Health Care “Reform” in an Uncertain Judicial and Political LandscapeMarch 2, 2012 – Articles
The Patient Protection and Affordable Care Act1, as amended by the Health Care and Education Reconciliation Act of 20102 (the “Affordable Care Act”) makes a number of significant changes to the way employers and their employees will secure health care coverage and how the cost of that coverage will be allocated among the U.S. Government, the states, employers, and their employees.
In order to understand the effect these changes will have on employers (and, therefore, their employees), employers and their advisors should:
- Understand the likely cost trends for health care coverage into which the Affordable Care Act has been inserted (and the likely effect the Affordable Care Act will have on those cost trends
- Understand the unique effects the Affordable Care Act is likely to produce on how those costs will be apportioned among employers
- Master how the Affordable Care Act’s requirements are likely to affect the employer and its work force
What is the Current Trajectory for Health Care Costs?
According to the 2011 Health Benefits Annual Survey of nonfederal private and public employers with three or more workers conducted by the Kaiser Family Foundation and the Health Research & Educational Trust (the “Kaiser/HRET Survey”)3, the average annual premiums for employer-sponsored health insurance in 2011 were $5,429 for single coverage and $15,073 for family coverage. Single coverage premiums increased 8% when compared to the results of the 2010 study; family premiums increased 9%. Since 2001, average premiums for family coverage have increased 113%.
This reflects a continuing and longstanding trend in which health care premiums increase more rapidly than the increase in the overall inflation rate, the increase in the gross domestic product, or the increase in employees’ earnings.
How are these premium costs shared by employers and their employees? The Kaiser/HRET Survey revealed that, on average, employees contributed 18% of the premium for single coverage and 28% of the premium for family coverage. The actual percentages varied significantly depending upon the size of the employer: individuals employed by small firms (3–199 employees, for the purposes of this survey) contributed a significantly lower average percentage for single coverage when compared to employees in larger firms (15% vs. 19%), but a higher average percentage for family coverage (36% vs. 25%).
This premium increase could have been significantly higher were it not for the increasing spread of high deductible health plans and their displacement of their much-lower copayment-deductible cousins, the traditional health benefit plan with a “preferred provider” network option (stay in-network, pay a lower copayment and/or deductible). The Kaiser/HRET Survey showed that enrollment in high deductible health plans continues to rise: in 2009, 9% of employees covered by an employer-sponsored health benefit plan participated in a high deductible health plan; that percentage increased to 13% in 2010 and to 17% in 2011. The percentage of smaller employers (3-199 employees) that have migrated to high deductible health plans is much higher than larger employers: as of 2011, 50% of those smaller employers have switched to a high deductible health plan. By comparison, 22% of larger employers (200 or more employees) have added or switched to high deductible health plans.
And, those deductibles have also escalated: an average of between $675 and $928 for plans that are not high deductible plans -- and an average of almost $2,000 for high deductible plans.
- Health care benefits costs -- premiums plus copayment and deductible obligations -- are increasing much more rapidly than profits or employee wages
- Employers are shifting an ever-increasing portion of employer-sponsored health benefit plan costs to employees
- In spite of those efforts, premium costs have more than doubled in nine years.
- We face another doubling of costs over the next five to seven years, all on top of these efforts by employers to control their share of these costs
Notwithstanding the accelerating migration to truly high deductible health plans,
How About the Future? In a 2008 study, the Congressional Budget Office estimated that job-based health insurance will increase another 100 percent over the next decade. Employer-based family insurance costs for a family of four will reach nearly $25,000 per year by 2018.4
Will the adoption of the Affordable Care Act materially bend this trajectory? In its recent study, the U.S. Centers for Medicare and Medicaid Services confirmed that the Affordable Care Act will not materially affect this outcome.5
Given the Inexorable -- and Frightening -- Increase in Health Care Benefit Plan Costs, How Will the Affordable Care Act Affect an Employer’s Calculus Concerning Sponsorship of a Health Benefit Plan?
Let’s now combine this knowledge -- even with high deductible plans, employers and their employees are likely to face premiums twice what they are today by 2018 -- with an understanding of what the Affordable Care Act will require employers to offer their employees and how the Affordable Care Act shifts health care costs among employers. Then, let’s formulate practical strategies for employers to consider adopting.
The Highlights of the Affordable Care Act
The Affordable Care Act deploys these fundamental building blocks for employer-provided health plan coverage:
The “Individual Mandate”
Beginning in 2014, the Affordable Care Act provides that non-exempted federal income taxpayers who fail to maintain a minimum level of health insurance coverage for themselves or their dependents will owe a tax penalty for each month in the tax year during which minimum coverage is not maintained. 26 U.S.C.A. 5000A. The amount of the penalty is initially equal to 2.5% of household income in excess of the taxpayer’s threshold amount of income required for income tax return, subject to a floor ($695 in 2014) and capped at the price of forgone insurance coverage.6
Individuals who are not required to file federal income tax returns for a given year are exempt from the penalty. So are individuals whose premium payments would exceed 8% of their household income.7
Various forms of insurance coverage satisfy the minimum coverage requirement: government-sponsored programs such as Medicare, Medicaid, CHIP, and programs offered by the Departments Of Defense And Veterans Affairs.8; and employer-sponsored group health benefit plans, and coverage purchased through the state exchanges.9
The U.S. Supreme Court is currently reviewing appeals from conflicting decisions of three U.S. Courts of Appeals. The 6th Circuit Court of Appeals sustained the constitutionality of the individual mandate10; the 11th Circuit Court of Appeals concluded that the individual mandate was not constitutional but does not invalidate the entire Affordable Care Act11; and the 4th Circuit Court of Appeals held that the federal Anti-Injunction Act denies courts the jurisdiction to consider the constitutionality of the individual mandate until a taxpayer is actually assessed the penalty.12
Proponents of the individual mandate state that the Affordable Care Act’s state exchange and health plan market reforms will work only if individuals are coerced (by the penalty) into enrolling in a health plan before they become ill, rather than electing to remain uninsured or under-insured until they need coverage. We have seen that those market reforms attempt to shift health care costs from older enrollees to younger enrollees. If individuals -- and younger individuals, in particular, elect not to enroll, then the attempted cost-shifting won’t work.
Assume the best case: assume that the individual mandate’s constitutionality is upheld. Will the individual mandate, in its current form, achieve its coercive objective? It may not: younger workers in particular have been the ones who have traditionally opted not to acquire coverage; the Affordable Care Act’s market reforms increase premiums for younger workers to levels above those younger workers have resisted paying to date, making coverage even less attractive. To overcome that rational reluctance, the mandate’s penalty must be sufficiently high so as to overcome that price resistance. But, at its inception, the mandate’s cost is likely to quite low. As a result, the mandate, even if upheld, may not achieve its objective.
As a result, employers should keep a wary eye on the enrollment behavior of their younger employees. To keep premiums affordable, employers need their younger workers to enroll. That means, (1) review premium pricing and co-insurance to see what affordable inducements might attract and retain younger workers (for example, employers might consider a small -- $500 -- contribution to a health savings account of workers who elect coverage under a (or the) high deductible plan; and (2) review plan communications to make sure that workers understand just how much even fairly routine procedures can cost (making insurance protection a more attractive option).
Medical Loss Ratios. If the medical loss ratio of an insurance company’s employer-sponsored health benefit plan insurance product (determined on a state by state and product by product basis) falls below 80% (for insurance products for the “small group market,” defined as employers of 1-100 employees) or 85% for products in the “large group market” (101 or more employees), then the insurance company must rebate premium dollars sufficient to reach those ratios.13 A product’s medical loss ratio is a fraction whose numerator equals the policy’s medical claims and allowable related health care expenses (plus certain taxes) and whose denominator is equal to the total premiums collected for the year. Administrative expenses cannot be included in the numerator.
Recent evidence shows that most insurance companies are not likely to fall prey to the medical loss ratio rebate obligation.14 Anecdotal evidence (conversations with executives of the major insurance companies) indicates that insurance companies intend to guarantee this result by reducing the number of product variants: employers -- particularly those in that “small group market” -- should plan on seeing a restricted choice of plan designs. That minimizes the insurance companies’ administrative costs, and thereby maximizes the insurers’ ability to avoid rebates.
Which plans will be offered? That takes us to --
State-Based Health Care Exchanges and “Qualified Health Plans” That Offer the “Essential Benefits Package”
The Affordable Care Act creates “qualified health plans” which insurers may offer in the individual and “small group market” through state-operated exchanges. To constitute a “qualified health plan,” and therefore be eligible to be offered on the stat-operated exchanges, the plan must satisfy a list of requirements.15 One significant requirement is that the plan or policy must provide the “essential health benefits package.”; must charge the same premium for a plan regardless if it is offered in or out of an exchange (including through an insurance agent); and must comply with regulations applicable to exchanges.
The “essential benefits package” consists of coverage that will not exceed out-of-pocket and deductible limits specified in the Affordable Care Act, will not impose a deductible on preventive services, and which provides “essential health benefits.” What are “essential health benefits” -- and why do we care?
The Affordable Care Act provides16 that the U.S. Department of Health and Human Services will define what constitutes “essential health benefits” and stipulated that they must include at least these categories:
- ambulatory patient services;
- emergency services;
- maternity and newborn care;
- mental health and substance use disorder services, including behavioral health treatment;
- prescription drugs;
- rehabilitative and habilitative services and devices;
- laboratory services;
- preventive and wellness and chronic disease management; and
- pediatric services, including oral and vision care.
Plans that are offered on the exchanges must provide bronze, silver, gold, or platinum level of coverage. These designs vary in the actuarial value of their coverage (the proportion of eligible covered claims paid for out of premium dollars, as opposed to enrollee co-insurance obligations). The higher the value, the lower the co-insurance (which in all events can’t exceed the maximum amounts permitted for a health savings account-eligible high deductible health plans) -- the higher the premium
To no one’s surprise, HHS was pummeled with comments from employer, consumer, and patient advocacy groups. HHS turned to the Institute of Medicine of the National Institutes of Health for advice. The Institute refused to issue a recommended basket of services, recognized the competing objectives of coverage vs. affordability, and recommended that HHS do the same.17 effectively stopped at that point.
On December 16, 2011, HHS issued a bulletin setting forth HHS’s proposed definition of the “essential health benefit package.”18 Each state must select one of these insurance plans offered in the state as the benchmark plan:
- One of the three largest small group plans in the state by enrollment;
- One of the three largest state employee health plans by enrollment;
- One of the three largest federal employee health plan options by enrollment;
- The largest HMO plan offered in the state’s commercial market by enrollment.
The benefits and services included in the benchmark health insurance plan selected by the state will constitute the essential health benefits package.
Employers and their advisors care about the content of these categories: the more generous and inclusive the categories, the more expansive the coverage. And, the more expansive the coverage, the higher the premium and/or deductibles and copayments must be set in order to cover those costs.
Practical Guidance: How does the employer’s current plan stack up against these “benchmark” plans? If the employer’s current plan is not as generous, then
- The insurance company offering the arrangement has no incentive to maintain multiple flavors of plans aimed at the same types of employers in a state. That’s because the Affordable Care Act penalizes insurance companies whose offerings fail to satisfy minimum “medical loss ratio” requirements (at least 80% of the plan’s premium revenues must be spent on medical claims and closely related expenses -- 85% in the large group market).19 That places an incentive on the insurers to lower administrative expenses. One good way to lower administrative expenses is to pare the insurer’s offerings to those necessary to satisfy the Affordable Care Act.
- If the employer’s current plan is not as generous as the benchmark plan, then plan on having to adopt that more generous menu.
- That means premiums will increase even more rapidly than the amounts we have already encountered.
Premium Tax Credits and Co-Insurance Support for Individuals Who Purchase Individual Coverage on a Health Exchange
Individuals whose household income is between 100% of the federal poverty level and 400% of the federal poverty level, and who are not eligible for coverage under an “affordable” employer-sponsored health benefit plan, will be entitled to a premium credit that will be applied toward the purchase of an individual policy purchased on a state exchange. The expected contribution is a specified percentage of the taxpayer’s household income.
The premium tax credit is equal to the difference between (1) the second least expensive [silver] plan offered on the exchange and (2) a percentage of the individual’s household income (the individual’s expected contribution). The expected contribution increases (and, therefore, the value of the credit declines) as household income increases: from 2% of income for families at 100% of the federal poverty level to 9.5% of income for families at 400% of federal poverty level.
Today, 400% of the federal poverty level for a family of four is $89,400 (for a single employee, 400% of the federal poverty level is $43,560).
The Employer Mandates
If an employer is an “applicable large employer” -- which, for this purpose, means an employer whose bona fide full time employees (employees regularly scheduled to work 30 or more hours per week) plus the full time equivalent number of part time employees --20, then the employer must navigate two different mandates. These mandates begin in 2014.
- The Penalty on the Applicable Large Employer that Fails to Offer Group Health Benefit Plan Coverage To All Of Its Bona Fide Full Time Employees.21
If an applicable large employer fails to offer to its bona fide full-time employees (and their dependents) the opportunity to enroll in an employer-sponsored health plan, the employer will be subject to a penalty only if at least one bona fide full time employee receives a premium credit toward the payment of the premium for a qualified health plan offered through a health exchange.
In 2014, the penalty is equal to: (a) the total number of bona fide full-time employees (regardless of how many opted to enroll in an exchange plan) minus 30, multiplied by (b) $2,000.
Planning for this Penalty:
Does the employer’s health benefit plan currently offer coverage to all bona fide full time employees? If the answer is, yes, then we don’t have to worry about this penalty.
But, if the answer is, no, then we must either amend the plan so as to offer coverage to all bona fide employees, or we must run the risk that one credit-eligible full time employee will enroll in an exchange plan. What’s the likelihood of that? That depends upon the employee’s cost to stay in the employer’s plan vs. the cost, net of the credit, of purchasing coverage on the exchange.
How likely is that? In an August 11, 2011 Fact Sheet,22 the IRS attempted to estimate the likely cost individuals will incur if they purchase coverage on the exchanges. For a family of four with $50,000 in household income, the IRS estimated that the employee’s premium cost -- the expected family contribution would be $3,570, plus the employee’s co-insurance obligation. How much are those likely to be? According to independent projections, they are likely to be high: in the vicinity of $5,000 to $6,000.23
How do those amounts compare to the employer’s plan? If the exchange policy’s cost is much more, it’s possible that no one will elect to enroll in an exchange plan. But, all it takes is one. Is the penalty ($2,000 times the number of bona fide full-time employees minus 30) less than the employer’s cost for covering the full-timers who are not currently covered?
Since the enrollment of only one credit-eligible full-timer will trigger the penalty, carefully review the income and number of full-time employees. The smaller the number, the more willing the employer will be to continue to exclude full-timers and pay the penalty. Remember: we get 30 full-timers for free. If an employer has less than 35 full-timers, the penalty won’t exceed $10,000. If the incremental cost to the employer off adding more full-timers is less than $10,000, then pay the penalty.
- The Penalty on the Applicable Large Employer that Offers Group Health Benefit Plan Coverage To All Of Its Bona Fide Full Time Employees -- But That Coverage is Not Affordable.24
This penalty applies to an applicable large employer whose employer-sponsored health plan fails to meet both of these requirements:
- the employee premium cost must be less than 9.5% of household income, and
- the plan’s share of covered health benefit costs must be at least 60%,
If the applicable large employer’s group health plan does not satisfy these criteria, then the employer is subject to a penalty if at least one of its bona fide full-time employees enroll in an exchange plan and are eligible for the premium tax credit. In 2014, the penalty will be equal to $3,000 times the number of full-time employees who receive the premium credit.
Planning for this Penalty:
First, look at the 9.5% requirement: At the moment, the IRS has taken the position that the requirement is based upon the cost of the self-only premium, divided by the employee’s household income, regardless of what coverage the employee actually elects.25 How does the employer subsidize the cost of single coverage? Many fully subsidize that cost. That guarantees satisfaction of this criteria, for the cost is equal to 0% of every employee’s household income, no matter how low it might be.
Consider recommending a change to the employer’s subsidy policy if the employer does not currently subsidize that much of the single premium. But watch out: the IRS’s tentative proposal to use self-only coverage has attracted fevered comment: consumer groups want the 9.5% affordability test based on the coverage the employee elects -- which may therefore be family coverage.
Second, how about the 60% actuarial value test? Will the employer’s plan use a deductible/co-insurance limit sufficiently low to assure that the plan is projected to pay 60% of the claims? And how do we determine this? No guidance has been issued yet. In all likelihood, plans that are high deductible and which approach the maximum permitted limits for an HSA-eligible plan (annual out-of-pocket expenses of $6,050 self-only and $12,100 family) are the most likely to flunk the 60% test.
Compare the premium subsidy costs the employer would incur to satisfy these two requirements to the number of bona fide full-time employees likely to both qualify for the premium tax credit and enroll in an exchange plan. The higher the median income, the higher the expected contribution, the fewer the number of full-timers who will enroll in an exchange plan and who will stick with the employer’s plan. Since this penalty is based solely on the number of full-timers who enroll, the fewer who enroll the lower the penalty.
For example, assume the average full time employee makes $80,000 -- the IRS has proposed a safe harbor that uses this assumption26-- or assume the employer’s workforce consists of employees whose median wage is $60,000 and that the average employee is married with a spouse who earns at least $20,000. For premium tax credit purposes, the employee’s expected contribution will be 9.5% of $80,000, or $7,600. And the employee must pay the exchange plan’s co-insurance, which is likely to be in the $5,000-$6,000. How does that compare to the total cost of participating in the employer’s plan? The closer the two are, the smaller then number of full-timers who will migrate to exchange coverage.
On the other hand, the lower the employer’s median wages, the more likely it is that the exchange plan will cost less than the employer’s plan. That will increase the penalty exposure.
Employers in low wage industries with significant numbers of bona-fide full time employees face the unappetizing task of almost certainly having to more heavily subsidize their employer-sponsored plans in order to avoid that $3,000 penalty.
Remember: part-time employees do not have to be offered coverage and they are ignored in the head counts for both penalties. They are counted only to determine whether the employer is an “applicable large employer.” Employers with a significant part-time employee population may wish to continue that practice, for it reduces the full-time headcount and thereby reduces exposure to both penalties.
Reforms Affecting How Plans Offered on the Exchanges Must Determine Premiums
The Affordable Care Act contains a variety of new requirements that all exchange-offered plans must satisfy. These changes will also apply to most employer-sponsored health benefit plans. These “market reforms” include:
- Prohibition on denial of coverage to enrollees with pre-existing conditions27
- Waiting periods may not exceed 90 days28
- Phase-Out of Annual Limits and Prohibition of Lifetime Limits29
- Individual and group health insurance issuers must offer coverage on a guaranteed issue basis and a guaranteed renewal basis30
Those market reforms contain a benefit and a burden, particularly for smaller employers. The benefit: employers with a “healthy” workforce should see lower premiums, for more of those “healthy” workers can participate and can participate sooner. That means more premium revenues from a group with relatively low expenses. That should depress the rate at which premiums increase, and should dampen the increase in the employer’s share of the premium expense.
On the other hand, there is a burden: less healthy workers will also find it easier to enroll and remain enrolled. That attracts more premium revenues, but it also will attract disproportionately higher expenses. That will push up premiums, and thereby increase the employer’s share of the premium expense.
Another market reform of particular concern to small employers requires that health benefit plans offered in the individual and small group markets (1) may not individually rate an employer’s actual claims experience to determine premiums; and (2) must determine premiums through the use of adjusted community rating. The Affordable Care Act shrinks the age spread premium multiplier insurers may use in determining premiums.31
This change will shift costs from older workers to younger workers. Recent studies predict this change alone can dramatically affect an employer’s health benefit plan premiums. A study performed for the Ohio Department of Insurance32 concluded that these effects are magnified in the small employer marketplace:
- “In the individual market, a healthy young male (with benefit coverage at the market average actuarial value pre and post-ACA[Affordable Care Act]) may experience a rate increase of between 90% and 130%. However, a 60 year old with chronic health conditions may experience a significant premium decrease.
- In the ESI [employer sponsored]-small group market, rating changes may result in a premium increase of 150% or a premium decrease of nearly 40% for groups at opposite ends of the current rating structure.
- Rate change variability attributable to ACR [adjusted community rating] may result in healthier insured risks leaving the insured risk pool, while attracting a greater proportion of less healthy risks.”
Planning Tip: Employers should determine how premiums for their employer-sponsored plans are currently determined. If they are individually rated, or if community rating with more-generous limits (i.e., an age spread greater than 3-1, for example) than those permitted under the Affordable Care Act have been used, employers should review the demographics of their workforce. This will provide a window on the possible shift in premium costs -- which may be dramatic.
Conclusion: Although it might more appropriately have been called the “Accessible Care Act” rather than the “Affordable Care Act,” the Act provides employers and their advisors with new opportunities to evaluate and acquire health benefit coverage. But, this legislation still leaves employers and their advisors with the task of coping with health plan expenses that are sufficiently large so as to require re-thinking the design of health plans that employers may currently sponsor, to seriously consider the option to discontinue sponsorship of a health plan, and to evaluate the sustainability of current wage-retirement benefit-health benefit compensation policies.
(1) Pub. L. No. 111-148, 124 Stat. 119 (2010).
(2) Pub. L. No. 111-152, 124 Stat. 1029 (2010).
(4) Congressional Budget Office, “Taxes and Health Insurance,” February 29, 2008.
(5) “National Health Spending Projections Through 2020: Economic Recovery and Reform Drive Faster Spending Growth,” Keehan et. al., CMS Office of the Actuary, Health Affairs, August 2011.
(6) New IRC §5000A(e), added by Affordable Care Act §1501(b).
(8) New IRC §5000A(f)(1), added by Affordable Care Act §1501(b)
(9) New IRC §5000A(f)(1)(b)-(d), added by Affordable Care Act §1501(b)
(10) Thomas More Law Ctr. v. Obama, 651 F.3d 529 (6th Cir. June 29, 2011)
(11) Department Of Health And Human Services v. State of Florida, 648 F.3d 1235 (11th Cir. August 12, 2011) and National Federation of Independent Business v. Sebelius, 648 F.3d 1235 (11th Cir. August 12, 2011)
(12) Virginia ex rel. Cuccinelli v. Sebelius, 656 F.3d 253 (4th Cir. September 8, 2011) and Liberty University Inc. v. Geithner, __ F.3d __, 2011 WL 3962915 (4th Cir. September 8, 2011).
(13) §2718(b) of the Public Health Service Act, added by Affordable Care Act §1001.
(14) “Private Health Insurance: Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards,” United States Government Accountability Office Report GAO-12-90R, October 31, 2011.
(15) Affordable Care Act §1301
(16) Affordable Care Act §1302(b).
(17) "Essential Health Benefits--Balancing Coverage and Cost" (Report & Recommendations of Institute of Medicine to HHS, October 6, 2011)
(18) CMS CCIO Fact Sheet on December 16, 2011 Bulletin Granting States Flexibility to Craft Definition of "Essential Benefits Package" for Qualified Health Plans on State Health Exchanges
(19) Affordable Care Act §1001, adding §2718 of the Public Health Service Act.
(20) New IRC §4980H(c)(2), added by Affordable Care Act §1513.
(21) New IRC §4980H(a), added by Affordable Care Act §1513.
(23) Actuarial Analysis to Estimate Costs of a Model EHB Package" (National Health Council, August 2011); What the Actuarial Values in the Affordable Care Act Mean" (Kaiser Family Foundation, April 14, 2011)
(24) New IRC §4980H(b), added by Affordable Care Act §1513, which then references new IRC §36B(c)(2)(C), added by Affordable Care Act §1401.
(25) IRS Notice 2011-73, Internal Revenue Bulletin 2011-40 (Oct. 3, 2011); IRS Proposed Regulations (REG-131491-10) On Premium Credit Under the Affordable Care Act, Federal Register dated Aug. 17, 2011.
(27) Public Health Service Act §2704 (Added by Affordable Care Act §1201)
(28) Public Health Service Act §2708 (Added by Affordable Care Act §1201)
(29) Public Health Service Act §2711 (Added by Affordable Care Act §1001)
(30) Public Health Service Act §§2702 and 2703 (Added by Affordable Care Act §1201)
(31) New §2701 of the Public Health Service Act, added by Affordable Care Act §1201.
(32) “Assist With The First Year Of Planning For Design And Implementation Of A Federally Mandated American Health Benefit Exchange,” Milliman Client Report for the Ohio Department of Insurance, August 31, 2011