Steps To Control Health Care Costs And Impact On Grandfathered Plan Status

June 17, 2010

Consultants are predicting an increase in medical costs for 2011 of 9%. This is on top of an estimated increase of 9.5% in 2010. What can an employer do to control this increase and how might various strategies impact a plan’s “grandfathered” status under the Patient Protection and Affordable Care Act (PPACA)?

Under the PPACA, a plan in existence on March 23, 2010 is “grandfathered” and is subject to only some of the PPACA health plan changes. For example, a grandfathered plan must comply with the new rules on annual and lifetime limits, pre-existing conditions and extended coverage for dependent children, but is not required to provide first dollar coverage for preventive services or comply with HHS rules on implementing an effective internal and external appeals process.

Under interim final regulations issued on June 14, 2010 by the Departments of Health and Human Services, Treasury and Labor, a plan will lose its grandfathered status if it makes certain changes to the plan design or cost-sharing features after March 23, 2010.

Following is a summary of common actions that employers take to control rising health care costs and how those actions may effect a plan’s grandfathered status.

1. Increasing the amount of employee contributions for coverage. If the percentage of employer contributions to the group health plan decreases by more than 5%, the plan will lose its grandfathered status. Thus, employee contributions can be increased, but only at a very modest level.

2. Increasing deductibles, copayments, coinsurance or out-ofpocket
limits.

• Any increase in coinsurance will cause the plan to lose grandfathered status.
• Increasing a fixed amount deductible or out-of-pocket limit is permissible as long as the increase is less than the rate of medical inflation (as defined in the regulations) plus 15%.
• Increasing a fixed amount copayment is permissible as long as the increase is less than the greater of (A) $5, increased by medical inflation, or (B) medical inflation plus 15%.

3. Eliminating coverage for certain conditions. Any change in plan design to eliminate coverage for a particular condition will cause the plan to lose grandfathered status.

4. Adjusting plan eligibility rules, for example, eliminating coverage for a spouse if he or she has coverage available through another employer’s plan. As currently drafted, amending a plan to adjust the eligibility rules does not result in the loss of grandfathered status.

5. Conducting dependent eligibility audits to ensure that only eligible dependents are covered by the plan. Removing ineligible dependents as the result of an eligibility audit will not result in the loss of grandfathered status.

6. Adding a high deductible health plan as an additional option or making this the sole option available for employees; this can be coupled with an employer contribution to a health savings account (HSA) or a health reimbursement arrangement (HRA) to assist employees in paying the high deductible. If an employer adds a high deductible health plan after March 23, 2010, the high deductible health plan would not be grandfathered. Because each health benefit package is generally looked at separately for purposes of determining whether it is grandfathered, any other benefit options that were in effect on March 23, 2010 will retain grandfathered status as long as they
are not otherwise amended to lose grandfathered status. If an employer had a high deductible health plan in effect on March 23, 2010 and subsequently eliminated its other benefit options, the high deductible health plan might lose its grandfathered status under an anti-abuse rule in the regulations, even if it is otherwise unchanged.

7. Adding or increasing the amount that can be contributed to a health flexible spending account so that out-of-pocket health costs can be paid for with pre-tax dollars. A health flexible spending account (FSA) can assist employees by allowing them to pay out-of-pocket health care costs with pre-tax dollars. The PPACA made two changes that will make a health FSA less attractive. First, an employee cannot be reimbursed for an overthe- counter medication without a prescription on and after January 1, 2011. Second, salary reduction contributions to a health FSA are limited to $2,500 on and after January 1, 2013. Even with these limitations, a health FSA still offers tax advantages to many participants.

8. Adding wellness programs and/or disease management programs. Adding benefits does not generally take a plan out of grandfathered status. However, if the wellness program is coupled with a penalty for a failure to participate, and the penalty results in an increase in plan costs that is greater than as described above, then the plan could lose its grandfathered status.

9. Changing insurers or TPAs. Changing an insurance company after March 23, 2010 will result in a loss of grandfathered status – even if the substantive plan terms are unchanged. Changing a third party administrator (TPA) after March 23, 2010 will not result in a loss of grandfathered status, as long as the plan is not otherwise amended to lose grandfathered status.

10. Making changes to dental and vision programs. A standalone, limited scope dental or vision program is an “excepted benefit” and, as such, is not subject to the market reforms under the PPACA. A standalone dental or vision plan can thus be amended after March 23, 2010 without any consideration of the need to preserve grandfathered status. However, if the dental or vision plan is an “integral part” of the overall health plan, then presumably any changes to the dental or vision plan could result in a loss of the health plan’s grandfathered status.

As health plan costs continue to escalate, employers will face difficult decisions as to whether to change plan design or cost-sharing features, which could take the plan out of grandfathered status, or to make only the minor permitted changes and preserve grandfathered status. If an employer decides that it is important to preserve grandfathered status,
it should be aware of two important administrative requirements. First, the plan must include a disclosure in any plan materials describing benefits that the plan believes it is a grandfathered plan, and provide contact information for questions and complaints. The regulations provide model language that can be used to satisfy this disclosure requirement. Second, the plan must maintain records documenting the terms of the plan in effect on March 23, 2010 and make them available for examination by participants or government agencies upon request.

For more information, please contact:

Cynthia A. Moore is a member in the Troy 
office and Practice Department Manager for the
Tax, Estate Planning, Employee Benefits, Health Care,
Immigration and Gaming departments. She can be
reached at 248.433.7295 or cmoore@dickinsonwright.
com.