For us in the Employee Benefits Group here at Michael Best & Friedrich, it is as if we were on the receiving end of the old Chinese curse: "may you live in interesting times." The federal government has certainly made things interesting with respect to health coverage. The Patient Protection and Affordable Care Act (PPACA) is complex in some areas and vague in others. For example, the 2014 transformation of the insurance industry into state or federal insurance exchanges describes outcomes but is light on how we as a country get there. Moreover, distracted by the possibility that either the Supreme Court or the November election might result in the law being overturned or changed, many decided not to get serious about dealing with these aspects of the law until later. This was not only true for employers but also for state governments and the federal government; everyone now has some catching up to do. This client alert attempts to describe what employers are likely to see in the weeks and months ahead.
The Obama administration is in the process of releasing a large amount of additional guidance on health care reform. Just released are proposed rules (i) defining "essential health benefits" which must be followed by insurance carriers, (ii) establishing new rating rules for individual and small group market insurance policies pertaining to guaranteed availability, renewability, risk pools and catastrophic plans, and (iii) setting standards applicable to wellness programs. Still to be issued are rules regarding taxation of medical devices, how money will be allotted for hospitals that treat the uninsured, and how coverage for contraceptives and abortifacients will be guaranteed for employees of religious-based organizations such as schools, hospitals and charities. Seemingly, many of these rules were not released until after the election, either to reduce the political heat they may have caused, or simply because the election could have taken the law in a much different direction. Furthermore, additional rules are expected regarding how insurance exchanges will work starting next October when they are to first permit open enrollment. Now, for the first time, the federal government is setting rules as to how it will permit insurers to set different prices based on age, family size, geographic location and tobacco use.
Employers are also awaiting regulations from the IRS indicating how it will enforce a $100/day excise tax per plan participant on "discriminatory" health plans. This tax effectively bans health plans that provide better benefits for those in the top 25% of pay than are provided to those in the bottom 75% of pay, but the rules are not being enforced pending further guidance because it is so easy to inadvertently fail to comply and because the penalty is so disproportionate to the infraction.
One of the ways Obamacare was rendered "affordable" by Congress was by having the states establish insurance exchanges and run much of the day-to-day administrative tasks through them. However, because the federal government does not have constitutional authority to force states to do this, Congress adopted a carrot and stick approach. A significant carrot is that certain premium subsidies are available to lower income individuals through exchanges "established by the State under section 1311." A stick is that, if a state does not create an exchange, the federal government will do so and further, the language of the law enacted by Congress provides no premium subsidies for low income individuals under federal exchanges, which are established under section 1321 of the law.
It is of interest that the IRS has issued guidance indicating it will provide premium subsidies under both state and federal exchanges. A working paper challenging this interpretation was issued earlier this year by Case Western Reserve University Law School, arguing that this IRS interpretation could be an $800 billion issue and determine the outcome of Obamacare. According to the working paper, under the plain language of the law, neither the individual nor employer "shared responsibility" penalties can be assessed in states where only the federal exchange has been implemented. It is anticipated that this issue will eventually receive judicial scrutiny and for the time being it is one of the unknowns as health care reform continues to evolve.
The decisions by (at this time) 16 Republican governors to not create state exchanges is another interesting development. Many business, health care provider, and insurance groups have urged their respective states to set up exchanges so as to maintain greater control. Nevertheless, the Republican governors that have declined to create state exchanges have been uniform in their complaint that state control is not possible under PPACA, which provides that state exchanges must comply with current and future regulations issued by the Department of Health and Human Services (HHS). Moreover, without this control, the Republican governors argue, the administrative burden and cost associated with building and maintaining these exchanges is hard to justify in their state budgets. Because Congress assumed that all states would create state insurance exchanges, no federal money was allocated for administering federal exchanges. Therefore, uncertainty abounds as to how the battle over state and federal insurance exchanges will play out.
What is becoming clear is that the insurance exchanges will not be ready by October of 2013. An extraordinarily large amount of work needs to be done and few anticipate that it can be fully accomplished within the time remaining. For example, the law enacted by Congress requires health plans to provide "minimum essential benefits," and then Congress empowered HHS to provide further guidance as to how these benefits are to be defined. HHS then adopted rules permitting states to set a "base benchmark" plan design that would be used as a standard for typical employer-provided coverage in each state, and HHS also set a September 30, 2012 deadline for states to do so. Only 20 states complied by the deadline. Many states asserted that they could not set a benchmark without further guidance which HHS only released on November 20, 2012.
It is anticipated that many states that are not creating state insurance exchanges will still establish a base benchmark plan design and will do so within the next few months, but HHS has adopted a procedure for adopting one if a state does not. State insurance carriers need these benchmark plan designs so they know what products they will put on the exchanges and also so they can determine how much to charge for them. Everyone is behind schedule.
Considerations for Employers
A key concern for employers is how to make critical decisions with so much financial impact but with so little certainty as to outcome.
Under the play-or-pay rules, employers with 50 or more employees or full time equivalents working at least 30 hours per week must provide coverage or could be required to pay a $2,000 penalty per year per full time employee (with no penalty assessed as to the first 30 employees). However, $2,000 is much less than employers would pay for coverage, so isn’t this an incentive for employers to drop coverage? In fact, the law, contrary to its name, is not anticipated to make healthcare more affordable for employers. Moreover, the regulations issued by the IRS, the Department of Labor (DOL) and HHS make providing health coverage much more administratively burdensome; another motivating factor for an employer to let the government provide healthcare.
Employers considering dropping coverage will want to know what their competitors are doing, but how will they know until January 1, 2014? When will employers learn from their insurance brokers what their insurance carrier will charge in 2014? What if renewal rates are not finalized until much later than normal due to the uncertainty? Will employers in a particular industry adopt similar changes in coverage and who will lead?
Furthermore, health coverage or penalty concerns are likely to cause employers to reconsider how they staff their businesses. Accordingly, small employers who would like to expand beyond fifty full time-employees will have to decide if it is worth additional health care costs and administrative burdens. Furthermore, many employers will consider moving full time employees to part time or using leased employees. Ultimately, employers will provide a discernible response to the law adopted by Congress in 2010 and, it is hoped, the system will become more predictable.
Our advice for employers is to do your homework and listen for announcements and trends. Communicate early and often with your consultants. Get second opinions before taking irreversible steps, maintain flexibility, and try to keep Plan B available. If you are negotiating a collective bargaining agreement, try for language that preserves flexibility or at least permits mid-contract changes or a re-opener if necessary. Be nimble.
Through all of this, try your best not to drop coverage altogether. Remember that employee benefits serve the purpose of setting one employer apart from another in a positive way that attracts and maintains the best employees. Furthermore, if a sizable number of employers drop coverage, the only way for the insurance industry to survive is if the federal government highly subsidizes coverage. It is anticipated that the federal government would struggle to do this if it charged a penalty of only $2,000/employee. Thus, some say that $2,000 could become $4,000 or more. In time, employers who have dropped coverage could face paying the same amount they paid for coverage before, but with no control at all as to the coverage their employees receive. What's more, the insurance industry could be completely transformed if the federal government sets the rules and controls the purse strings.
Through the next several years, employers, brokers, insurance carriers and health care providers will need to be innovative within a regulatory framework that discourages innovation by its inability to contemplate and make room for it.
Employers will need to make decisions as to modifications to their workforce, their health plan design, the amount employees are required to pay, and whether or not to provide coverage at all. These decisions must occur in an uncertain environment in which certain states have signaled unwillingness to comply and where others may not be ready in time to meet all compliance requirements. Fasten your seatbelts.© MICHAEL BEST & FRIEDRICH LLP