How do employer healthcare costs affect the use of grandfathered health plans?

Employer healthcare costs are a primary driver behind the strategic decision to maintain, or reluctantly abandon, grandfathered health plan status under the Affordable Care Act (ACA). Grandfathered plans, those in existence on or before March 23, 2010, that have avoided significant changes, enjoy a unique regulatory carve-out. The relationship is a tug-of-war: rising medical and pharmacy trend costs push employers to preserve grandfathered status as a cost-containment lever, but the same cost pressures can trigger the loss of that status, forcing plans into the fully ACA-compliant pool. Understanding this dynamic is critical for benefits professionals navigating the delicate balance between compliance, cost management, and employee value.

The Cost-Saving Appeal of Grandfathered Plans

For many employers, particularly those with older, stable plan designs, grandfathered status functions as a financial shield. These plans are exempt from several ACA mandates that can drive up premium and administrative expenses. Maintaining grandfathered status allows a plan to avoid:

• Essential Health Benefits (EHB) coverage requirements in the small group market, allowing leaner benefit designs.
• Community rating rules in the fully insured small group market, preserving the ability to set premiums based on group health status or industry.
• The prohibition on annual dollar limits on essential health benefits.
• Coverage of certain preventive services without cost-sharing beyond the pre-ACA baseline.
• Expanded internal and external appeals processes that add administrative complexity.

When employer healthcare costs spike, driven by specialty drugs, high-cost claimants, or provider consolidation, the temptation to cling to these exemptions intensifies. A grandfathered plan can sidestep the richer benefit mandates that would otherwise apply, keeping costs lower and making budgeting more predictable. For self-funded plans, retaining annual limits and a leaner benefit design can reduce claims exposure.

The Hidden Costs of Maintaining Grandfathered Status

However, the cost-containment motive can backfire. To remain grandfathered, a plan must avoid "significant changes" that reduce benefits or raise cost-sharing beyond allowed thresholds. The rules are unforgiving:

• Eliminating all or substantially all benefits to treat a particular condition loses grandfathered status.
• Increasing a coinsurance percentage by any amount loses it.
• Raising deductibles or out-of-pocket maximums by more than medical inflation since March 23, 2010 plus 15 percentage points triggers loss.
• Raising a copayment beyond the greater of $5 adjusted for medical inflation, or that same percentage formula, triggers loss.
• Decreasing the employer contribution rate by more than 5 percentage points below the March 23, 2010 rate forfeits grandfathering.

A December 2020 final rule added headroom for deductibles and out-of-pocket maximums, which may now rise by the greater of medical inflation plus 15 percentage points or the change in the premium adjustment percentage plus 15 points. One common worry runs the other way: since a 2010 amendment, plans may switch insurance carriers or third-party administrators without losing grandfathered status, as long as benefits stay the same.

As healthcare costs rise, employers face a difficult trade-off. To offset medical trend, they often need to shift more cost to employees through higher deductibles or copays. Those same design changes can breach the permitted thresholds and cause the plan to lose grandfathered status. Many plan sponsors have lost that protection by raising a deductible modestly, unaware they had exceeded the cumulative allowed increase calculated from 2010. The consequence is immediate: the plan must comply with all ACA market reforms at the next renewal, potentially triggering a sharp premium increase or a full rework of the benefits strategy.

Rising Costs Directly Undermine Grandfathered Plan Longevity

The attrition of grandfathered plans reflects the upward pressure of healthcare costs. KFF survey data shows that the share of covered workers in grandfathered plans fell from 56% in 2011 to 13% by 2019. Each year, inflation pushes benefit structures against the permissible change limits, and a plan that was fully compliant in 2015 may breach the threshold later simply by adjusting its deductible to keep pace with medical trend. The permitted increase is cumulative medical inflation since 2010 plus 15 percentage points, so a plan that has used up much of that headroom can lose its status with one more routine cost-sharing adjustment.

For small and mid-sized businesses, this squeeze is particularly acute. They lack the large-group negotiating power to absorb cost spikes without altering plan design. Consequently, many small employers have already hit the wall: they either lost grandfathered status by implementing necessary cost-shifting, or they voluntarily surrendered it because maintaining the plan as-is became uncompetitive or unaffordable even with the regulatory exemptions. In some cases, the administrative burden of tracking the precise 2010 baseline and calculating the minute-by-minute changes was simply not worth the avoided cost of full ACA compliance.

Strategic Nuances: When Rising Costs Make Grandfathering a Liability

Paradoxically, rising costs can actively discourage employers from clinging to grandfathered plans. The ACA's premium tax credit and employer shared responsibility provisions create a counter-incentive. A grandfathered plan that is "unaffordable" under the ACA's 9.96% of household income threshold for 2026 can expose a large employer to §4980H penalties. Grandfathered status exempts a plan from many market reforms, but the employer shared responsibility rules still apply, so the affordability test does too. Employers facing double-digit annual trend may find that an outdated grandfathered plan simply cannot meet affordability requirements for their lowest-wage workers without employer contributions that undermine the whole purpose of cost containment. In this scenario, transitioning to a compliant, newer plan design, perhaps with narrow networks, an ICHRA, or a level-funded solution, can deliver superior long-term cost control while mitigating penalty risk.

Also, the advantage of avoiding EHBs often diminishes over time. Employees have come to expect preventive care coverage, mental health parity, and no-cost contraceptive coverage. A grandfathered plan that lacks these features can create recruitment and retention challenges, indirectly increasing workforce costs. As healthcare costs push employers to reconsider their total rewards value proposition, the relative "cheapness" of a grandfathered plan may be outweighed by its inadequacy in a competitive labor market, prompting a deliberate exit even if technical grandfathering could still be maintained.

Best Practices for Employers Navigating the Cost-Grandfathering Nexus

For employers still operating a grandfathered plan, cost management requires a proactive, precise approach:

1. Model the cumulative impact: Use actuarial tools to forecast how planned cost-sharing increases interact with the legacy 2010 baseline. Track medical inflation indices meticulously. A one-millimeter slip loses the status forever.
2. Explore non-triggering cost levers: Consider changes that do not affect grandfathered status, such as adding wellness incentives, implementing reference-based pricing within the same plan structure, or tightening formulary management without reducing covered drug categories.
3. Quantify the real exemption value: Calculate the dollar savings from avoiding EHBs, modified community rating, and preventive service mandates. Compare this to the projected cost of fully compliant plan alternatives (including potential carrier negotiations for a new plan). Many employers discover that the gap has narrowed.
4. Monitor workforce demographics: If your workforce now includes more lower-wage earners, the penalty risk from an unaffordable grandfathered plan may surpass the direct medical savings.
5. Have an exit strategy: Recognize that grandfathered status is a transitional tool, not a permanent solution. Develop a multi-year roadmap that anticipates the inevitable loss of status and prepares for a smooth transition to an ACA-compliant offering when the cost/benefit equation flips.

Containing cost without touching the grandfathered plan

The obvious cost lever, shifting more cost to employees, is also the one that ends grandfathered status. A supplemental benefit that works alongside the grandfathered plan and is used first avoids that bind. WellthCare™ operates this way: employees receive $0-co-pay care through the supplemental plan before claims reach the primary plan, reducing claims over time while the grandfathered plan's benefits, cost-sharing, and carrier arrangement stay unchanged. Adding a separate plan does not require changing the grandfathered plan's design, so the significant-change rules do not come into play. For an employer weighing a deductible increase that would forfeit grandfathering, this is a route to cost containment without that trade-off.

In summary, employer healthcare costs are both the reason employers cling to grandfathered status and the force that erodes it. The exemptions create a strong motive to preserve them, but the same cost pressures make them hard to sustain over years of medical inflation. The number of grandfathered plans will keep declining as routine cost-sharing increases push plans past the allowed threshold. Employers that understand this dynamic, and that have a way to reduce claims without altering plan design, can manage the transition deliberately instead of losing status by accident.

This article is for general information only and is not legal, tax, or medical advice. Employers should consult their own advisors.