U.S. presidents and their parties have called for health care reform in this country since Teddy Roosevelt and the Progressive Party in 1905. However, what he, FDR, Truman, Kennedy, LBJ, Nixon, and Clinton were unable to do, in 2010 we saw the most significant change to the U.S. health care system since 1965’s enactment of Medicare and Medicaid. On March 23, 2010, President Obama signed into law the “Patient Protection and Affordable Care Act” (P.L. 111-148) (“PPACA”). A week later, a second “fix-it” reconciliation package was also signed into law. Together, this article will refer to the combined laws as Health Care Reform, or the PPACA.
Washington may have taken its time addressing health care reform, but employers can’t afford to. Employers and employees need to immediately begin a detailed study of what is contained in the new law.
A number of items quickly emerge, and there is a timeline by which many of the new provisions are to take effect (see sidebar). In addition, employers will need to figure out which of the new provisions apply to them and in what manner. For example, plans in existence on Employers’ Directives for Health Care Reformthe date of enactment (March 23, 2010) are considered “grandfathered” plans having different employer options than are plans established after March 23, 2010. So too are collectively bargained group health plans, which have different effective dates for various provisions of the PPACA than do non-collectively bargained plans. Further, PPACA was enacted with broad strokes, establishing the need for comprehensive regulatory guidance still to be forthcoming. A good example of this need for regulatory guidance is in the definition of a grandfathered plan. If the employer amends the plan after March 23, 2010 or if it changes insurance carriers, is the plan still grandfathered?
By the time all of the coverage provisions of the PPACA phase in by 2018, over 94.5 percent of all Americans are expected to have health insurance, either through their employers, as individuals in the marketplace, or via expanded government programs such as Medicaid and Medicare. In order to facilitate coverage, initially for employees of small businesses and for individuals in 2014, and by 2017 for employees of any size organization, the states are given the opportunity to create state-run health insurance Exchanges (also known as SHOPs [Small Business Health Option Plans]). Modeled after Massachusetts’ experimental Connector, an Exchange would offer privately insured plans that are required to “minimum essential coverage” under the terms of the PPACA. If the state declines the opportunity to create such an Exchange, the federal government would do so for the citizens of that state. Exchanges would create different coverage-level options and then private insurers could offer their version of each of those options to all eligible takers. For individuals with adjusted gross income up to 400 percent of the federal poverty line (FPL) (thus to $43,200 for an individual and $88,000 for a family in 2010 dollars), a federal tax credit will be available to spend at an Exchange.
"Washington may have taken its time addressing health care reform, but employers can’t afford to."
Perhaps the first questions an employer needs to ask are strategic ones: What is our overarching total rewards strategy, and what forms of total rewards assist us in meeting our HR and organizational goals and objectives? Are health benefits part of that total rewards mix? If an organization chooses not to offer health benefits (as many small employers do today) or chooses to discontinue their health plans between now and 2014, when most of the PPACA provisions take effect, would the organization be able to compete for and then retain the talent necessary to achieve its mission? If so, at what cost, both people-related and financial? If the organization chooses to start or continue a health benefits program as part of its total rewards strategy, would it be better able to meet its objectives while playing on a much more uniform field? Lastly, do any of these answers change if unemployment levels begin to return to historically normal levels of six percent and employees begin feeling more comfortable leaving a job?
The Play-or-Pay (or Not) Decision
The PPACA does not directly impose a mandate on employers to offer health coverage to their employees. In fact, nothing in the Act says that an employer must offer any health coverage, and for a small employer, there is no penalty for not doing so. The Act imposes penalties on employers in any of two conditions:
• Employers (1) with 50 or more full-time equivalents (FTEs); (2) that do not offer health care coverage; and (3) have at least one full-time employee (someone regularly scheduled to work 30 or more hours per week) who receives a premium tax credit from the federal government for use in a state Exchange will be fined $2,000 per full-time employee per year. In calculating the number of full time employees, the first 30 are subtracted.
• Employers (1) with 50 or more FTEs; (2) that do offer health benefits; and (3) have at least one full-time employee who receives a premium tax credit from the federal government will be fined the lesser of $3,000 for each employee receiving a credit or $2,000 for each full-time employee.
"The PPACA does not directly impose a mandate on employers to offer health coverage to their employees."
In determining the number of FTEs, an employer must aggregate the number of hours of service of non-FTEs for a month and divide by 120 to determine the number of additional FTEs it should add to its actual number of full-time employees.
There are, however, many incentives to offer a qualified health benefits plan.
A small employer with 25 or fewer full-time employees, with an average annual wage of $50,000 or less can receive up to a 35-percent subsidy this year towards the cost of eligible coverage if it pays at least 50 percent of the total premium costs, rising to a 50-percent subsidy for two years more starting in 2014. For employers of all sizes, providing qualified health benefits is a tax-efficient mechanism to compensate employees as opposed to increasing taxable compensation. Qualified health benefits not only receive an employer deduction (of limited value to governmental and other tax-exempt entities but of significant value to for-profit entities), but the plan participant recognizes two tax advantages. First, the costs of coverage are tax-free (both the employer-paid portion in all cases as well as any employee-paid portion if offered through a Section 125 cafeteria plan). Second, any medical utilization benefits received through the plan are also tax-exempt to the employee. Taxable cash does not receive any such tax-favorable treatment. From the employer’s perspective in all sectors, payroll taxes are not paid on providing qualified health benefit plans.
According to Paula Calimafde, Chair of the Small Business Council of America, “Given that small employers typically pay 35 to 45 percent more for the same plans as larger employers, providing a tax incentive for small businesses to begin to offer or continue to offer health coverage will enable many to now purchase coverage for their employees. Whether it will be enough of an incentive to get small businesses into the health care delivery system remains to be seen, but if it works it will enable the small business to attract and retain talent in order to better compete with larger entities.”
Since historically small employers have been less likely than large employers to offer coverage, another incentive is added by the PPACA. Starting in 2011, new SIMPLE cafeteria plans enable an employer with 100 or fewer employees to bypass all applicable nondiscrimination rules if it is willing to meet certain eligibility and contribution requirements.
Calimafde says, “While the PPACA didn't rectify all of the disparity between small and large cafeteria plans, it certainly was a good first step towards parity. Now if only Congress would allow small business owners to participate in their own cafeteria plans, we'd be almost all the way there.”
Lastly, employers with 200 or more employees will be required to automatically enroll new employees into coverage beginning in 2014. The new employee may choose to opt-out, however.
Employers with over 50 employees are already asking themselves if they should continue to offer health coverage after 2014, or just pay the penalty. After all, with the average employer currently paying approximately $9,800 per employee per year in health care costs, why not just pay the $2,000 per employee penalty instead? It doesn’t require rocket science to make that calculation. But it’s not nearly that easy.
While low and middle-income employees would receive a subsidy to purchase coverage, the subsidy phases out as income rises, and disappears completely after $88,000 for a family. Thus, an employee and spouse each earning $50,000 would have to pay about $15,000 to purchase coverage through an Exchange. Presumably there would be significant pressure on employers to increase the direct compensation of its employees to pay for that coverage. If it were paid as direct compensation, it is subject to payroll taxes and workers’ compensation costs. In addition, any other benefit predicated on compensation (e.g. retirement plan contributions, life insurance, disability coverage) would also proportionately increase. And after all of that, the employer still has to pay the $2,000 penalty. Lastly, the employer would now lose the ability to influence employees’ health through prevention and wellness programs, which could result in a less healthy, less productive workforce.
Required Plan Design Changes
If an employer chooses to offer coverage, new rules under the PPACA will affect how and what provisions may be contained in the plan.
All group health plans and health plans offered by insurers to individuals that provide for dependent coverage must continue to make such coverage available for an adult child until the child attains his or her 26th birthday. Coverage must be made available regardless of the child's marital status, but generally does not need to be provided to adult children who are eligible to enroll for coverage under a group health plan of the child's employer. Coverage for eligible adult children will not be considered taxable income to the employee or the child, even if the child does not qualify as a tax dependent of the employee. Starting in 2014, even if the child has coverage available though his or her own employer’s group health plan, the parent’s plan will not be able to exclude such an adult child at all until the child’s 26th birthday. It should be noted that the PPACA does not require plans to cover children of covered children. Thus, from a plan design perspective, it would be up to the employer to define whether that coverage would be provided.
Most employer plans today tend to provide some coverage to children after age 19, usually to 23 or 25 if the child is enrolled as a full-time student. Until 2014, this new PPACA provision will cause many children who do not have coverage available through the child’s employer to enroll or re-enroll in the parent’s health plan. While traditionally this group has relatively low utilization expense, employers will need to be mindful of potentially increasing plan costs from previously ineligible children.
Second, all lifetime limits in individual and group health plans must be eliminated on “essential health benefits” as defined by the Department of Health and Human Services (HHS). Many employer plans currently impose a $1,000,000 or $5,000,000 lifetime limit on coverage. Further, annual benefit limitations for items deemed as “essential health benefits” must also be eliminated by 2014. This provision is not expected to add significant plan costs due to both the relatively small number of individuals who exceed such limits (except of course in “mini-med” health plans with small [e.g. $10,000] annual or lifetime caps), as well as the mobility of a workforce that according to the Bureau of Labor Statistics stays just under 3.5 years at an employer.
Third, any pre-existing condition exclusion provisions in a plan that apply to enrollees under the age of 19, regardless of the current HIPAA carve-out for creditable coverage, must be eliminated. Starting in 2014, no pre-existing condition limitations may apply to a participant of any age. Since the 1995 effective date of the HIPAA creditable coverage rules—whereby if an individual had health coverage for the last 12 months without a break in coverage of more than 63 days then any pre-existing condition limitations had to be waived—most employers will not see significant increases in health care costs due to this change.
Prevention and Wellness Benefits
Starting for plan years beginning on or after September 23, 2010, all nongrandfathered health plans would be required to provide full coverage with no deductibles, co-pays, or co-insurance for a list of preventive services, including those items rated A or B by the U.S. Preventive Services Task Force, recommended immunizations, preventive care for infants, children, and adolescents, and additional preventive care and screenings for women.
Starting in 2014, employer may adopt wellness initiatives providing an employee incentive of up to 30 percent of the cost of coverage, up from the current 20 percent cap. Further, if IRS, DOL, and HHS permit, applicable wellness incentives could reach 50 percent of the cost of coverage. This would provide a significant tool for employers to use to encourage further use of new and existing wellness programs.
Both of these measures are expected to increase employer efforts at improving the overall health status of their employee (and perhaps dependent) populations, leading to reduced health care costs and absenteeism, and increased worker productivity.
Personal Care Account Changes (FSAs, HRAs, and HSAs, [oh my])
The PPACA makes three significant changes to various types of personal care accounts, such as health care flexible spending accounts under Section 125 (FSAs); health reimbursement arrangements (HRAs); and health savings accounts (HSAs).
Starting in 2011, nonprescription over-the-counter drugs are excluded as eligible expenses under an FSA or HRA, and are ineligible as a medical expense under an HSA. According to Ben Cohen, CEBS, Health and Welfare Practice Leader at Kushner & Company, “FSA expenditures on nonprescription OTC drugs account today for almost 10 percent of all eligible expenses submitted by plan participants.” Employers sponsoring health care FSAs and/or HRAs will need to amend their plans before 2011, and perhaps more importantly, they will need to thoroughly communicate this change to all eligible participants prior to the 2011 open enrollment period.
Second, also starting in 2011, the penalty for a nonqualified withdrawal from an HSA will double from 10 percent to 20 percent. For employers either already sponsoring or looking to sponsor qualifying high deductible health plans with an HSA component, the PPACA legislative history may be troubling and should cause some further examination of these plans. Unless considered a grandfathered plan, all plans must provide minimum essential coverage, which among other items includes a provision that the deductible does not exceed $2,000 for an individual or $4,000 for a family. Many providers offer high deductible health plans with up to the currently allowed deductible limit of $5,950 for individuals or $11,900 for families (2010 figures), far beyond the allowed maximum deductible and out-of-pocket cost under the PPACA.
Lastly, starting in 2013, health care FSAs will be limited to $2,500 per year, indexed annually. Most employers today have limits far in excess of this new cap, and thus will need to amend their plans and communicate the new cap when the 2013 open enrollment period is near.
The “Cadillac” Tax
One of the more contentious items in an already controversial bill was the attempt by Congress to hold down the appetite for high cost health plans. Because of the tax incentives—both current and future under PPACA—many commentators believed that high cost health plans were unwittingly driving overall health care costs even higher. The solution to this under the PPACA was to impose a 40 percent tax on “Cadillac” health plans starting in 2018. Cadillac plans were defined as those with individual aggregate values of $10,200 or family aggregate values of $27,500 or more. These dollar values will be indexed annually starting in 2019. The term “aggregate values” is defined not just as the cost of the health plan premiums, but it is to include health care FSA employer and employee contributions as well as employer contributions to a health reimbursement account (HRA) and a health savings account (HSA), but will exclude dental and vision coverage costs.
From the Act, it would first appear that the tax would not impact employers at all. Insurers would be assessed the tax on any group health plans it provided. However, in reality it is widely expected that insurers would then pass any tax on to employers in the form of yet-higher premiums. And for self-funded plans, the tax would apply to the plan administrator, typically the employer.
With the relatively high aggregate value limits set in the Act, very few employers will initially be impacted. Average health plan costs for a large majority of employers are significantly below these levels today. However, two factors may cause employer concern in 10 to 15 years. First, the indexing mechanism on the aggregate values does not use medical cost increases but rather regular CPI. Second, in some collectively bargained plans, greater health benefits have historically been negotiated in exchange for lesser forms of direct compensation. It was for this reason that many in organized labor opposed the Cadillac tax. Employers with collectively bargained plan participants will need to work with their unions to determine if perhaps the trade-off of lesser health benefits in exchange for more taxable forms of compensation might make financial sense both for the employer and the employees.
All employers will have quite a bit of work to do in analyzing the various components of the PPACA and determining how they should proceed. By starting first with the strategic questions and determining if after weighing all of the incentives and disincentives they should offer or continue to offer health coverage, only then should their thoughts turn to the long-term details of their implementation of the Act. For some organizations, this may provide the first opportunity in a very long time to re-examine their overall total rewards strategies as a part of their HR and organizational strategies. While clearly not the intent of the proponents of the PPACA, that might be a very valuable unintended consequence of their actions.
Gary B. Kushner SPHR, CBP is the President and CEO of Kushner & Company.
Internationally recognized as an expert in the field, he is one of the nation's most sought after speakers on HR strategy and employee benefits. He has advised four U.S. Presidents on health care and has testified before the U.S. Senate Finance Committee, the U.S. House Ways and Means Committee and the U.S. House Small Business Committee on employee benefit issues.