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AIS's Health Business Daily
Featured Story, July 6, 2010 Grandfather Regs Under Reform, Rate Hike Put Insurers, Employers Between a Rock and a Hard Place Reprinted from HEALTH PLAN WEEK, the industry's leading source of business, financial and regulatory news of health plans, PPOs and POS plans. By Steve Davis, Managing Editor (sdavis@aishealth.com) As long as employers don’t alter their benefit design or shift more costs on to workers in 2011, they will be able to offer the same coverage they offered this year, according to interim final rules released June 14 by HHS and the departments of Labor and Treasury. But a new study on likely rate hikes for 2011 could make it difficult for many employers to comply with the regulations. Industry observers contacted by HPW agree the new rules are more stringent than expected.
“While we had some indication that the agencies would adopt a more restrictive view — the breadth of the restrictions on changes came as a major surprise,” says John Hickman, an employee benefits attorney with the law firm Alston & Bird. “Really, the only good news was solid confirmation that retiree-only plans and excepted benefits (e.g., dental, vision, cancer) are completely exempt from the new PPACA [i.e., health reform law] mandates.”
Health plans that retain grandfather status won’t have to abide by several provisions of the reform law, including the coverage of adult children up to age 26, first-dollar benefits for preventive care and inclusion of “essential health benefits” the feds will require beginning in 2014.
Employers will lose grandfather status if they drop coverage for a particular medical condition, if overall benefits are reduced “significantly” or if out-of-pocket costs for enrollees are increased too much. Employers, however, might have a different definition of “significant” than do federal regulators. Employers and health plans, for example, can increase copays by no more than $5 or a percentage equal to medical inflation plus 15 percentage points. Moreover, Hickman says such increases likely need to be tracked for each discrete group of employees or tier of coverage, rather than in the aggregate.
But compliance could be difficult. Employers can expect coverage costs to jump an average of 9% in 2011, according to the results of an employer survey conducted by PricewaterhouseCoopers (PWC). The increase is down slightly from the percentage cited in last year’s study, due in large part to employers that increased deductibles and/or copays, says Rick Judy, a principal in PWC’s Health Industries Advisory practice. A growing number of employers, according to PWC, are returning to “indemnity-style” cost-sharing by raising out-of-pocket limits, replacing copays with coinsurance and adding high-deductible health plans. According to the study, employer-based health plans in 2011 will include annual deductibles that average $400 or more, the highest level ever reported by the study. The survey — coincidentally released the same day as the grandfather regs — is based on responses from more than 700 firms.
Jenny Mills and John McGowan, attorneys at the law firm Baker Hostetler, say the new rules are very specific “to the point of attempting to micromanage where the regulatory line gets drawn.” They contend that the rules should have been grounded in principals such as the covered employees’ overall expectations or whether the coverage continues to have substantial economic value. They tell HPW that there is “a movement” to invalidate grandfather protections even if changes occur which either are beyond the plan sponsor’s control (e.g., a change in an insurer’s provider network) or are not perceptible to covered employees (such as a change from fully insured to self-insured coverage, or vice versa). While the interim final rules are effective immediately, there is a 60-day public comment period. The final regulation could contain some changes.
Employers May Pull Plug On ‘Grandfather’
Steven Wojcik, vice president of public policy at the National Business Group on Health, says the grandfather rules could tie the hands of employers when it comes to making changes that could help lower coverage costs, such as switching to a high-performance provider network for certain procedures or covering only generic drugs.
Given the “hoops that the government has put up,” employers will need to determine if retaining an existing health plan is worth the effort, he tells HPW. “The answer isn’t clear at this point. But the government has made it clear that grandfather status isn’t going to be such a great deal for employers in terms of helping them achieve the overall goal of improving value of their health care spend.”
Many large employers are finalizing their 2011 plan designs and likely will opt to keep what they have and re-evaluate next year. Wojcik says a couple NBGH members have already decided to forego grandfather status and make substantial changes to their 2011 offerings.
Mills and McGowan agree that the new rules essentially “handcuff” employers to existing plan designs. But encouraging employers to comply with the reform law sooner rather than later might be what federal regulators have in mind, they say.
Robert Moffit, Ph.D., director of the Center for Health Policy Studies at the right-leaning Heritage Foundation, says the restrictive rules indicate a desire to “destroy” employer-based coverage. “This is not designed to promote a robust health insurance market. It is going to drive [employers] out of the market,” he says. The grandfather rules, along with others yet to come, he contends, will eventually force employers to drop health coverage, increase wages and encourage employees to purchase individual coverage through an insurance exchange.
Reform Could Trigger Consolidation
The reform law, he adds, ultimately will force further consolidation among health plans. “We’ll have an unintended consequence that is exactly the opposite of what the president and the Congress promised, which was more robust competition,” he says.
Another possible unintended consequence is that the new regs could encourage employers to place all new hires into non-grandfathered plans that comply with provisions of the reform law but have substantially higher contribution rates, copays and deductibles and substantially lower benefits levels, Mills and McGowan warn.
“In many cases, the flexibility to tweak plan design is going to outweigh the cost of maintaining [an existing plan under] the grandfathering provision,” says PWC’s Judy. However, there’s little time for employers to make changes to plans that go into effect on Jan. 1, he adds.
Self-funded employers are allowed to switch administrators as long as the plan design isn’t altered, but fully insured employers lose exempt status if they switch carriers. But even self-funded employers might be wary of making changes because it could affect the provider network, which could void the grandfather protection. “You generally cannot switch [administrators] without changing networks,” Hickman says.
If more employers do decide to keep their existing plans, that could be good news for health insurers. “It might help them satisfy the new medical loss ratio (MLR) rules because their brokers’ and agents’ commission costs are likely to be lower,” according to Mills and McGowan. “Insurance brokers and agents are more likely than health insurers to find the new rules distressing.”
For a complete look at the interim final rules, visit AIS’s Health Reform page.
Join Chantel Sheaks of Buck Consultants and Kathryn Bakich of The Segal Co. for a July 8 webinar on what the grandfathering rules mean for health plans and employers. For additional information, please call (800) 521-4323, or visit the Marketplace. |
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