The insurance market is filled with options, so how do employers choose the right path?
- By Malibu Kothari
Everyone is likely to agree that employers in the United States are faced with a much more complex health insurance market now that the Patient Protection and Affordable Care Act (ACA) has been implemented. Before the ACA, employers could self-insure, buy insurance through a health insurance company, or develop a combined program to manage costs for employee and retiree groups. After the ACA, new options and challenges were added, including government-run private health care exchanges where individuals can purchase insurance; the SHOP Marketplace offering small businesses affordable employee coverage; and the employer mandate requiring large employers to offer health insurance or pay a fine. Health insurance has become a balancing act as employers try to design the right plan to maximize value of the benefits plan, contain insurance costs, avoid government penalties, and offer benefits that attract and retain staff.
The Requirements…
Though books could be written on the long-term impact of the ACA on businesses, the economy, the number of employer insured, and so on, the time of implementation finally arrived on January 1, 2014. The first point to keep in mind is that a number of mandates have a delayed implementation. For purposes of this discussion, the assumption is that the mandates will eventually be fully implemented.
As of January 1, 2015, the Employer Mandate involving penalties becomes effective. Large employers, as defined by the law, must offer full-time employees, and their children who are younger than 26 years old, health insurance that meets certain standards of coverage. Large employers have 50 employees or more. They must “play” by offering employees affordable health insurance or “pay” a penalty. To play means the health insurance offers “minimum essential coverage,” is affordable, and satisfies an ACA minimum value requirement.
Small businesses with 50 or fewer employees are not required to provide health insurance. Since the government wants as many people as possible to have insurance, it created the SHOP Marketplace so small employers can provide coverage. A business with less than 25 employees can claim a Small Business Health Care Tax Credit if buying insurance through SHOP.
The Options…
Employers have a number of options. They can buy group health insurance in the marketplace directly from private insurers or private health insurance exchanges. A second option is to not offer health insurance and drive employees to the state and federal health insurance exchanges, knowing there may be a penalty. A third option is to self-insure, meaning the employer covers certain health care costs. A fourth option is to create a blend of insurance coverage that may include sending some employees to the exchanges, while offering employer health insurance to others.
The Challenges of Doing the Math…
There are many complexities to calculating the ideal value solution. For example, there has been much discussion on whether employers will reduce work week hours to less than 30 to manage costs. The discussion as to whether employers will cut staff hours on average each week arises from the ACA definition of a full-time employee as someone who works 30 hours or more. Reducing hours will also reduce the average number of full-time equivalent (FTE) employees. If that number falls below 50, the employees can go to the state and federal health insurance exchanges.
The required minimum essential coverage refers to a fully-insured or self-insured employer sponsored group health plan or flexible spending accounts. “Affordable” is defined as a plan that does not require an employee to contribute more than 9.5 percent of the family household income for self-only coverage. The health insurance coverage provides “minimum value” if the projected actuarially projected cost of the benefits coverage is at least 60 percent.
Large employers will go through a thought process that involves a mixture of calculations and an assessment of the role of health insurance as a component of a benefits package that helps attract and retain employees. Though employees can go to the government exchanges and perhaps qualify for a subsidy, the reality is that the best plans are likely to be offered by employer group plans.
The calculations include determining the number of FTE equivalents and the cost of group insurance that meets mandated requirements. Some employers will decide to pay rather than play, especially if premiums increase over time. If the employer decides to not offer health insurance, and a full-time employee enrolls for insurance on an exchange and qualifies for a subsidy, the employer will owe a “no coverage penalty” calculated as $2,000 per year times the number of full-time employees less the first 30 people.
If an employer does provide insurance coverage, but it does not meet the requirements discussed in one way or another, and, at least one employee enrolls through an exchange and qualifies for a subsidy, the “inadequate coverage penalty” kicks in. However, it is based on the total number of full time employees who get a subsidy through an exchange.
Employers who pay high wages to employees who would not qualify for a subsidy would probably not have to pay a penalty because of how the math works out. Subsidies are also not available to employees who buy affordable health insurance coverage through an employer. The math sometimes works out oddly because of the subsidy rules. For example, assume an employer has 50 full-time employees and 45 of them earn annual incomes over $120,000, while the remaining five earn $35,000. The 45 employees are not eligible for a subsidy, so the employer only has to offer health insurance to the five who are eligible to avoid paying a penalty.
Most employers want to offer employees health insurance for all the right reasons. However, the complexity of the ACA rules, regulations, and mandates, coupled with rising premiums, is making decision-making more complex also. It is important to think through a decision-tree type of analysis before selecting the right route. Each company has unique metrics and analytics, so there is no single “right” answer. The path chosen should be thoughtful, involve a cost analysis, and bring value to the employer and employees. It is highly recommended that employers also seek the advice of their accountant.