The Affordable Care Act was passed by Congress and then signed into law by the President on March 23, 2010.
On June 28, 2012 the Supreme Court rendered a final decision to uphold the health care law. There are several components of the law that will affect employers. We will address some of the many key components in this summary. We recommend you participate in the Health Care Reform Impact Study Alliance Insurance Group provides for a comprehensive and actuarial review of your program.
Employer Mandates
If an employer does not provide employer-sponsored coverage;
Regardless of whether or not a large employer offers coverage, it will be potentially liable for a penalty beginning in 2014 only if at least one of its full-time employees obtains coverage through an exchange and receives a premium credit (a “full-time employee” includes only those individuals working 30 hours per week or more). Part-time workers are not included in penalty calculations (even though they are included in the determination of a “large employer”). An employer will not pay a penalty for any part-time worker, even if that part-time employee receives a premium credit. Conversely, seasonal workers are not included in the determination of large employer. However, if an employer is determined to be a large employer, without counting its seasonal workers, it could still potentially face a penalty for each month that a full-time seasonal worker received a premium credit for exchange coverage.
Beginning in 2014, individuals who are not offered employer-sponsored coverage and who are not eligible for Medicaid or other programs may be eligible for premium credits for coverage through an exchange. These individuals will generally have income between 138% and 400% of the federal poverty level (FPL).
Individuals who are offered employer-sponsored coverage can only obtain premium credits for exchange coverage if, in addition to the other criteria above, they also are not enrolled in their employer’s coverage, and their employer’s coverage meets either of the following criteria: the individual’s required contribution toward the plan premium for self-only coverage exceeds 9.5% of their household income, or the plan pays for less than 60%, on average, of covered health care expenses.
Other PPACA provisions will also affect whether full-time employees obtain premium credits for exchange coverage. For example, exchanges are required to have “screen and enroll” procedures in place for all individuals who apply for premium credits. This means that individuals who apply for premium credits must be screened for Medicaid and the State Children’s Health Insurance Program (CHIP) and, if found eligible, are to be enrolled in those programs; exchange premium credits will not be an option. This could affect whether any of an employer’s full-time employees obtain premium credits in an exchange—and if so, how many.
Penalty for Large Employers Not Offering Coverage
Beginning in 2014, a large employer will be subject to a penalty if any of its full-time employees receives a premium credit toward their exchange plan. In 2014, the monthly penalty assessed to employers who do not offer coverage will be equal to the number of full-time employees minus 30 multiplied by one-twelfth of $2,000 for any applicable month. After 2014, the penalty payment amount would be indexed by the premium adjustment percentage for the calendar year.
Penalty for Large Employers Offering Coverage
Employers who do offer health coverage will not be treated as meeting the employer requirements if at least one full-time employee obtains a premium credit in an exchange plan because, in addition to meeting the other eligibility criteria for credits, the employee’s required contribution for self-only coverage exceeds 9.5% of the employee’s household income or if the plan offered by the employer pays for less than 60% of covered expenses. According to the Congressional Budget Office (CBO), about 1 million individuals per year will enroll in an exchange plan and receive a credit because their employer’s plan was unaffordable. The total penalty for an employer would be limited to the total number of the firm’s full-time employees minus 30, multiplied by one-twelfth of $2,000 for any applicable month. After 2014, the penalty amounts would be indexed by the premium adjustment percentage for the calendar year.
Finally, those firms with more than 200 full-time employees that offer coverage must automatically enroll new full-time employees in a plan (and continue enrollment of current employees). Automatic enrollment programs will be required to include adequate notice and the opportunity for an employee to opt out. Although most of the provisions discussed in this report are not effective until 2014, this particular provision could be in effect as soon as the Secretary promulgates regulations.
Real Considerations employees will have to make
For some low-income employees, Medicaid or the insurance exchanges may provide cheaper and richer benefits than their current plans.
For these employees, the employer-sponsored health benefits may offer limited value because a better or equivalent plan could be purchased in the insurance exchange.
As household income rises, the premium subsidies in the exchanges are phased out. For employees qualifying for a limited or no premium subsidy, the cost of coverage in the insurance exchange may be significantly higher than the employer plan.
Further, out-of-pocket premiums in the insurance exchanges cannot be paid on a pretax basis, a significant consideration for higher-income employees. For these employees, employer-sponsored insurance is likely to remain an important part of their benefit compensation.
To optimize the value of its health insurance plan and its benefit spending, employers should consider strategies that result in covering only employees who consider employer-sponsored insurance a valuable part of their total rewards compensation. This may be achieved by educating employees on alternative sources of coverage that may be more affordable and offer richer benefit coverage and by calibrating employee health plan contributions to optimal levels.
What Should You Consider When Evaluating Whether You Should Offer Insurance To All Full-Time Employees Or Pay The Penalties?
MIGRATION ANALYSIS
OUT
Under Health Care Reform certain employees and dependents may leave the health plan because of eligibility for Medicaid, due to a government Subsidy to join an Exchange, or to be covered under a parent’s health plan up to age 26.
IN
Under HCR, more employees and dependents could potentially join the health plan due to the individual mandate and auto enrollment (e.g., requirement to automatically enroll employees unless the employee chooses to disenroll) starting in 2014. Some may also join the health plan due to changes to or elimination of a spouse’s employer health plan. In addition, more children under the age of 26 could also join under a parent’s plan for financial reasons, but that risk may be limited since the plan already covers children to age 26.
ADVERSE SELECTION ANALYSIS
Along with estimating the net migration of employees and dependents to and from the health plan, it is also important to know the impact of adverse or positive selection (e.g., any increase or decrease in higher cost individuals in the plan due to migration). The estimated impact of selection, which is calculated based on the demographic characteristics of the groups, is translated into gross savings or costs in the table below.
FREE RIDER PENALTY ANALYSIS
Several potential penalties exist for employer health plan sponsors under HCR. Employers may be assessed penalties if: The company does not sponsor a health plan, a health plan is sponsored, but it is not considered qualified and affordable (i.e., has to have a minimum actuarial value of 60% and the employee share of total premium costs cannot exceed 9.5% of household income).
PLAN SPONSORSHIP PENALTY
The plan sponsorship penalty would not apply unless a decision was made to terminate the plan for active employees.
AFFORDABLE PLAN PENALTY
Under HCR, if the employee premium contribution to the health plan exceeds 9.5% of their household income, the plan is considered not affordable. In that situation, if employees eligible for Subsidies purchase coverage through an Exchange, an employer will incur a penalty. The penalty is $3,000 per employee joining the Exchange with a Subsidy, not to exceed $2,000 times all full-time employees (minus the first 30 FTEs).
QUALIFIED PLAN PENALTY
Under HCR, if the actuarial value of a health plan is below 60%, and/or the plan does not meet minimum benefit standards, the plan sponsor is subject to penalties. In that situation, if employees eligible for a Subsidy to purchase coverage through an Exchange, an employer will incur a penalty. The penalty is $3,000 per employee joining the Exchange with a Subsidy, not to exceed $2,000 times all full-time employees (minus the first 30 FTEs). Another Reason Why Actuarial Values are Important is that HCR requires each state to set up an Exchange to facilitate the sale of qualified benefit plans to individuals and small groups (i.e., those with fewer than 50 employees) starting in 2014. The health plans offered, which will be fully insured, must meet certain criteria, including actuarial value standards.
Five health plans could be offered through an Exchange. Each has a separate actuarial value so that participants can have choice with respect to how much the plan will cost and what level of benefits will be provided. The Exchange plans are as follows:
Platinum Plan – Actuarial value of 90%
Gold Plan – Actuarial value of 80%
Silver Plan – Actuarial value of 70%
Bronze Plan – Actuarial value of 60%
Catastrophic Plan – Currently undefined, but focused on those under age 30
Employers who have health plan option(s) with high actuarial values may become more attractive relative to the Exchange plans and/or relative to other employers that may reduce the actuarial value of their plans over time. Reducing the actuarial value of your plan(s) will help reduce the costs related to adverse selection and in-migration that might otherwise occur if plan changes are not made.
BENEFIT MANDATES AND GRANDFATHERED STATUS
Under HCR a company may avoid or delay certain provisions of the law by maintaining Grandfathered Status. To do so, the company must be willing to accept prescribed limits on the nature and extent of changes that may be made to the plan on an annual basis. These limits include prohibition against certain plan changes listed below:
Elimination of benefits for a specific condition or illness, which includes the elimination of benefits necessary to diagnose or treat a particular condition
Increasing a participant’s cost sharing requirement (i.e., the deductible or out-of-pocket amount) by more than medical CPI plus 15%
Decreasing employer contribution for any tier of coverage by more than 5% (using COBRA rates as basis of calculation)
Implementation of the annual limit on the dollar value of benefits
HCR PASS-THROUGH FEES AND TAXES
Health Insurer Assessment – Beginning in 2014, Section 9010 of PPACA imposes an assessment on health insurers. In 2014, the total assessment is $8.0 billion, increasing to $14.3 billion in 2018. Each insurer is assessed based on its premium market share. However, self-funded / ASO business is not included in the premium market share calculation, and therefore exempt.
Tax on Pharmaceutical Manufacturers- Imposes a non-deductible fee on brand drug manufacturers based on market share from 2011 through 2019. Manufacturers with annual sales under $5 million are excluded.
Tax on Medical Device Manufacturers - 2.3% excise tax on sale price of devices for device manufacturers. Does not apply to eyeglasses, contact lenses, hearing aids, and other items as defined by Secretary of HHS.
Comparative Effectiveness Research Fee - Insurers and sponsors of self-funded health plans pay annual comparative effectiveness fee of $1 per participant beginning in 2013; rising to $2 in 2014 through 2019 for the Outcomes Research Trust Fund.
Transitional Reinsurance Program - The transitional reinsurance program will assess fees on the individual and group (including self-funded) health insurance markets. The funds will be used to make reinsurance payments to the individual insurance market during calendar year 2014 through 2016. A portion of the funds will go directly to the Department of Treasury.
CADILLAC PLAN EXCISE TAX ANALYSIS
HCR imposes an excise tax on employers starting in 2018, if their total health benefit costs (i.e. including medical, HSA contributions, etc.) exceed prescribed amounts. This tax equals 40% of the cost in excess of those amounts, which are currently defined as $10,200 for individual coverage and $27,500 for family coverage.
COST SHIFTING AND ADMINISTRATIVE COSTS
Provider Cost Shifting. With the expansion of Medicaid, the growing number of baby boomers becoming eligible for Medicare, along with potential reductions in Medicare reimbursement levels, providers will be under pressure to increase their reimbursement per service unless significant changes are made to the delivery of health care.
EMPLOYER PLAN SPONSOR TERMINATION COST SHIFTING
Some employers, particularly those in the small employer market where play-or-pay penalties are not in effect, may eliminate employer-sponsored health plans. A majority of other employers maintaining coverage may reduce benefit levels to offset the impact of HCR. The combination of these issues will result in more exposure for employer plan sponsors that do not make similar changes to their own plans because more employees and/or dependents will migrate to such subsidized employer plans. Employers will consider many of the following questions,
What is the estimated household income distribution of an employee population?
As discussed above, employee household income is fundamental in evaluating the value of offering employer-sponsored health insurance. The Alliance employer model estimates household income using a formula based on an employee’s salary, gender, marital status, and number of children, education level, and cost of living area.
How many employees may qualify for Medicaid or significant premium subsidies in the state or federal exchange?
Estimate the number and demographic characteristics of employees that will qualify for either Medicaid or a premium subsidy.
How many employees will elect to enroll in Medicaid or purchase an individual policy in the exchange using a premium subsidy?
Because an employee qualifies for Medicaid or a premium subsidy does not necessarily mean that the employee will opt out of an employer’s plan.
Consider the relative costs (including tax differences) between employer-sponsored and alternative sources of health insurance coverage.
This allows an employer to observe the estimated impact of modifications to required employee contribution rates on enrollment and costs.
Should employers incentivize or make eligible a portion of their employee populations for the premium subsidies in the state or federal insurance exchanges?
For low-income employees, many may have lower premiums and richer benefit plans in the exchange rather than on an employer’s plan. For employees with household income under 250% FPL, exchange coverage may be significantly less expensive.
WILL THE NUMBER OF EMPLOYEES AND DEPENDENTS COVERED UNDER AN EMPLOYER’S PLANS CHANGE SIGNIFICANTLY BEGINNING IN 2014?
Factors that may increase enrollment include:
• Auto enrollment
• Individual mandate
• Dependent coverage to age26
FACTORS THAT MAY DECREASE ENROLLMENT INCLUDE:
• Eligibility for Medicaid
• Eligibility for premium subsidies in the state or federal exchange
• Dependent coverage to age 26
Allowing some employees to qualify for the premium subsidy and purchase coverage in the exchange mitigates a portion of this cost increase.
WHAT IS THE ACTUARIAL VALUE OF AN EMPLOYER’S BENEFIT PLANS IN RELATION TO THE PLANS OFFERED IN THE HEALTH INSURANCE EXCHANGES?
While the vast majority of employer-sponsored health plans are likely to meet the minimum requirements under PPACA, it is important to understand how the actuarial values of employer plans compare to the tier-level plans (platinum, gold, silver, and bronze) offered in the insurance exchanges. Employers may reevaluate why they are offering plans comparable to gold or platinum plans in the insurance exchanges, when silver-level coverage is the benchmark in the individual health insurance market.
How will employer penalties, affordability requirements, individual mandate penalties, and premium tax credit percentages change over time?
For example, the employer penalty for not offering health insurance coverage is estimated to increase from $2,000 in 2014 to approximately $2,500 by 2018.
HOW WILL AN EMPLOYER BE IMPACTED IF ITS STATE DOES NOT CARRY OUT THE MEDICAID EXPANSION?
The PPACA Supreme Court ruling indicated that states can retain existing Medicaid funding even if they do not expand Medicaid eligibility to 138% FPL in 2014. For employers, this may have a potential cost impact, as employees that may have been Medicaid-eligible may now be eligible for the premium subsidy tax credit, which may result in higher penalties for employers.
ARE THERE OTHER NONFINANCIAL CONSIDERATIONS RELATED TO AN EMPLOYER’S HEALTH PLAN THAT MAKE IT A VALUABLE EMPLOYEE RETENTION TOOL?
Often individuals or groups are resistant to changing historical patterns or policies, even if a new policy is in their best interest. For many employers and employees, employer-sponsored coverage is ingrained as a fundamental value provided to employees. Therefore, even if an exchange plan was a better value to an employee, the employee may maintain their employer coverage. Likewise, employers may be reluctant to drop their employer-sponsored coverage, viewing it as an important component of the compensation program and/or a competitive advantage.
WHAT ADDITIONAL CONSIDERATIONS ARE THERE FOR SMALL EMPLOYERS?
PPACA defines the small group insurance market as employers up to 100 employees. However, a state has the option of limiting the small group market to employers up to 50 employees in 2014 and 2015. Although small employers (50 or fewer employees only) are exempted from the employer play-or-pay provisions, there are additional impacts affecting only small employers, including:
• Maximum deductible of $2,000 (single coverage) and $4,000 (family coverage) in 2014
• Adjusted community rating (elimination of health status, gender, industry, and group size ratings; age rating limited to a 3:1 age ratio; 1.5:1 rate adjustment allowed for tobacco usage)
• The availability of coverage through a state or federal Small Business Health Options Program (SHOP) exchange
• Small employer tax credit available to employers meeting certain income requirements
Small employers may be significantly impacted by the adjusted community rating requirement, resulting in significant premium increases or decreases to certain groups.
NEW UPDATES
HHS continues to publish and update the current laws. Here are the latest.
The Departments of Labor (DOL), Health and Human Services (HHS), and Treasury have announced that employer notification to employees about the Affordable Care Act (ACA) health insurance exchanges will be postponed beyond the March 1, 2013, statutory deadline. Although the announcement does not specify a new date, it states that the timing for distribution of the notices will be in the late summer or fall of 2013, which will coordinate with the open enrollment period that begins in October 2013 for purchasing health insurance through the new exchanges. While there is no action for employers at this time, they should anticipate questions from employees as increasing attention is paid to this topic.
The ACA requires employers to provide all new hires and current employees a written notice about the exchanges. The notice must:
- inform employees about the existence of the exchanges and give a description of the services provided;
- explain that employees may be eligible for a federal premium tax credit or a cost-sharing reduction if they purchase health insurance through the exchange if their employers plan does not meet the 60% minimum value standard; and
- specify that employees purchasing coverage through the exchanges may lose any employer contributions toward the cost of employer-provided coverage, and that all or a portion of the employer contributions may be excludable for federal income tax purposes.
The DOL is considering providing model, generic language that could be used to satisfy the notice requirement or, alternatively, language based on information from the employer coverage template under the Jan. 22, 2013, proposed rule on Medicaid, Children’s Health Insurance Programs, and Exchanges.
The delayed notification announcement appears in the federal agencies FAQs about Affordable Care Act Implementation (Part XI), dated Jan. 24, 2013. The document also provides guidance on: health reimbursement arrangements and other account-based arrangements; the DOL’s plan not to bring enforcement action against certain self-insured group health plans that are Employer Group Waiver Plans; fixed indemnity insurance policies that are not excepted benefits; and payment of the Patient-Centered Outcomes Research Institute fee by multiemployer plans.
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