Losing Health Plan Grandfathered Status May Pay for Some

September 8, 2010 (PLANSPONSOR.com) – A new Mercer study found that 53% of employers surveyed predicted they will be able to keep grandfathered status for all their plans next year under the health reform law – 14% fewer than a government estimate.

However, according to Mercer, many other employers are facing dramatically higher potential 2011 cost hikes by not making cost-saving changes. Specifically asked about raising the dependent eligibility age to 26 and taking away annual and lifetime benefit caps, employers estimated a 10.1% hike by not making the changes and 2.3% by doing so.

If employers avoid making certain changes to their health plans – such as raising employee coinsurance requirements – their plans will be grandfathered and considered exempt from a number of new cost-sharing and coverage mandates. Interim regulations released in June estimated that between 67% and 85% of employer plans will retain grandfathered status in 2011.

Mercer said 63% of respondents reported that the cost avoidance from the plan design and contribution changes they make will be greater than the additional costs resulting from the loss of grandfathered status. For example, while grandfathered plans are exempt from rules limiting cost-sharing for emergency services and mandating that certain preventive services be covered without cost-sharing, many employers already meet these standards and others don’t expect that compliance will add significantly to cost, Mercer said.

Twenty-six percent of employers say that complying with the rules for non-grandfathered plans will not be onerous, and 11% say they simply want to comply with the ultimate reform rules as soon as possible.

Thirty-two percent of employers expect to lose grandfathered status for all plans (or their only plan, if just one is offered), while 15% expect to lose it for at least one plan, but not all. Of the survey respondents that expect to have a grandfathered plan in 2011; about half believe they will have to forgo grandfathered status before 2014.

According to the study, in their need to manage cost in 2011, many employers are not willing to stay within the grandfathered plan limits. When asked what changes they would consider making that would result in the loss of grandfathered status, 35% said “increase deductibles or OOP maximums by more than the allowed amount;” 31% said “increase employee coinsurance levels;” and 23% said “raise copays by more than the allowed amount.”

Holding Cost Hikes to 6% 

When asked for the increase they hope to achieve after making such changes as switching plan vendors, raising deductibles and other cost-sharing provisions, or offering a different type of plan – employers estimated that they could hold the cost increase to an average 5.9%, Mercer found.

Employers with fewer than 500 employees, which generally offer fully-insured plans, predicted an underlying cost increase of nearly 12%, while large employers, which typically self-fund, predicted an increase of about 9% if they made no changes other than those required health reform, the study found. Still, small employers also expect to bring their cost increase down to 6%.

“Six percent seems to be employers’ collective comfort level,” said Beth Umland, Mercer’s research director for health and benefits, in a news release. “For the past five years the actual cost per employee has risen by about 6% annually, even as the underlying trend has been running at about 9%. Employers have been working hard to keep it at that level, and they’ll have to work a bit harder in 2011 to achieve the same result.”

Mercer found that overall, 57% of survey respondents will ask employees to pay at least a somewhat greater share of the cost of coverage in 2011. Over half of these will increase the cost of dependent coverage proportionally more than the cost of employee-only coverage.

At the same time, researchers found many employers will be looking to reduce health care cost increases by improving workforce health: 44% of respondents say they will add health management or wellness programs or services in 2011, and 38% say they will add incentives for employees to participate in the health management programs already available to them. More respondents will attempt to curtail health care spending through new or improved health management programs in 2011 than through higher deductibles or other cost-sharing provisions. 

The survey covered nearly 1,100 employers.