The recently enacted Patient Protection and Affordable Care Act (PPACA), or healthcare reform, is prompting human resource managers and their employee benefit consultants to spend countless hours assessing the impact on employer-sponsored benefit programs.

Major components of PPACA went into effect last month. As of September 23, 2010, certain changes must be made to health plans as of their next plan year start date. If an employer keeps the same coverage it had on March 23, 2010 (the date the law took effect), the plan may qualify as a “grandfathered” plan. The grandfathering provision exempts certain plans from some of the requirements of the new reform rules, though not all.

Employers with plans that existed on March 23, 2010, can make modest changes without losing grandfather status; however, if employers choose to significantly cut benefits or increase costs for plan participants, these plans will lose their grandfather status and the employer will be subject to all PPACA coverage guidelines.

While the absence of clear guidance from the government on key provisions of healthcare reform creates unique challenges, employers should nevertheless make a concerted effort to determine if the advantages of “grandfathered” health plans outweigh the disadvantages of dealing with the “non-grandfathered” requirements. The answer is not the same for every employer.

What Advantages Do “Grandfathered” Plans Offer?

Grandfathering a plan allows employers to avoid mandatory expansion of benefits until 2014 for some aspects and indefinitely for others. Key advantages include:

• Plans are not required to provide specified preventive health services.
• Cost sharing may be applied to preventive services.
• Plans are exempt from cost-sharing limits effective in 2014.
• Plans are not required to cover adult dependent children who can secure other employer-sponsored group health care coverage until 2014.
• Plans are exempt from the requirement of providing coverage of routine patient cost for clinical trials of life-threatening diseases, starting in 2014.

Grandfathering a plan provides several advantages from an administrative perspective, including:

• Plans are not required to create a new external claims appeal process.
• Fully insured plans are not subject to IRS 105(h) nondiscrimination rules.

What Disadvantages Do “Grandfathered” Plans Create?

Employers opting to grandfather existing health plans will be limited in their ability to shift cost increases to employees:

• Coinsurance percentage paid by participants cannot be increased.
• Co-payments can increase only by limited amounts or percentages.
• Increases in deductibles and out-of-pocket maximums are limited to medical inflation plus 15 percent from the March 23, 2010 level.
• Employers cannot decrease premium contribution percentage by more than five percentage points from the March 23, 2010 level.

Grandfathered plans will also entail increased administrative burdens for employers:

• Employer must maintain records documenting terms of plan in effect March 23, 2010, including costs and contributions.
• Multiple new notices regarding health plans are required by PPACA.
• All benefit materials must clearly provide the “Grandfathered Status Model Notice”.

What Reforms Apply to All Plans, Including Grandfathered Plans?

Even though grandfathered health plans are exempt from a number of the new insurance reforms, they are still subject to a number of requirements, most of which became effective for plan years beginning on or after September 23, 2010. The following list identifies the key provisions impacting both grandfathered and non-grandfathered health plans:

• No lifetime limits on essential health benefits.
• No annual limits on certain types of benefits.
• No pre-existing condition exclusions for children under 19 years of age (and for all participants in 2014).
• Dependent coverage for adult children up to age 26 for those unable to obtain employer-sponsored coverage.
• No prior authorization for emergency services or higher cost-sharing for out of network emergency services.

Conclusion

Performing a cost/benefit analysis is the only way to make a rational decision, though much of the analysis will involve speculation on future costs as insurers have yet to fully determine the cost impact of mandatory changes and many of the new requirements have yet to be clearly defined.

One option is to simply maintain your plan’s grandfather status for a year or two until further clarification becomes available. At that point, you may be positioned to make a more informed decision regarding your future employee benefits strategy.

This notice is provided as information only and should not be considered a legal opinion. If you have questions about this Client Advisory, please contact Seacrest Partners at 912-544-1900.