Pitfalls of PPACA – The Grandfathering Problem

Picture 5 Throughout his election campaign and his subsequent efforts to achieve passage of health care reform, President Obama assured Americans that anyone with existing coverage could keep that coverage. Consistent with the president’s promise, Democratic lawmakers worked to include language guaranteeing continuation of coverage in the reform legislation.

They may have been too successful.

Section 1251 of the Patient Protection and Affordable Care Act provides assurances that nothing in the Act requires that an individual terminate existing coverage, excludes many of the provisions of the Act from applying to existing coverage, and goes on to guarantee that existing coverage can be extended to new employees (in a group plan) and additional family members (if allowed by any plan).

On the one hand, these provisions counter some concerns about reform (at least for those who understand them). On the other hand, the grandfathering of existing coverage undermines much of the intent of other parts of PPACA. Grandfathered plans are exempt from each of the following reform requirements (and others):

  • Elimination of cost-sharing for preventive care
  • Elimination of annual limits (individual plans only)
  • Elimination of preexisting condition exclusions (individual plans only)
  • Provision to consumers of “plain language” plan information
  • Availability of a standard appeals process
  • Limitation on premium variations by age and other factors
  • Guaranteed availability of coverage
  • Guaranteed renewal of coverage
  • Prohibition on discrimination based on health status
  • Provision of comprehensive health care coverage

In other words, grandfathered plans will be able to continue most of the practices that have angered consumers—and discriminated against those most in need of coverage.

There’s another problem, too. In the small group market—and possibly also in the individual market in some states—the effect of grandfathering may be to reduce the diversity of the insurance exchange risk pools. Insurers will be eager to perpetuate their current plans and avoid most of the new regulatory requirements, while employers with younger and healthier employees will want to retain their prior lower-cost coverage, leaving older and sicker groups to migrate to the exchanges, with regulations and rates more favorable to them. The effect in states currently with high numbers of uninsured—and therefore potentially with the most exchange enrollees—may be minimal, but in others the result may be that premiums are higher for plans available through exchanges than for those outside, while many insurers may decide to focus on their present less-regulated business and simply avoid the exchanges.

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Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies. He is editor of Health Care REFORM UPDATE [reformupdate.blogspot.com].

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10 replies »

  1. I’m pretty confused by this whole healthcare stuff. I have a a PPO plan through Anthem that I pay for myself. I’ve had it for over 5 years now and I think it’s pretty expensive. Anthem is offering me a less expensive plan which I think is comparable if not better. What are the disadvantages of losing my “grandfather” status on the plan I currently have?

  2. Alan Grayson Honors The Dead http://www.youtube.com/watch?v=TV9TRoYMtjs&feature=player_embedded
    Alan Grayson on Healthcare http://www.youtube.com/watch?v=oPpQ2MNaSDo&feature=player_embedded
    Ron Sparks HealthCareReform http://youtu.be/kqlBFRJh4Cw
    John Garamendi – The Public Option http://www.youtube.com/watch?v=EyBTEke68aQ&feature=player_embedded
    I want to commend all of you for working so hard and being so strong at helping the whitehouse and congress begin to address our U.S. and Global healthcare crisis. You have been AWESOME! my fellow Americans and peoples of the World. America and the World is better and safer for it. My greatest pride is the knowledge that I am one of you. And that you really get it. You really understand the importance of it all.
    There are some potentially very good things in the healthcare legislation. Especially with the reconciliation fix’s. The Democrats, Bernie Sanders and the Whitehouse did a GREAT! job of fighting to produce the best healthcare legislation that they could. They have earned all our strong support. And we should give it to them.
    But it was your relentless pressure and hard work that made the difference. Whatever good comes from this healthcare legislation, America and the peoples of the World will have each of you to thank. You were smart, creative, courageous and relentless. You fought together for the best legislation possible. And when you had to, you fought alone. No matter who stumbled and fell you continued to push and forge ahead. Fighting for the lives and health of the American people and the World. YOU SHOULD BE PROUD OF YOUR-SELVES 🙂
    It may come to pass that future generations will look back on us and say that we were ALL Americas Greatest Generations. And that healthcare reform was our finest hour. You should be proud of our leaders President Obama, Speaker Pelosi, Majority Leader Reid and the many other Democratic and independent fighters for the people in congress. They proved them-self worthy of the leadership of a GREAT! PEOPLE.
    But we are not done yet. This was just the beginning of healthcare reform, not the end. WE THE PEOPLE OF THE UNITED STATES, ARE NOT! divided on healthcare legislation. The vast majority of you have been consistently crystal clear that this legislation does not go far enough. You want a strong Government-run Public Option CHOICE!! available to everyone on day one. And you want it NOW!
    WE THE PEOPLE have been crystal clear that we want an end to dependence on for-profit healthcare and the for-profit proxies called private for non-profit healthcare. The American people want the CHOICE! of a strong Government-run Public Option to replace their need or dependence on healthcare providers whose primary motivation is profit. Rather than providing the highest quality, easiest accessible and most affordable medically necessary healthcare possible. This is what the rest of the developed World has. And the American people want it too. They want healthcare ASSURANCE! Not, for-profit health insurance. And they want it NOW!
    Now is the time to continue the push for a strong Government-run Public Option CHOICE! available to everyone that wants it on day one. Rationally it’s clear what we have to do to get this done. SUPPORT THE DEMOCRATS that supported you with a Public Option choice, and REMOVE as many republicans as you can. Not one republican in congress was willing to step across the isle to support a strong Government-run Public Option CHOICE!! available to everyone on day one. NOT ONE! Let no candidate prevail this November that does not support a Strong Government-run Public Option.
    47,000 AMERICANS die each year from lack of healthcare. 120,000 die from treatable illness that don’t die in other developed countries. Hundreds of thousands of you are dieing from medical accidents in a rush to profit. And Millions of you are injured. Millions more are driven into bankruptcy. All for the privilege of paying two to three times as much as any other people in the developed world for healthcare. HOGWASH!
    Additionally, tens of thousands of you and your children were killed and millions sickened and injured from a terror attack with H1N1 (swine flu). Released on the American people and the World by the for-profit healthcare industry. All in an attempt to panic and frighten you into accepting the oxymoronic criminal enterprise of private for-profit healthcare (The most costly, deadly, dangerous, and disgraceful product sold in America). H1N1 is still sickening people and killing them. Especially children, the young and the middle aged. And there will be a third wave. These are the terrorist you need to worry about the most. Even the so-called international terrorist would not do something so INSANE! But greed driven medical profiteers would and did.
    Apparently as far as republicans in GOVERNMENT are concerned, YOU! my fellow Americans – CAN JUST DROP DEAD! Including their own family members. Fools!… Hundreds of thousands of you, and possibly millions of you will die from the long-term effects of your infection and poisoning with H1N1.
    So my fellow Human Beings. Rest-up, Take good care of the basics (Balanced nutrition, hydration, exercise, rest and POSITIVE emotional supports). Then wade back into the FIGHT! for a strong Government-run Public Option CHOICE! available to everyone on day one. Drug re-importation, Abolishment or strong restrictions on patents for biologic and prescription drugs. And government controlled and negotiated drug and medical cost. You must take back control of your healthcare system from the Medical Industrial Complex. You MUST do it NOW! This is a matter of National and Global security. There can be NO MORE EXCUSES.
    God Bless You My Fellow Human Beings. I’m glad to know of you. And proud to be one of you.
    See you on the battle field.
    jacksmith – WorkingClass 🙂

  3. First, a couple of responses to critical comments on my original post:
    To Actuary – (1) Yes, grandfathering is likely to work to the advantage of most enrollees in grandfathered plans. But not all—and the dissatisfied always make more noise than the satisfied. (2) I doubt that we’ll see large companies dropping coverage, although we may well see coverage reductions as PPACA drives costs upwards (yes, I agree with you on this). The unknown here is what the final regulations will define as benefit changes that move a plan out of grandfathered status.
    To Brad – I didn’t intend to imply that groups could disenroll their more expensive members, only that those groups whose premium costs (because of older or sicker enrollees) were above those of the exchanges would naturally gravitate to the exchanges.
    Then, to Michael Turpin and jd :
    Thank you for a thoughtful and knowledgeable discussion. Again, we don’t know what the final regs will look like, but my guess is that they will be somewhat flexible, influenced by Obama’s campaign promises—and the need to keep at least some employers and employees (slightly) happy. So I’m expecting grandfathered plans to be around for quite a while.
    On the issue of barriers to entry, like jd, I’ve seen no evidence that having more insurers leads to lower premiums. In fact, since insurers entering a market must contract with the same providers—who already have existing insurer contracts—the opposite is likely to be true. Hawaii provides an interesting example. While there are several factors that make it different from other states, it is notable that, with just two dominant insurers, Hawaii has some of the lowest insurance rates.
    On the issue of market forces, we may have to wait a while for large employers to kick prestigious hospitals out of their networks. (Maybe until insurance benefits are taxable to employees.) Employees—who typically are paying only a fraction of the cost—will oppose it, and the post-tax employer cost differential between a network with expensive hospitals and “average” hospitals isn’t so great that employers will want to face such opposition.

  4. Michael, agree on all points, and great analogy:
    However, blaming the insurers for our health crisis is like trying to blame the school systems for juvenile delinquency. This is a team effort and the insurers would welcome more support to enforce tougher standards for care.
    You should post here more often.

  5. jd – good points as well. The barriers to entry debate is typically brought up by those who believe competition will reduce healthcare costs. There is no evidence that more carriers – even non profits, makes a market’s healthcare more affordable. As soon as a non profit Blues plan runs down reserves ( if they do – most are overfunded ), commercial plans know the non profit must raise rates and they can shadow price the non profit to try to improve their loss ratio.
    “A few dominant insurers make it easier to control costs if the public will support a hard-line approach to providers.” – – – You nailed it. It is my long held belief that employers are equally culpable for the mess we have in healthcare because of their demand for open access models, limited pre-certification, heart burn over limited networks and hospital/insurer disputes. A few carriers opened the floodgates some years ago by adopting ” care coordination ” as a model. It was a brilliant marketing move to gain marketshare but it gave away control over utilization that ultimately led to higher trends. In my past life, market forces were not allowed to really work in healthcare because employers viewed the knife fight between insurers and providers as creating disruption for employees. A typical employer would tell the healthplan to not risk losing the hopsital from the network. Large systems realized this and were able to extract larger increases and leverage. Small hospitals and primary care docs took the brunt of these large system increases and got fee cuts or very limited increases causing many to go into financial distress.
    There is another word for disruption in certain markets it is call “market forces”. The day a large employer agrees not to include to have a prestigious teaching hospital in their network because the clinical quality of said teaching hospital can not be proven to be worth the much higher costs, then we will see marketforces at work. Other than a ” All Payer ” legislation, I am not sure what lever to pull to level the field.
    However, given the profits the delivery side (insurers, brokers,third party managers like PBMs ) have gathered in while presiding over this period of unprecedented medical inflation, there is a sentiment among the supply side ( providers ) that the delivery system is broken, not the supply side. If the carrier’s primary value proposition is ” we will reduce your medical trend and keep your employees healthy”, they have not really been very successful and the monetary rewards they have reaped during this period do not track with their performance.
    However, blaming the insurers for our health crisis is like trying to blame the school systems for juvenile delinquency. This is a team effort and the insurers would welcome more support to enforce tougher standards for care. The issue centers around whether the insurance community can restore public support and/or whether employers are simply at a point where they would rather just be rid of employer sponsored healthcare than really get their hands dirty to drive population health improvement. I think the private sector could do a better job if they were willing but my guess is they deep down just want out.
    I wonder if we could insert Kaiser in every market how the trends and delivery system might change.

  6. Good points, Michael. I tend to agree with you. The grandfathered plans will be phased out of existence as their mix of benefits loses relevance and groups decide it is worth changing.
    As Michael points out, most employers offer equivalent or richer benefits than the lowest benefit plans allowed under the new law. Employers that offer a lower benefit plan (mostly small employers with major medical type benefits) can always offer a lump sum to their employees to participate in the exchanges if they want to get out of the hassle of providing insurance directly.
    What has been overlooked is that if grandfathered plans do start to become a problem, HHS can tighten the criteria for what counts as a change in benefits. They could count nearly any change at all as disqualifying a plan for grandfathered status.
    But Michael is too pessimistic with the following:
    By the time 2014 rolls around, the composite cost to cover an insured in the US will have risen another 30%. The next debate when we realize costs are not under control and the barriers to entry are too high for new insurers to compete with CUBA (CIGNA, United, Blues and Aetna) is a wrestling match over re-introducing the notion of the public option.
    A 30% increase over 3.5 years would mean almost 9% growth per year, which I’ll predict is way off. I’d guess closer to 20% cumulative growth, which of course is still deeply problematic.
    As for entry barriers, what is the evidence this is a problem? Do markets with more insurers, each with a smaller market share, have lower premiums and medical costs? I have not seen evidence of this. A few dominant insurers make it easier to control costs if the public will support a hard-line approach to providers. Another prediction: any place with at least two viable participants in an exchange will have an exchange that is deemed successful.

  7. Personally, I think grandfathering is a bit of a red herring. It essentially requires plans to freeze into place provisions that would most likely change each year as employers adjust plan designs to cope with medical inflation that will most certainly continue. ” Grandfathering” was a political false promise to allow voters to ” keep what they have” if they like it. The problem is that healthcare is provided by employers and not purchased by individuals. Employees will have no say on whether they can” keep what they have”. Employers will behave differently based on their size. The under 10 market will most likely pay the fine and run for the hills. The 10 – 50 market will do they math and decide based upon how much they believe benefits are an attraction and retention tool. The 50-100 employee companies will most likely insure up to the minimums required by law but the generous plan design will likely atrophy. The 100+ employer market will watch very carefully whether insurers can truly help reduce the cost of care or whether medical trend accelerates and is merely passed through by insurers.
    Why would an employer already covering benefits above the levels required by the new legislation not actually reduce their subsidy of medical to ensure that they are in compliance with the minimum amount required by PPAC and then pocket the difference or use the difference as an incentive for wellness credits if employees choose to engage in programs like biometric testing and health risk assessments.
    I do not know too many informed employers that are planning their health reform cost mitigation strategies around attempting to maintain grandfathered status. Most are infinitely more concerned about cost shifting and spiraling medical trend as Medicare cuts, 15M additional insureds under Medicaid and the absence of affordability measures mean only higher costs.
    By the time 2014 rolls around, the composite cost to cover an insured in the US will have risen another 30%. The next debate when we realize costs are not under control and the barriers to entry are too high for new insurers to compete with CUBA (CIGNA, United, Blues and Aetna) is a wrestling match over re-introducing the notion of the public option. As evidenced in Massachusetts, the next big debate is how do we pay for everyone to get everything. I think we are going to find as the Bay State has that affordability comes at a steep price – – it means someone gets less – less pay, less care, less access, less bedside manner. Meanwhile the insurers are all non profits with 2% margins so you will have to find a new whipping boy. Who will it be ? Teaching hospitals? Fat people ? Anyone with a “gist” attached to their professional designation ?
    I would be paying a much closer attention to the minimum loss ratio debate right now and what the NAIC recommends to HHS. Much of the unintended consequences of this legislation will play out once the carriers figure out where they will and will not make money in the brave new world. Most importantly, we have three election cycles to go before 2014 legislation begins to hit in earnest. Politically this is a lifetime and my bet is anyone who claims a crystal ball clear enough to predict what PPACA will ultimately look like is probably in need of some mental health care.

  8. Roger
    Even in the small group market, the same plan must be offered to all of the employees. Assuming cost of plan is not >9.5% of total income of worker, how would a company jettison a swath of their staff, say 10 of their costliest 30 workers, given eligibility issues for the HIE? They cant get in as they dont qualify. Alternatively, to get rid of the 10, they would have to purge the entire plan and get rid of the other 30 as well.

  9. On the contrary, “grandfathering” is one of the few positive features of PPACA, although it doesn’t go far enough. All plans should be “grandfathered” until 2014 so people have the most time to get coverage that suits their budgets and mindset (i.e., I don’t mind having a large deductible). When even a $20 co-pay for preventative care is outlawed, you know that the authors are hoping we all believe in the mythical “free lunch”.
    The “keep your coverage” promise looks very shaky, especially given that large companies are already discussing dropping health coverage benefits for their employees.
    According to Actuarial experts (including the CMS), many people with existing coverage are going to pay higher rates as the cost curve gets bent upward by PPACA.