Opinion: Grandfathered plans, the ACA and the 'If you like your plan …' pledge

By Bob Semro

President Obama, on many occasions, said, “If you like your plan you can keep it.”  However, we’ve heard many stories about Americans who can’t keep their old insurance coverage, and last week, the president apologized, saying, “I am sorry that they are finding themselves in this situation based on assurances they got from me.”

In testimony before a House committee, Health and Human Services Secretary Kathleen Sebelius was asked, “Why not let the consumer decide whether to renew it (their plan) or not? Why were regulations promulgated in the summer of 2010 that then undermined the ability of those folks to re-sign up?”  Sebelius responded, “There were no regulations changed. We outlined the grandfathered policy so people could keep their plans.”

So what’s the real story?  What does the Affordable Care Act do to protect existing plans? If you like your plan, can you keep it, and is that decision up to the policyholder? Does your ability to keep your plan depend on the type of insurance you have?  Can your coverage be canceled? And, finally, is it true that new provisions in the ACA will require you to pay higher premiums for a new plan?

Faced with mounting discord, the president has proposed a fix to this problem, but it is useful to understand the background behind it.

Grandfathered plans

As Sebelius stated, the “grandfathered plan” policy was a provision of the ACA designed to protect existing plans. A grandfathered plan is any policy in existence before March 23, 2010, when the ACA became law.  Grandfathered plans must eliminate lifetime benefit caps, offer coverage to dependent children over age 26 and eliminate pre-existing condition exclusions in 2014, but they are exempt from most other ACA reforms.

The idea was to limit the impact of the ACA on those plans so that insurance companies would continue to offer them and employers and individual consumers could continue to enroll in them.

Under the ACA, a grandfathered plan can lose its status if out-of-pocket costs increase above the rate of medical inflation plus 15 percent, co-insurance rates increase, annual benefit limits decrease, employer contributions decrease by more than 5 percent, or the plan eliminates coverage for a previously covered condition.  

With the exception of those provisions, designed to protect consumers, a grandfathered plan could continue to be available to policyholders as long as the insurance company chose to offer it.

And that is the key. Insurance companies are not required to offer these plans forever, and the ACA cannot force them to do so – in the same way that the ACA cannot force insurance companies to keep the same doctors and hospitals in their provider networks. And insurance carriers have many motivations to discontinue older plans.

The plans receiving the most attention are those that lost their grandfathered status or were created after March 2010 and did not meet the ACA’s benefit standards. As a result, those plans must be replaced with new offerings, often at higher cost because of the added benefits. This is the scenario that’s proved to be the most problematic for the president. As a result, he proposed an administrative fix today that will allow insurance companies to keep those plans for an additional year. Insurance companies must notify policyholders of alternatives under the ACA and indicate which benefits required by the ACA are not covered in these policies.

Employer sponsored insurance

The large majority of Americans (149 million in 2013) get their health insurance coverage through their employers. This population represents about 90 percent of the almost 168 million Americans in the private insurance market. According to the Kaiser Family Foundation’s 2013 Employer Health Benefits Survey, 54 percent of firms offering health benefits offered at least one grandfathered plan in 2013. And small firms with fewer than 200 employees were more likely to offer a grandfathered plan than larger employers.

However, fewer and fewer grandfathered plans are being continued. Enrollment has dropped from 56 percent of covered workers in 2011 to 48 percent in 2012 and 36 percent in 2013. From an insurance company’s point of view, grandfathered plans limit flexibility, since it cannot significantly modify benefits, premiums or cost-sharing.

The good news is that in the employer-sponsored insurance market, the vast majority of grandfathered plans already offered equivalent or greater benefits than those required under the ACA. As a result, very few policyholders will have to “buy up” into more comprehensive coverage. So, for the vast majority of Americans on employer-sponsored insurance, the impact of the ACA will not be noticeable.

The individual insurance market

The real issue is the individual insurance market, where an individual purchases coverage directly from an insurance carrier. About 19 million Americans (roughly 5 percent of all Americans, insured or uninsured) are in the individual insurance market. Before the ACA, about half these plans would “churn over” in any given year. According to Sebelius, discontinuing plans in the individual market has never been unusual.  “People move in and out. They often have coverage for less than a year.  One-third have coverage for about six months.”

Insurance business models in the individual market have always managed premium prices and claim costs by keeping out the sick. They did so with exclusions on pre-existing conditions, higher premium rates, gender rating, annual or lifetime benefit caps and rescinding or canceling coverage when policyholders became seriously ill.

Another practice that insurance companies frequently used was limiting the range of covered benefits and increasing out-of-pocket costs. A report from the Obama administration in 2011 found that 62 percent of individual-market plans did not offer maternity care; 18 percent did not cover mental health benefits; and 9 percent did not pay for prescription drugs. All too often, when people became injured or seriously ill, they found out how little these policies covered and how financially draining they were.

Under the ACA, private insurance has been reformed to eliminate or limit these practices.

Should a grandfathered plan end, any new plan is subject to all of the ACA’s reforms, including a minimum level of covered benefits. The 10 “essential benefits” required by the ACA include coverage for prescription drugs, preventative care, maternity care and mental health treatment. These new policies will offer consumers better coverage, but the expanded benefits may lead to higher premium prices for some. For others, this coverage may be comparable to or even more affordable than in the past.  According to MIT economist Jonathan Gruber, approximately one-half of Americans in the individual market will likely have to purchase a new policy that may cost more.

Cancelations vs. continuous coverage

However, under the ACA, old plans cannot simply be canceled, leaving the policyholder uninsured.  Now, insurance carriers must offer continuous coverage. That means that insurance companies must offer the policyholder an alternative plan should they discontinue their old one.

Cost vs. coverage

Policyholders have the option of purchasing another plan from the same insurer or another insurer in the private market. They also can purchase coverage through the new health insurance market places, and they may qualify for federal subsidies that make that purchase more affordable. During testimony before a Senate committee, Marilyn Tavenner, administrator of the Centers for Medicaid & Medicare Services, said that 48 percent of Americans currently in the individual insurance market (and not eligible for Medicaid) would receive an average tax credit subsidy of $5,500.

The bottom line is some people in the individual market may have to pay more for coverage. That extra cost pays for better coverage and the security of knowing that they can stay covered regardless of their gender, health status or age – and not face financial ruin in the event of a serious illness.

Reports on television and news sites have talked about these customers as winners or losers, but that score-keeping is counting only the cost of changing coverage. Ultimately, these Americans will have to factor in the value of greater security and comprehensive and affordable health care against the cost of their insurance.

Bob Semro is a health care policy analyst with the Bell Policy Center, a non-partisan policy research center that advocates public policies that reflect progressive values.

Opinions communicated in Solutions represent the view of individual authors, and may not reflect the position of the University of Colorado Denver or the University of Colorado system.


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