Grandfather Rules Looser Than Expected

HPM legal notes June 15, 2010

For HealthPlanMarkets Subscribers (used with permission)

HMOs Are The Most Affected By New HHS Deductible Ceilings

New HHS rules released yesterday allow bigger than expected changes in grandfathered health plans before they lose their grandfather status. HHS appears to have gone far to make the rules less burdensome on industry.

But HPM has discovered that one of the new rules limiting increases in deductibles in grandfather plans will affect mostly HMOs in 2010. Most PPOs will not lose grandfather status until 2012, and most CDHPs will be exempted, although much of their growth comes from new non-grandfather plans.

To stay a grandfather, plans cannot raise the percentages now used for co-insurance, cannot raise copays in the future by more than $5 or 20%, and cannot raise deductibles by more than 25% over two years (20% in 2011). They also cannot reduce the employer contribution by more than 5 points. They can’t change insurer, but ASO type plans can change administrator.

The new rules contain an accurate chart showing who will be affected. Between 36% and 66% of large employers will still be grandfathers in 2013, and between 20% and 51% of small employers will still be exempted.

The lower percentage is most likely. The main reason: two-thirds of U.S. employers now shop for a new plan each year. That combined with pressure to keep premiums low by raising cost-sharing will in our opinion make being a grandfather much less attractive. For instance, a recent Mercer study shows that 38% of employers are now providing “unaffordable” PPACA coverage.

A grandfathered plan actually is not that much different. It is exempted from the new mandated first dollar prevention coverage, and from a new any-willing-provider mandate for OB-GYNs. But a large percentage of even the grandfather plans will have to carve out employees with a too high a percentage of family income paid to out-of-pocket costs (including premium).

New Deductible Limits Affects HMOs Most, CDH Plans Least

HealthPlanMarkets has compared the new HHS rules on how much a health plan can increase its deductibles with the 2009 Mercer employer survey. We found that from 2008 to 2009 most plan types came in below the 25% ceiling. But HMOs would be hit the hardest because they have been raising deductibles at a much faster rate to catch up with PPOs and CDHPs. In fact, most HMOs in the U.S. have probably already lost any hope of grandfather status:

New Grandfather Deductible Limit Only Affects HMOs

Plan Type

2009 >

U.S. Average

HMO

44.7%

$1524

PPO

10.7%

$1488

POS

17.8%

$2191

HDHP

1.9%

$3626

Source: HealthPlanMarkets, KFF/HRET 2009 Employer Survey

CDH plans like HSAs and HRAs are the least impacted by the new rules because they already have high deductibles, and are barely increasing them from year to year. Few if any CDH plans even have copays, and co-insurance generally applies to above the deductible for about half of all plans.

Virtually all HRAs in the U.S. probably meet the deductible rule, and a large percentage of HSAs are not increasing deductibles at all. The only caveat is that employers also cannot reduce they HSA/HRA contributions by over 5 points without running afoul of the rule on sudden changes in the employer share. Employers have generally been increasing CDH contributions, though.

PPOs on average will probably not hit the deductible limit until 2012. However, PPO/POS plans have the most enrollees in the market and thus are likely to see the most plans losing grandfather status immediately.

“Plans will lose their ‘grandfather’ status if they choose to significantly cut benefits or increase out-of-pocket spending for consumers,” the new rule states. This will “allow employers to make routine and modest adjustments to co-payments, deductibles and employer contributions to their employees’ premiums without forfeiting grandfather status.”

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