Managing Employer Costs in the Post-PPACA World
By Lisa R. Nelson, Barney & Barney LLC, San Diego, CA
The Patient Protection and Affordable Care Act (PPACA)1 at fifteen months old,2 is an infant law taking its wobbly first steps through the regulatory process. The law’s provisions have already been subjected to repeals, amendments and court challenges. With a questionable future for the law, employers find themselves uncertain how to prepare for the impact to their health insurance costs.
Employer-sponsored health coverage represents the majority of health insurance offered to Americans today, with 61 percent of non-elderly Americans covered by employer-sponsored health insurance3 PPACA is intended to cover 80 percent of the forty-seven million uninsured that have some connection to the workforce, either themselves or through a spouse4 . With so many employers affected, PPACA will have an inevitable effect on employers’ bottom lines.
Employers already face medical inflation rates averaging four percent annually5 in addition to insurance premium trend increases that raise premiums approximately ten percent annually.6 Employers anticipate PPACA to add another one to two percent (per cost-driving provision) to their healthcare premiums.7 Added with increases due to trend, inflation and claims experiences, PPACA will raise some mid-to-large size employer premium dollars by six-digits.8
Dealing with PPACA Cost-Drivers
With inevitable increases to the employer’s health insurance premiums, what should employers consider in managing costs? There is no “one-size fits all” approach to managing PPACA costs. Employers should analyze the following options to determine the best approach for their company and health insurance plans:
Option 1: Grandfathered Plan(s)
If no significant changes to the employer’s plan have been made since PPACA’s inception, consider grandfathering.9 Employers struggling with PPACA compliance may consider grandfathering until 2014. Grandfathering buys time during periods of uncertainty due to repeals, amendments and lack of guidance. Grandfathered plans may opt-out of some PPACA cost-drivers, as illustrated in the chart below. But, there are trade-offs; recordkeeping and notice requirements attach to grandfathered plans. In addition, plans may not modify contribution strategies10 to offset increases due to trend, inflation and/or unavoidable PPACA cost-drivers. In 2011 alone, PPACA is responsible for approximately two percent of the expected ten percent cost increase, even for grandfathered plans.11 As a result, most employers are not, or do not intend to remain grandfathered until 2014.
2011 Cost-Drivers for Grandfathered Plans versus Non-Grandfathered Plans
Provisions Effective Plan Years On/After September 23, 2010
Dependent To Age 26
Required - Only if Ineligible for Their Own Employer Plan Until 2014
Required In Full
Preventive Care Services (1st Dollar)
Annual Limits Restrictions (Phased In Starting Now Until 2014)
No Lifetime Essential Benefit Limits
Preexisting Exclusions for Dependent Children Under Age 19
Nondiscrimination Rules Extended for Fully-insured Medical Plans12
*This chart represents 2011 PPACA cost-drivers and is not intended as an exhaustive list of PPACA provisions.
By the year 2014, the PPACA cost-driving provisions below will also become effective:
2014 Cost-Drivers for Grandfathered Plans and Non-Grandfathered Plans
Provisions Effective January 1, 2014
90 Day Limit on Waiting Periods
Free Choice Vouchers
No Preexisting Condition Exclusions
No Annual Limits
Guaranteed Issue/Renewability for Small Groups
Limits on Small Group Deductibles
Annual Out-of-pocket Maximums Limited
* This chart represents 2014 PPACA cost-drivers and is not intended as an exhaustive list of PPACA provisions.
Option 2: Plan Redesign: Consumer Driven Health Plans (CDHP),13 Self-funded Plans and Cost-shifting
Employers facing unavoidable PPACA cost increases should consider implementing a CDHP. Enrollment in CDHPs rose two percentage points for the fifth consecutive year, reaching eleven percent of covered employees.14 In fact, eight percent of employers with fewer than five hundred employees, and two percent of larger companies, offered only CDHPs.15 The appeal is evidenced in that these plans cost nearly twenty-five percent less than Preferred Provider Organization (PPO)16 plans (e.g., $6,200 per employee versus $7,800).17
Another plan redesign option to manage costs is self-funding. Self-funded plans offer employers flexibility in plan design, as well as increased control over benefit design through greater access to loss and trend data. Employers set aside reserves to pay claims out of current cash flow as claims arise. A stop-loss insurance policy mitigates risks in the event of a large claim or increased utilization. Traditionally popular with large companies, self-funding for companies with fewer than 1,000 plan participants has doubled to 48 percent in 2010.18 Companies with locations in multiple states that can afford a reserve may find self-funding an attractive option to avoid some PPACA provisions,19 state insurance regulations and concerns about the various state Exchanges.20
Finally, employers seeking to reduce PPACA cost increases may shift costs to the employee. Increasing co-pays, out-of-pocket maximums and deductibles are common options employers utilize to shift costs.21 However, employers wishing to maintain a competitive benefits package to attract talent may shy away from increasing employee cost-sharing. Like employer contributions, employee premium contributions have steadily risen year after year, as shown in the chart below.
Average Annual Premium Contributions Paid by employees 1999-201022
Option 3: Develop an Employer Mandate Action Plan
Employers faced with PPACA cost increases must also develop an action plan for the employer mandate effective in 2014. For most companies, the employer mandate will drive up costs through expansion of coverage to more employees and/or shorter waiting periods. Consider the following employer mandate options:
Employer ceases to offer health coverage, opting to pay $2,000 per employee23 (indexed by the insurance premium adjustment percentage for the calendar year24)
Employer reduces coverage offered to all employees to the minimum PPACA standard
Employer extends existing coverage to all benefits-eligible employees
Employer implements a CDHP or modifies cost-sharing
The Future for PPACA
The joint regulatory agencies25 charged with writing PPACA regulations have only released interim final regulations for provisions effective in 2011, illustrated as highlighted sections in the below chart. The rulemaking process will take another seven to ten years to complete. Faced with “nip and tucks,” legal challenges and amendments along the way, employers are likely to see PPACA 2.0, 3.0, and beyond before full implementation is complete. Most employers have chosen a “wait and see” approach to healthcare reform; choosing to wait to implement changes until required versus attempting to implement policies for provisions effective in future years.
PPACA Timeline Highlighting Provisions Supported by Joint Agency Guidance
The future for PPACA is unclear. PPACA has been challenged in several U.S. district courts with varied rulings26 deeming PPACA both constitutional27 and unconstitutional.28 The district courts’ rulings have no effect in overturning PPACA; rather the rulings shed light onto what the U.S. Supreme Court may consider when finally addressing PPACA’s constitutionality. The Supreme Court has declined to review challenges expediently,29 leaving employers in a “wait and see” game. In the meantime, PPACA has been “nipped and tucked” through Congressional actions; the most recent “nip” evidenced in the repeal of the Free Choice Voucher provision. Uncertainty remains, yet employers are nevertheless required to comply with provisions as they become effective; all the while remaining amorphous in preparation for inevitable amendments and repeals.
Employer Action Plan
- Manage compliance cost-drivers
Employers adapting to the new healthcare marketplace must understand causational cost-drivers. PPACA’s unavoidable costs include employee communications, plan modifications, and changes to administrative and payroll systems. Where possible, consider avoidable costs, including exemptions for grandfathered and self-funded plans, workforce restructuring and plan design changes.
- Consider human and capital needs
In 2014, PPACA’s employer mandate subjects employers30 to a penalty for insufficient or unaffordable coverage. The definition of full-time will be expanded to include anyone working an average of thirty or more hours per week. This expanded definition, in conjunction with a restricted waiting period of no longer than ninety days, will result in employers covering more employees. Employers (especially hospitality and retail-sector employers utilizing a large number of part-time workers) should evaluate their financial and human capital needs to determine if workforce restructuring can be utilized to offset increases in health insurance costs. Considerations should include the following options:
- Expand coverage to the larger list of benefits-eligible, full-time employees
- Manage hours by reducing hours and/or by converting part-time or temporary employees to full-time employees
- Restructure workforce responsibilities to best utilize full-time employees
Pub. L. No. 111-148 (March 23, 2010), as amended by the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152 (March 30, 2010) (HCERA).
|2 ||PPACA was signed into law on March 23, 2010.|
University of Minnesota State Health Access Data Assistance Center, Trends in U.S. Employer-Sponsored Health Insurance, June 2011
United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index Summary, May 2011 <http://www.bls.gov/news.release/cpi.nr0.htm> (last updated June 15, 2011).
Kaiser Foundation and Health Research & Educational Trust, Employer Health Benefits 2005 Annual Survey, graph 62 Ex. 6.3 (1999-2005).
Mercer Survey, One in Four Employers Expect Health Reform’s 2011 Requriements to Add 3% or More to next year’s Cost, May 2010
Beth Levin Crimmel, MS, Medical Expenditure Panel Survey, Chanes in Premiums and Employee Contributions for Employer-Sponsored Health Insurance, Private Industry, 2001-2009, June 2011 < http://www.meps.ahrq.gov/mepsweb/data_files/publications/st325/stat325.pdf>
Employers maintaining the same plan in place on March 23, 2010, are considered grandfathered.
The following changes will result in a loss of grandfathered status: any increase in coinsurance; increases in co-pays in excess of $5; reductions in employer contributions by more than 5%; adding or decreasing annual dollar limits; increases to deductible by more than 15%; eliminating benefits for a particular condition or treatment; and moving employees to a grandfathered plan with lower benefits or merging, acquiring or restructuring to avoid PPACA compliance.
Mercer Survey, One in Four Employers Expect Health Reform’s 2011 Requriements to Add 3% or More to next year’s Cost, May 2010
Enforcement delayed pending issuance of Interim Final Regulations. Plans need not comply with this provision at this time.
CDHPs include high-deductible health plans with corresponding Health Savings Accounts (HSA), Health Reimbursement Arrangements (HRA), and Flexible Spending Accounts (FSA).
Kaiser Foundation and Health Research & Educational Trust, Survey of Employer-Sponsored Health Benefits 2010, graph 12 Ex. 11 (2005-2010).
|15 ||Kaiser Foundation and Health Research & Educational Trust, Employer Health Benefits 2010 Annual Survey <http://ehbs.kff.org/pdf/2010/8085.pdf> (accessed June 17, 2011). |
In most markets, PPO plans are most common, with the exception of California, where Health Management Organizations (HMO) retain the biggest market share.
Roy Ramthun, The Council for Affordable Health Insurance’s, Only Consumers Can Bend the Cost Curve, No. 155 (accessed June 20, 2011).
Pricewater Cooper, Behind the Numbers: Medical Cost Trends for 2010, May 2011 < http://pwchealth.com/cgi-local/hregister.cgi?link=reg/behind-the-numbers-medical-cost-trends-2012.pdf>
National Health Policy Forum, Issue Brief #840, December 2010,
Mark W. Stanton, M.A., U.S. Department of Health & Human Services, Agency for Healthcare Research and Quality, Employer-Sponsored Health Insurance: Trends in Cost and Access, Issue 17 (Sept. 2004).
|22 ||Kaiser Foundation and Health Research & Educational Trust, Survey of Employer-Sponsored Health Benefits 2010, graph 5 Ex. 4 (1999-2010).|
|23 ||The penalty clock begins only upon one or more full-time employees receiving subsidized coverage through the Exchange. The first thirty employees counted will not be assessed a penalty.|
|24 ||Per IRC §4980H(c)(5) and PPACA § 1302(c)(4), the premium adjustment percentage is the national average premium growth rate.|
|25 ||The Departments of Labor, Health and Human Services, and Treasury are the joint agencies charged with writing regulations for the Employee Retirement Investment Security Act of 1974 (ERISA), the Internal Revenue Code and Public Health Services Act (PHSA).|
|26 ||Richard Cauchi, National Conference of State Legislatures, State Legislation and Actions Challenging Certain Health Reforms, 2011 < http://www.ncsl.org/?tabid=18906> (last updated June 13. 2011). Independent Women's Forum, Health Care Lawsuits (accessed June 17, 2011).|
|27 ||Thomas More Center v. Obama, Case No. 2:10-cv-11156-GCS-RSW, 702 F. Supp.2d 882 (E.D. Michigan Southern Div. 2010).|
|28 ||Florida v. U.S. Dep’t of Health & Human Services, Case No. 3:2010-cv-0009 (N.D. Florida 2010).|
|29 ||Virginia ex rel. Cuccinelli v. Sebelius , 131 S.Ct. 2152, 79 USL W 3480,79 USL W 3609 (U.S. April 25, 2011) (NO. 10-1014).|
Employer subject to the employer mandate has 50 or more full-time or full-time equivalent employees.
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