On June 17, 2010, the Internal Revenue Service, Department of Labor, and Department of Health and Human Services released interim final regulations (the "Regulations") in an attempt to resolve ambiguity regarding the changes that affect a plan's grandfathered status.  But what's the fuss if a plan loses its grandfathered status while adopting a plan design change that creates cost-savings?  This brief will explore the cost-benefit analysis that each plan sponsor should undergo in deciding whether to adopt plan design changes affecting a plan’s grandfathered status.

The Patient Protection and Affordable Care Act (“PPACA”), as amended by the Health Care and Reconciliation Act of 2010, exempted or “grandfathered” group health plans and health insurance coverage in which an individual was enrolled on March 23, 2010 from certain insurance market reforms and coverage mandates under Subtitles A and C of PPACA.  PPACA did not address what design changes to a plan would affect its status as a grandfathered plan.  Enter the much anticipated Regulations which provide guidance regarding both the determination and maintenance of a group health plan or health insurance coverage as a "grandfathered health plan" under PPACA. 

In order to maintain a plan’s grandfathered status, the Regulations are full of examples of “don’t do or else” changes.  But, when faced with a proposed amendment which creates significant cost savings for the plan sponsor, what factors should be considered before disregarding the change merely because of its affect on a plan’s grandfathered status?  The action items below can be used as a guide to explore both the costs and benefits of the proposed change:

Understand the Nature of the Proposed Design Change – Remember not all plan design changes will cause a plan to lose its grandfathered status.  Thus, the first step in analyzing a proposed plan design change is to determine whether or not the plan design change will affect a plan’s grandfathered status.  As a rule of thumb, the following proposed changes should be scrutinized before implementation:

• Reduction and/or Elimination of a Benefit to Treat or Diagnose.  If the proposed amendment eliminates a benefit used to treat or diagnose an illness, then the plan could lose its grandfathered status.  The plan sponsor should examine whether, after the amendment is effective, the participant will be able to treat or diagnose the illness?  If the answer is no, then the proposed design change will likely cause the plan to lose its grandfathered status;
• Increase in Cost-sharing for Participants.  If the proposed design change will cause an increase in costs to the participant (e.g., an increase in coinsurance, premium, deductible, or out of pocket limits), the change could cause the plan to lose its grandfathered status.
• Decrease in Employer Contribution Rates.  Plan Design changes which affect employer contribution rates (either by changing a formula or flat-dollar amount) will likely cause the plan to lose its grandfathered status.
• Change/Impose Annual Limits.  PPACA prohibits annual limits, but allows restricted annual limits on certain benefits before 2014.  However, if a plan did not have annual limits before March 23, 2010, it cannot impose a restricted annual limit without losing its grandfathered status.  Similarly, if a plan established an annual limit before March 23, 2010, it cannot decrease the annual limit without losing its grandfathered status.

Understand the Scope of the Proposed Design Change – The Regulations provide that the determination of a plan’s grandfathered status is made separately with respect to each benefit package made available under a group health plan or health insurance coverage (e.g., HMO-option, PPO-option).  Thus, it is important to understand and determine the scope of the proposed plan change.  Plan sponsors should consider:

• What benefit package(s) does the proposed design plan change affect?
• Does a change to one benefit package force a change in other benefit packages (i.e., will the change impact nondiscrimination testing to force a broader change than anticipated?)
• Can the reach of the proposed amendment be limited?  Plan sponsors should be aware that the Regulations clarified that stand alone retiree-only plans are exempt from the insurance reform mandates of PPACA (e.g., no lifetime or annual limits, no rescission, etc.).  Thus, if the proposed plan design change will affect a retiree-only component, it might be advantageous to create a separate retiree-only plan so that the retiree-only component is exempt from most PPACA mandates.

Understand the Costs of Compliance with Provisions of PPACA Applicable to Non-Grandfathered Plans – Before deciding to implement a plan design change which will subject the plan to additional mandates of PPACA, it is important to understand the costs associated with compliance with the major provisions applicable to non-grandfathered plans.

Generally effective for plan years beginning on or after Sept. 23, 2010:

• Claims Appeal Procedures.  PPACA mandates non-grandfathered plans to have an internal and external claims appeal process that incorporates ERISA claims procedures and follows DOL and HHS standards.  Most group health plans should already have a claims appeal process in effect.  Thus, the cost of adding additional claims procedures to an already existing framework will likely be minimal.  However, plan sponsors should examine how many claims have been processed in previous years in order to determine the additional cost associated with the heightened requirements. 
• Discrimination Testing. Fully-insured non-grandfathered group health plans are subject to the nondiscrimination requirements of Section 105(h)(2) of the Internal Revenue Code, including the prohibition against discrimination in favor of highly compensated employees.  Plan sponsors of fully insured plans should review their plan to ensure that the plan will survive discrimination testing.  If a plan design change is made that takes a fully-insured plan out of grandfathered status and the plan fails discrimination testing, the cost associated with adding additional benefits for non-highly compensated employees could be substantial.
• Various Patient Protections.  Non-grandfathered plans are required to cover certain types of preventive health care, including limitations on cost-sharing for emergency services and cancer screenings.  Compliance with this provision will have an immediate dollar impact which plan sponsors should determine before contemplation of any design change which could affect its grandfathered status.

Generally Effective for Plan Years Beginning on or after January 1, 2014:

• Insurance Cost-sharing. Non-grandfathered group health plans must limit cost-sharing and offer minimum coverage levels (e.g., no annual out-of-pocket limits greater than $5,950 for individual coverage and $11,900 for family coverage).  Plan sponsors should determine the potential dollar impact of this mandate by reviewing their current coverage levels.
• Clinical Trials.  PPACA prohibits group health plans from denying coverage for certain clinical trials.  This cost will likely be minimal, but the plan sponsor should analyze its participant population to determine the associated cost of compliance.

Analyze the Benefits of the Proposed Plan Design Change -  After analyzing the additional costs of compliance with the provisions of PPACA that are applicable to non-grandfathered plans, plan sponsors should weigh those costs against the benefits of the proposed plan design change.  Plan sponsors should consider:

• What are the cost savings to be realized as a result of the proposed change?  This consideration is a tangible factor that can be weighed directly against the increased costs associated with compliance with non-grandfathered plan provisions of PPACA.
• Are there any costs associated with the plan design change which offset some or all of the benefit?  Will the plan be harder to administer post-change?  What will be the effect on the participants?

From a practical standpoint, this analysis will be quantitative as well as qualitative.  Not all costs or benefits can be simplified into values or identified before a plan design change is implemented.  However, the action items listed above can serve as a starting point for plan sponsors to consider whether or not it is worth taking a plan out of grandfathered status.   At the end of the analysis, many plan sponsors can find that implementing such a plan design change is in the best interest of the plan and its participants even if grandfather status will end.