. “It’s really important to keep your eye on the ball and what you want to accomplish. And if you want to accomplish it, [ask yourself] is it consistent with grandfathered status?”