MCGOWAN: Reform’s grandfathering option requires close look

In recent weeks, as we’ve sat down with clients to discuss their firms’ health benefits, many of them have asked, “What do we have to do to be grandfathered?”

In other words, what must they do for their health benefit plans to qualify as “grandfathered” plans under health care reform? Most of them had been relieved when they first learned the reform law included a provision allowing employers to keep existing plans.

However, as we outline for our clients the requirements for grandfathered plans, the questions usually take a different tone. The client is no longer focused on, “What do we have to do?” as much as, “Should we even pursue grandfathered status?”

Given what we’ve learned over the last few months, that’s exactly the question they should be asking.

The concept of grandfathering emerged early in the health care reform discussions when Americans were assured that, if they have a health plan they like, they may keep it after reform. When they first heard this, most employers assumed it would be in their best interests—and employees’ best interests—to pursue grandfathered status.

But as the reform law took shape, it added requirements to grandfathered plans that made many employers reconsider whether they could attain or hold onto grandfathered status—requirements that pivoted in part on notions such as “material changes” to benefits and “significant increases” in employee costs.

What’s driving this concern? In helping our clients with this choice, we’ve discovered four key factors.

Uncertainty

Perhaps the biggest concern with health care reform has been uncertainty. The meaning of terms such as “material,” “significant” and “routine” will continue to take shape as rules and regulations are finalized and interpreted. As recently as Nov. 15, the Department of Health and Human Services issued a substantive change in the regulations. Furthermore, we face the real possibility that the law will change based on shifting political tides.

Finally, many employees might opt out of employer-sponsored plans, affecting insurance pools and rates, and many carriers likely will drop health benefit programs altogether (a number of carriers already exited the sector in the wake of reform).

Cost

As health care costs rise, the employer has to find ways to make those increases affordable, a task typically achieved through some combination of measures such as increasing employees’ costs, altering benefits, and changing carriers. If an employer chooses to pursue grandfathered status, however, it will be limited in its ability to make such changes. For example, while the law allows “routine” changes, if cost increases to employees exceed a prescribed range, the plan loses its grandfathered status.

Required changes

Technically, it’s true that employers can keep the same health benefit plans they had before reform was enacted, but that doesn’t mean they can keep the same plan design. Even grandfathered plans must meet certain reform laws standards. For example, grandfathered plans cannot include lifetime coverage limits, and they must offer coverage to plan members’ children up to age 26. If they don’t already meet those standards, they’ll have to change or lose grandfathered status.

Timing

Ostensibly, in order to qualify for grandfathered status, a plan needs to have been in effect on the day the law was enacted, March 23, 2010. But regulations detailing how the plan would be implemented weren’t issued until June 14 (and, as mentioned above, substantial changes were made just this month). If you happened to renew your plan in the interim, and you failed to select a plan that complies with the regulations, your plan will not qualify for grandfathering.

“Transition relief” is available, but it requires essentially revoking the new plan and reverting to the old plan or putting a newer one in place.

While some employers might see benefits in maintaining a grandfathered status, the concept is not as automatically attractive as it originally seemed. So, what should an employer do?

First, honestly assess the pros and cons of seeking grandfathered status. Review your benefits package in a vacuum, considering the decisions you would make if health care reform were not a part of the picture. Then compare those choices to the post-reform world and, with the help of your accountant, business consultants, broker and other trusted advisers, assess your options and make the choice that makes the most sense for your business.

Your business will be around a lot longer than the conversation about grandfathered benefit plans.•
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McGowan is president of McGowan Insurance Group. Views expressed here are the writer’s.