'Grandfathering' clause raises more questions on impact of overhaul

NORTH BAY — Throughout the health care reform debate, employers and employees alike were told they’d be able to keep their current health plans, if so desired. With the unveiling of details on the so-called “grandfathering” clause by the Department of Health and Human Services, however, brokers said such a prospect seems slim, and employers will face a series of tough choices regarding what type of plan they choose to offer employees as they attempt to grapple with still-rising costs.

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“Very few of the groups will be grandfathered by 2014,” said Victor McKnight, a broker with Sitzmann Morris & Lavis in Santa Rosa and past president of the North Coast Association of Health Underwriters.

Mr. McKnight’s point was echoed by numerous insurance professionals who said seemingly minor changes to health plans on such short notice mean that few employers will be able to keep existing plans in place.

“My biggest problem is the limited amount of warning to clients,” said David Hodges, who heads Hodges Insurance Services in Santa Rosa.

Requirements for plans in place on or before March 23 of this year to meet grandfathered status were issued by the federal government recently and quickly created a buzz among brokers – most of whom in the North Bay expressed doubt that the promise to keep plans as is would not be met for the majority of both group plans and individual plans.

Changes that would alter the status of plans include the elimination of any specific benefit, an increase in employee co-insurance, an increase in deductible or the out-of-pocket maximum, any increase in employee co-payment, a decrease in employer contribution of more than five percent, changes to annual policy limits and change of carrier for a new policy.

“If you raise the co-pay by more than five dollars, you lose status. Or if you ask your employees to pay a little more, say from 80 percent to 90 percent, you lose status. If you go from Blue Cross to Blue Shield or Health Net, you lose status,” Mr. McKnight said.

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Brenda Gilchrist, who advises many employers on polices as the principal and co-founder of the HR Matrix, said many employers may not be aware of some of the implications that certain plan design changes will have under the rules.

“Some employers may be making changes this year, such as increasing cost-sharing, changing co-pays or making other plan changes to decrease costs. In the end, some of their plan design changes made after March 23 may increase their costs,” she said.

Another possibility is that some employers may find it more cost-effective to drop employee coverage all together, since it may be cheaper to pay government fines rather than footing the cost of benefits, Mr. Hodges said.

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He called the new rules "a blind side to small businesses" because they will likely be impacted more so than companies with 50 or more employees. Based on conservative estimates from the Congressional Budget Office, he said the average cost for a single employee’s health plan will be around $7,000 a year when all elements of the health overhaul bill take effect. The average fine per employee on an annual basis will be around $2,000 a year.

“I think you’ll have a lot of employers paying the $2,000 fine and dropping their plans,” Mr. Hodges said.

While brokers doubt plans in effect before or on March 23 will meet grandfathered status, the exact impact remains unclear.

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"Everybody thinks they want it, and they're not sure exactly how they are going to get it. And even if they can achieve it, it is not clear what the exact benefit to the employer will be," said John Fradelizio, managing director of Wells Fargo Insurance Services in Petaluma. “When you really look at the law, being grandfathered really only gets you a couple of things.”

Mr. McKnight echoed such a viewpoint, adding, “Nobody’s able to keep their benefits the same for five years anyhow. They have to make changes because of premium inflation. Companies, because of inflation, constantly have to change plans because rates are going up,” he said.

Cost could increase by approximately 4 percent to 6 percent, Mr. McKnight said, depending on what level of preventative care is offered. “There are some real questions on what is going to be included.”

Smaller employers will likely be hit harder by the grandfathering issue, Mr. Hodges said, because they often have to be more creative and have a smaller margin for error with the plans offered – typically health care savings accounts and health reimbursement arrangements. Such plans, under the new provisions, will not be as flexible as they have been in the past, and as employers seek ways to offset cost – such as an increased deductible – “those plans are really getting creamed,” he said. Larger employers are more likely to either be self-funded or rely on HMOs for their benefit plans, but that’s not the case for smaller employers.

While the merits of grandfathering remain an issue, the HHS rolled out another important facet of the health care overhaul that insurers said will be of particular interest – the pre-existing condition health insurance plan.

California, along with 28 other states and the District of Columbia, have chosen to operate their own plans, while the remaining states  elected to let HHS run such plans.

As part of the health overhaul, $5 billion has been set aside for high-risk pools that will provide insurance for individuals who have had no insurance for the past six months because of a high-risk pre-existing condition, such as diabetes, cancer and other medical conditions. Premiums for new coverage under the law must be the same as the existing rate for healthy adults in individual states, with the intent of providing a bridge for those who have either been dropped from health plans or who have been denied any insurance until 2014, when more components of reform take effect.

The $5 billion allocated by the federal government for the pre-existing conditions plan is set to last for two years, and concerns have been raised on whether that's too short of a time frame to be successful and a sustainable component of the health overhaul.

“It will be interesting,” Mr. McKnight said. “That’s a big deal for people trying to get coverage.” Such coverage could be available as soon as August.

Mr. Hodges agreed that it was significant.

“The one thing I’m hoping for is that if more people buy insurance, if more people have the insurance, you won’t see the cost impact,” he said. “If more people sign up for insurance, then this could be successful. If you get more people into the pool, you spread the risk more evenly.”

Mr. McKnight said much concern is centered on whether the $5 billion at the federal level is enough for such a program. He did note that it’s potentially a positive development by expanding access.

“It’s a problem when people can’t get coverage," he said. "I don’t know how it will go, but I think it will be interesting to see the cost. A lot of people feel they’ve underfunded it at $5 billion nationwide.”