Health Reform Grandfathering

An interim final rule on the grandfathering provisions for employers under the health care reform law contains surprises that raise the stakes on employer health plans.

The Patient Protection and Affordable Care Act puts new obligations on employers. It generally exempts health plans existing on March 23, 2010, allowing exemption from some requirements like nondiscrimination, and extending deadlines for others like coverage of dependents up to age 26.

Employers will try to maintain grandfather status. Loss of the status is permanent and the impact is uncertain until future provisions are clarified. Despite the advantages to being grandfathered, some employers are rethinking this because of the new rule.

The regulations change the analysis completely. They impose a cost on maintaining grandfather status that was not expected. For example, to avoid losing grandfather status, an employer cannot eliminate or substantially reduce coverage. An employer also risks losing grandfather status if it changes the cost structure beyond limits the rules impose, like lowering employer contributions by more than five percent, raising copayments more than the greater of $5 or 15 percent, or raising deductibles more than medical inflation plus 15 percent.

Likewise, if an employer changes carriers, it loses grandfathered status, even if the plan is identical. Smaller employers administer a fullyinsured plan should be mindful that if they lose grandfather status they will be subject to new nondiscrimination requirements.

If an employer has a fully insured plan just covering upper level workers and loses grandfathered status, group coverage will have to be broadened, a very expensive change to the plan.