Rx for Health Insurance Costs Obamacare Brings Opportunities and Complexities

By Phillip M. Perry

Finding quality, affordable health insurance has never been easy. The Affordable Care Act (ACA), passed in 2010 and also known as “Obamacare,” was introduced in part to solve the health insurance conundrum for employers.

Has the law succeeded? Reports from the field suggest that the ACA in its early stages can best be described as “a mixed bag.”

“Some smaller employers may have gotten better deals under the ACA,” says Adam C. Solander, an associate at the law firm of Epstein Becker Green, Washington, D.C. (ebglaw.com). “Most, though, have experienced cost increases, in some cases large ones.”

Premium hikes

Reports from the field lend credence to Solander’s analysis. Nine out of 10 employees responding to a recent survey by the International Foundation of Employee Benefit Plans (IFEBP) stated their health care costs had increased as a result of the ACA. While the median reported increase was four percent, one in seven respondents said their rates went up by over 10 percent. Some small businesses claimed spikes of some 20 to 50 percent.

In 2014 the premium for employer-provided family coverage averaged $16,834, a rate three percent higher than the previous year, according to the “2014 Employer Health Benefits Survey” from the Kaiser Family Foundation (kff.org). The average annual premiums for such coverage have risen 26 percent over the past five years.

While these increases are unwelcome, the Kaiser Foundation points out that they are smaller than the escalations for the previous five year period. Too, some higher premiums have not arrived absent advantages. “Premium increases often result from the law’s requirements for coverage of better quality than what employers have offered in the past,” says Solander.

Experience ratings

One ACA benefit seems certain: Small employers are no longer penalized by skyrocketing premiums when one employee incurs an expensive treatment. That’s because the ACA eliminated what insurers call “experience rating,” or the assessment of premium levels by the medical history of participating employees.

“Some employers had found it challenging to provide coverage at a reasonable cost if they’d had adverse health experience among their employee population,” says Julie Stich, Director of Research at the IFEBP (ifebp.org). “With premium reform, adverse experience can no longer be taken into consideration and can no longer jack up premiums.”

The disappearance of experience ratings has also resulted in an overall leveling effect. “Before the ACA, employers with healthier employees would have seen premium discounts, while employers with less-healthy employees would have seen premium surcharges due to poor experience,” says Stich. “After the ACA, some employers that had previously received discounts may be seeing increases. Those who had previously seen surcharges may be seeing lower costs or cost increases that aren’t as high.”

Finally, any assessment of the ACA has to consider whether premiums might be higher without the law. That is indeed the conclusion of at least one expert on health care costs. “There has been a two percentage point downward pressure on insurance premiums,” estimates Steven Eastaugh, a Washington, D.C.,-based health economist and consultant (http://www.projectspeaker.com/StevenEastaugh). “This has been caused by a combination of consumer comparison shopping and competition among insurance companies.”

SHOP and save

The ACA provides employers with several resources and advantages. One is the dedicated Internet-based insurance marketplace called The Small Business Health Options Program, or SHOP.  It’s available to employers with 50 or fewer full time workers. (To access SHOP, go to healthcare.gov and click on “Small Businesses.”)

“For smaller employers, SHOP is a great resource,” says Kaya Bromley, an Incline Village, Nevada,-based attorney who counsels employers nationally on the ACA (yourobamacareadvisors.com). “SHOP allows them to get the pricing that only larger employers enjoyed before.”

The SHOP exchanges were originally scheduled to open in late 2013 but were delayed until late 2014 while energies were devoted to fixing the public exchanges for individuals. In many states employers were required to fill out paper applications. The inelegant process led to dismal results: California, for example, signed up 1.4 million people through its public exchange but only 11,500 employees and dependents through its SHOP exchange.

“SHOP certainly has been a slow growing,” says Eastaugh. “The program is barely working in 15 states Perhaps it will get up and running in 10 more sometime in 2015.”

Even in the 15 states where SHOP is working, it is not picking up much market share. “In those states there is an average of one employee signed up through a SHOP program for every 100 people signed up on the state exchanges,” says Eastaugh.

One reason SHOP has been slow to catch on is because word has not yet gotten around. “Many employers still do not know anything about SHOP,” says Bromley. “Also, they are accustomed to working with brokers, and those brokers will lose their commissions if they encourage employers to go to the exchanges.”

Another problem with the nascent SHOP program is the lack of economies of scale. The small businesses who patronize SHOP do not have enough employees to attract competitive pricing from insurance carriers. Whether that problem will be mitigated in the future as the SHOP participation grows, remains to be seen.

Tax credits

Many small employers enjoy another ACA benefit: the tax credit program intended to assist organizations that offer their workers health insurance. These credits are available for employers with fewer than 25 employees and average wages of less than $50,000 a year. The credits are worth up to 50 percent of employer contributions to employees’ premium costs, and the program is good for two consecutive years. Employers desiring to take advantage of the tax credits must offer coverage through the SHOP marketplace.

Despite the allure of tax credits, employers have not taken advantage of them as much as anticipated. “Again, I think this is due to the learning curve,” says Bromley. “Employers are confused about how to calculate the tax credit. They do not see a penalty for not providing insurance so it’s hard for them to look further down the road.”

And perhaps the program’s benefits need to be adjusted. “My feeling is that the tax creits were not of sufficient size, and the fact that they expire in two years doesn’t help,” says Eastaugh. “Maybe the carrot needs to be made bigger: Perhaps the tax credits should be 80 percent and they should go on for five years.” He adds that a more generous tax credit policy might also allow employers to offer plans with lower deductibles.

For information on the tax credits, go to healthcare.gov and click on “Small Businesses,” and then on “For Employers.” Then scroll to the bottom of the window.

Private Exchanges

While the SHOP exchanges and its attendant tax credits are potentially valuable resources for smaller employers, businesses large and small can take advantage of an unexpected offshoot of the ACA: Private health insurance exchanges. These are set up by private sector companies such as insurers, brokers or consultants.

Like their SHOP counterparts, the private exchanges offer a variety of plans to employers and opportunities to reduce administrative overhead. Basic human resource functions (such as tracking which employees are signed up with which polices) are done automatically by the organization running the private exchange.

But there are also differences. Private exchanges offer more choice and plan customization than SHOP. They also provide the opportunity for employers to contribute toward premiums in the form of a fixed amount rather than a percentage. That can help reduce costs as premiums rise.

“Private exchanges are growing like wildfire,” says Larry S. Boress, President and CEO of the Midwest Business Group on Health, a Chicago-based consortium of over 120 employers (mbgh.org). “Our surveys show that 40 percent of our member employers plan to look at private exchanges as possible sources for health insurance.”

More information about private health exchanges can be found through an organization called The Private Exchange Evaluation Collaborative at THEPEEC.com.

Public exchanges

Thanks to the ACA, employers can take advantage of a third type of exchange: the state public exchanges at which people can shop for a health insurance plan that meets the ACA minimum coverage guidelines. Smaller employers who decide health insurance is too expensive to provide as a benefit might decide to send their employees to these marketplaces to shop for coverage.

But which employers can send their workers to the public exchanges without incurring fines? This is a good point to cover one of the more confusing parts of the ACA legislation: the employer mandate. This term refers to the requirement that employers of a certain size must either offer health insurance to their workers or pay financial penalties.

The threshold for the employer mandate is defined by the number of full time equivalent employees (FTEs) at the business. As of January 1, 2015, businesses with 100 or more FTEs must provide health benefits to at least 70 percent of their full-time employees (95 percent by 2016) or pay a $2,000 annual penalty for each employee, excluding the first 30.

The deadline is later (January 1, 2016) for businesses with 51 to 99 FTEs. Employers with 50 or fewer FTEs are not required to offer any coverage at all. These are the employers who are most likely to either utilize the SHOP exchange described earlier in this article, or send their workers to the public exchanges, since doing so will not result in an ACA fine. (One final thing about FTEs: Only organizations with fewer than 25 of them can take advantage of the tax credit discussed earlier in this article).

Unfortunately, calculating the FTE number for an employer is easier said than done. “The employer mandate has been the hardest part of the law for businesses to understand,” says Solander. “Determining who is a full time employee, for example, by reviewing the hours they have worked has been a challenge.” For help in calculating your own FTE, go to healthcare.gov/shop-calculators-fte. You may also want to consult with your accountant.

Solander cautions against instituting a program that gives employees after-tax payments that they are told to use to purchase insurance on the open market, including the state individual exchanges. Such arrangements, sometimes called Employer Payment Plans, or Premium Reimbursement Arrangements, are deemed group health plans and are considered insufficient to satisfy the ACA’s minimum requirements for coverage. Because they violate the ACA they can trigger fines of $100 per day (or $36,000 per year) per employee.

Note that even businesses which have 50 or fewer FTEs, and which are therefore not subject to the employer mandate, should not engage in this kind of reimbursement program. Doing so may subject them to fines, because any health insurance program offered by any employer must satisfy ACA minimum requirements.       

An alternative and legitimate arrangement is to increase the salary of employees with the idea that they can—but are not required—to use their additional income to buy their own insurance. Such an increase, though, would be subject to payroll taxes. (Additionally, businesses with 100 or more FTEs, and for that reason are subject to the employer mandate, would incur penalties because the increased salary on its own does not constitute health insurance coverage).

Prime benefit

If the costs and complexities of an employer-provided health insurance program seem more than the benefit is worth, opting out is a possibility. “Some employers are attempting to stay below the 50 FTE threshold so they are not mandated to offer coverage,” says Stich. In the IFEBP survey, one in 10 respondents said they had reduced hiring to stay below the threshold. Still others said they were reducing work hours so more employees fall into the part time worker category for which health insurance need not be offered.

Despite those reports, the fact remains that most employers seem determined to continue offering what they deem a benefit which is valued by employees and thus vital to business success. In the IFEBP survey, some 93 percent of employers with 50 or fewer workers stated they “will likely” (or “definitely will”) continue to offer coverage. They cited three key reasons: “to retain current employees, to attract future talent, and to maintain or increase employee satisfaction and loyalty.” In contrast, fewer than one percent of survey respondents stated that they will definitely discontinue health insurance coverage. 

“None of our employer members is planning to drop health insurance coverage,” says Boress of the Midwest Business Group on Health. “They all feel it is necessary to recruit and retain talent. When you compete for talent you will miss out if you don’t offer insurance equivalent to that of other employers. And you will not be able to keep the people you have.”

A good benefits program also enhances profitability by keeping people productive, says Boress. The impact is especially acute at smaller businesses. “If you have a business with six people and the delivery person comes down sick you do not make the money you would otherwise. Any break in your systems interferes with the bottom line.”

For all these reasons, the annual search for affordable quality health insurance is not likely to end any time soon. “It’s good for all businesses to have employees with health insurance,” says Bromley. “It means a healthier, happier, and more productive work force.”

Keeping Employees Well

Under the Affordable Care Act (ACA), employer-sponsored health insurance plans may reward employees who participate in wellness programs with premium reductions of up to 30 percent. Such programs benefit employers in the form of healthier workers, and employees in the form of lower premiums.

“I think one of the best parts of the ACA is its wellness initiative,” says Adam C. Solander, an associate at the law firm of Epstein Becker Green, Washington, D.C. (ebglaw.com). “Wellness programs help keep minor conditions, such as high blood pressure, from escalating into expensive problems.”

As valuable as wellness programs, says Solander, are the ACA’s mandate that all insurance policies include prevention benefits such as regular physicals with no cost sharing. “Again, people will be able to deal with minor health issues before they become worse. Employers are starting to see that this can save a lot of money.”

Beware the Cadillac Tax

Employers need to be careful of the so-called “Cadillac tax” which is part of the Affordable Care Act (ACA). “The Cadillac tax may be the biggest issue for all employers,” says Adam C. Solander, an associate at the law firm of Epstein Becker Green, Washington, D.C. (ebglaw.com).

Starting in 2018 there is a 40 percent non-deductible excise tax on premiums that exceed the law’s thresholds (which are $27,500 for a family or $10,200 for an individual). “The problem as I see it is that the thresholds are indexed to the CPI rather than to the pace of medical inflation,” says Solander. “We have seen medical inflation outpace the CPI, so employers are likely to bump up closer to the threshold every year.”

While the tax does not take place for a few years, employers should act now to assess how the tax might affect them, given their current benefits and anticipated increases.

One quarter of employers responding to a survey by the International Foundation of Employee Benefit Plans (IFEBP) have started redesigning their health insurance to avoid triggering the 2018 tax.


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Labtalk May/June 2018