To Grandfather or Not to Grandfather…

When President Obama promoted his comprehensive health insurance reform legislation he frequently said: “if you like your current health insurance plan; you’ll be able to keep it.”  What he failed to mention was that the government’s definition of “current plan” is extremely narrow and includes many new mandates. There is a growing consensus in the broker and insurance carrier community that the benefits of keeping a current plan will be minimal while the cost will be very high.i

In a letter to Health and Human Services (HHS) Secretary Kathleen Sibelius, the Coalition for Affordable Health Care described the difficulty of keeping grandfather status:

“small businesses are struggling to keep their businesses open, create jobs and provide health coverage. They do this partially by shopping for a better deal, and yet the HHS rule would require them to relinquish grandfather status if they seek to obtain a lower cost plan, even if the plan provides the same level of benefits. It is hard to understand how this anti-competitive, anti-cost containment and anti-choice aspect of the rule would benefit these small employers who are trying to provide jobs and coverage for themselves and their families.” ii

We’ve found that most people are OK with their current health insurance plan – until they receive a rate increase. Then, we work to obtain similar benefits from another insurance company at a lower rate and/or, if necessary, reduce the benefits (e.g., change from a $500 deductible plan to a $1,000 deductible) to lower the rate increase. Given the newly proposed regulations, we now know that changing insurance companies and/or down grading benefits will cause a plan to lose grandfather status. 

New Law Allows Few Changes to Keep Grandfather Status

A  White House health reform document lists many aspects of your current health insurance plan that cannot change if you want to keep grandfathered status. For example, you:

  1. Cannot Significantly Cut or Reduce Benefits.
  2. Cannot Raise Co-Insurance Charges.
  3. Cannot Significantly Raise Co-Payment Charges.
  4. Cannot Significantly Raise Deductibles.
  5. Cannot Significantly Lower Employer Contributions.
  6. Cannot Add or Tighten an Annual Limit on What the Insurer Pays.
  7. Cannot Change Insurance Companies.

These restrictions leave few, if any, ways to off-set the ever-increasing cost of health insurance. And, one thing everyone agrees on is that PPACA does little, if anything, to reduce the cost of health care. As of today, it appears that the only way to offset the rising cost of health insurance is to forego the option of grandfathering.

To determine whether you should keep your current health insurance plan you need to compare it to the costs and benefits of plans that will be available in 2014.

Current Cost & Benefits of Pre-Reform Plans

After September 23, 2010 current health insurance plans must include the cost for these benefits mandated by PPACA:

  1. no lifetime limits on coverage;
  2. no rescissions of coverage;
  3. extension of parents’ coverage to young adults under 26 years old;
  4. no coverage exclusions for children with pre-existing conditions; and
  5. no “restricted” annual limits.

While all of these benefits are desirable, nothing is free. All of these mandates will increase the cost of grandfathered and non-grandfathered health insurance plans.  To be clear, all health insurance plans will become more expensive beginning in October 2010 because they must include the cost of these new mandates.iii If you want to lower reform-related cost increases by changing plans; you will lose grandfathered status and be forced to change to a new plan in 2014.

Future Cost & Benefits of 2014 Plans

In 2014 health insurance companies will only be able to sell four plans labeled: platinum, gold, silver, and bronze.iv Additionally, people under age 30 will be able to purchase a “catastrophic” plan.  So, in 2014 there will be very few options to lower your monthly premium by downgrading benefits – as only five plans will exist.

The only health insurance plans available in 2014 will have very rich benefits (i.e., low deductibles, low co-pays, brand medications, etc.). The lowest level “bronze” plan; will be HSA (Health Savings Account) compatible with the maximum deductible of $2,000 individual/$4,000 family. Rich benefits require high premiums.

Additional cost increases will result from PPACA. By 2014, PPACA will have added huge new taxes on pharmaceutical companies ($3 billion/year); a 2.9% tax on medical devices; and an $8 billion/year tax on health insurance plans v. These cost increases are in addition to medical cost inflation. Private health insurance companies (e.g., Kaiser, Anthem Blue Cross, UnitedHealth Care, etc.) will pass these taxes through to consumers; causing health insurance to become even more expensive.

Individual Premium Subsidy: In 2014 very low income people will be able to enroll in Medicaid (called “Medi-Cal” in California.) Low-to-middle income people who purchase individual and family coverage (not group coverage) may receive a subsidy from the Federal government to offset part of the cost of their plan. People must purchase their health insurance in the government run “exchange” in order to obtain the subsidy.  Most importantly, subsidies are only available to people based on their income. The subsidies diminish as household income increases. To get an idea of the subsidy amount and the individual cost of a “Silver” plan in 2014, please use this 2014 premium calculator created by the Kaiser Family Foundation.

2014 Employer Group Options: Employers in the small group market (i.e., companies with 1-100 employees) will not have a subsidy and they will only be able to purchase one of the 4-5 plans that can be sold in 2014.  There is no requirement for companies with 50 or fewer employees to offer health insurance.  However, all companies that offer group health insurance coverage –regardless of size – will face a $3,000/year/employee penalty if they require an employee to contribute more than 9.5% of the employee’s household income toward the monthly premium for the employer’s health insurance plan.

Companies with 51 or more employees must purchase group health insurance for their employees or pay a penalty of $167/month/employee ($2,000/year/employee.)  Considering that most employers pay two-to-five times this amount for their employees’ health insurance; PPACA provides a strong incentive for employers to drop their group health insurance plan and pay the penalty.  Employees would then be able to purchase their own individual coverage in the government exchange where they may be eligible for a Federal subsidy.  Clearly this is a loop hole that Congress must change or virtually all companies will cancel their coverage and taxpayers will be forced to pay for everyone’s health insurance.

Conclusion: It will become increasingly more expensive for employers and individuals to keep the health insurance plan that covered them pre-reform, March 23, 2010. The only people who may want to keep their current plan are employers and individuals who are covered by a very high deductible – low cost plan (e.g., $5,000 deductible.) High deductible plans (greater than $2,000/individual, $4,000/family) will not be available in 2014.  Keeping a high deductible-low premium plan may make financial sense because by 2014 that plan will likely be less expensive than the rich benefit, expensive plans that the government will force people to purchase.

Those with pre-reform, lower deductible (or HMO) health insurance plans may not see any benefit to grandfathering their plan. Most people will likely conclude it is better to lower the cost of their health insurance plan now and forego grandfather status. Then, in 2014 when we know the actual plan benefits, premiums and income-based subsidy amounts; we will try to make the best of the situation.

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i. The National Association of Health Underwriters (NAHU – an association of health insurance agents) recently wrote “We maintain, along with many employers and other stakeholders that the requirements for maintaining grandfathered status set out in an interim final rule are much too difficult to meet.” Source: August 20, 2010 NAHU Washington Update, http://newsmanager.commpartners.com/nahuw/issues/2010-08-20/1.html
ii. Source: August 16, 2010 letter from the Coalition for Affordable Health Care (CAHC) to Health and Human Services (HHS) Secretary Kathleen Sibelius on the Interim Final Rule (“IFR”) relating to Grandfathered Health Plan Status under the Patient Protection and Affordable Care Act (PPACA), as published in the Federal Register on June 17, 2010 (Volume 75, Number 116), http://newsmanager.commpartners.com/nahuw/downloads/08-16-10_CAHC_Grandfathered_Plan1.pdf

iii. Aetna has estimated the cost increases associated with the new 2010 Federal requirements in this document: Impact of Health Care Reform in 2010: A Guide to the 2010 Health Care Reform Provisions.

iv. NAIC (National Association of Insurance Commissioners) definition of Essential Health Benefits Requirements:
“Deductibles for plans in the small group market are limited to $2,000 individual/$4,000 family, indexed to average premium growth. This amount may be increased by the maximum amount of reimbursement available to an employee under a flexible spending arrangement.
The levels of coverage are defined as follows:

  1. Bronze level-Must provide coverage that provides benefits that are actuarially equivalent to 60% of the full actuarial value of benefits under the plan.
  2. Silver level-Must provide coverage that provides benefits that are actuarially equivalent to 70% of the full actuarial value of benefits under the plan.
  3. Gold level-Must provide coverage that provides benefits that are actuarially equivalent to 80% of the full actuarial value of benefits under the plan.
  4. Platinum level-Must provide coverage that provides benefits that are actuarially equivalent to 90% of the full actuarial value of benefits under the plan.

Individuals under 30 years of age or those exempt from the individual mandate because no affordable plan is available to them or because of a hardship may purchase a catastrophic plan providing the essential benefits package with a deductible equal to the total limitation on cost-sharing above and first-dollar coverage of at least three primary care visits. “ Source: National Association of Insurance Commissioners, Patient Protection and Affordable Care Act of 2009:
Health Insurance Exchanges, April 20, 2010, http://www.naic.org/documents/committees_b_Exchanges.pdf

v. “Annual revenues collected by the fee (from pharmaceutical companies) would total $2.5 billion for 2011, $2.8
billion per year for 2012 and 2013, $3.0 billion for 2014 through 2016, $4.0 billion for 2017, $4.1
billion for 2018, and $2.8 billion for 2019 and thereafter…The aggregate fee collected across all health insurers will equal $8 billion in 2014, $11.3 billion in 2015 and 2016, $13.9 billion in 2017, and $14.3 billion in 2018…Also under PPACA, a new excise tax of 2.3% will be imposed on the sale of medical devices by manufacturers, producers, or importers…this excise tax is projected to raise $20 billion over a 10-year period” Source: Congressional Research Service, Health-Related Revenue Provisions in the Patient Protection and Affordable Care Act (PPACA) May 3, 2010, click here for pdf.