Beginning in 2014, the Patient Protection and Affordable Care Act (PPACA) will foster greater competition in the individual and small group markets through state-level health insurance exchanges. Plans offered through these exchanges must meet minimum standards for scope of benefits and member cost sharing, and federal premium assistance tax credits and subsidies will be available to many low- and middle-income consumers.
Employers with more than 100 employees will generally not have access to the exchanges before 2017. Nonetheless, these exchange standards could influence employer health plan design and funding decisions. Moreover, large employers that decide to offer coverage to their full-time employees must comply with similar but less stringent standards regarding scope of benefits, member cost sharing and level of premium support under the PPACA’s employer pay-or-play mandate.
Health insurance exchange standards
Beginning in 2014, covered benefits in the individual and small-group markets must include 10 statutory categories of “essential health benefits” (EHBs),1 which must be “equal to the scope of benefits provided under a typical employer plan.” The U.S. Department of Health and Human Services (HHS) has proposed allowing each state to choose a benchmark plan to represent the typical employer plan for the purpose of defining EHBs.2
The PPACA’s standard metric for member cost sharing is actuarial value or the “percentage of expected health care costs a health plan will cover” for a “standard population.” To facilitate comparisons, plans offered through the exchanges will be grouped into four tiers by actuarial value: bronze=60%, silver=70%, gold=80% and platinum=90%. All plans — whether obtained inside or outside of an exchange — must have an actuarial value of at least 60%, with the exception of catastrophic plans targeted to people younger than 30 or otherwise unable to obtain affordable coverage. Actuarial value calculations will be based on coverage for the EHBs, so the actuarial value of all plans in a given state will be based on the same covered services.3
The PPACA also tries to make premiums more affordable to enrollees in exchanges. Individuals with family incomes between 100% and 400% of the poverty level will be eligible for sliding-scale tax credits that cap the premium for a silver plan at 2% to 9.5% of family income.4 Those with incomes between 100% and 250% of the poverty level are also eligible for cost-sharing subsidies that raise the actuarial value of a silver plan to 73% to 94%, depending on income. At all income levels, the premium for the most expensive age group is limited to three times the premium for the least expensive age group within a given plan, which will likely reduce premiums for older people.5 Premiums may not vary by personal claims history or health status.
Large employer and self-insured plans
Employers with 101 or more employees may not purchase coverage for their employees through the state insurance exchanges, at least until 2017.6 Employer plans need not cover all 10 essential benefits or classify their plans into actuarial value tiers. Nevertheless, the PPACA requires large-employer-insured plans and all self-insured plans, whether offered by large or small employers, to meet similar standards for benefit generosity and plan affordability:
- Actuarial value: Under the PPACA’s employer pay-or-play mandate, employers with 51 or more full-time employees must offer at least one plan with an actuarial value of at least 60% or face potential penalties. Employees of large firms that fail this “minimum value” standard may become eligible for federal premium assistance tax credits to buy coverage in the exchanges. When employees qualify for these credits, the employer must pay a penalty of $2,000 per full-time employee or $3,000 per full-time employee receiving a premium assistance tax credit, whichever is less. Large firms that do not offer a health plan to all full-time employees also face a penalty of $2,000 per full-time employee.7
- “Core” benefits: Most plans offered by large employers already include benefits similar in scope to the 10 statutory essential health benefits, but the law does not require large-employer-insured plans or any self-insured plans to satisfy this standard. The Internal Revenue Service (IRS) has proposed basing actuarial value calculations for these plans on four “core” categories of health services: physician and midlevel practitioner care, hospital and emergency room services, pharmacy benefits, and laboratory and imaging services.8 The four core categories include 95% of the charges covered by a benchmark plan with broad coverage.9 In practical terms, this difference is likely to have little material impact on actuarial value estimates.
- Employer premium contributions: Employees of large firms that offer coverage meeting the minimum value standard are not eligible for premium assistance tax credits or cost-sharing subsidies in an exchange unless their share of the employee-only premium in the employer’s lowest-cost plan exceeds 9.5% of family income. Employers whose coverage does not meet this affordability standard must pay the same financial penalty as firms that fail the minimum value requirement. The IRS proposed regulation applied the affordability standard only to single coverage, but the final regulation suggested that future guidance will address family affordability. The regulation could make nonemployee family members eligible for premium tax credits where the self-only coverage is affordable but the family coverage is not.
How do current employer plans compare with exchange standards?
Figure 1 depicts key cost-sharing provisions for prototypical plans that might be offered in the four exchange tiers in the individual market. These plan designs are largely similar to plans that employers currently offer with the exception of the bronze plan, which has considerably higher cost sharing than most current employer plans. The $3,000 deductible is about $1,100 higher than the average deductible for an account-based health plan (ABHP) in 2010.10 The PPACA might cap deductibles for all employer-sponsored plans at $2,000 (see sidebar), potentially making it difficult for employers to design a plan with a 60% actuarial value.11
Figure 1. Prototypical health plans in each exchange tier
* See sidebar for discussion of the deductibles that might be allowed for employer-sponsored plans.
** Applies to services that do not have a copayment.
Source: Towers Watson
To determine where current employer plans would fall in the exchange tiers, we used a simulation model to estimate actuarial values for the plans offered by over 2,000 U.S. employers in 2010. Figure 2 shows the resulting distribution of private-sector employees by actuarial value and plan type.
Figure 2. Percentage of group policies by actuarial value and plan type, 2010
Note: ABHP estimates do not reflect employer contributions to health reimbursement accounts (HRAs) or health savings accounts (HSAs).
Source: Jon R. Gabel, Ryan Lore, Roland D. McDevitt, Jeremy D. Pickreign, Heidi Whitmore, Michael Slover and Ethan Levy-Forsythe, "More Than Half Of Individual Health Plans Offer Coverage That Falls Short Of What Can Be Sold Through Exchanges As Of 2014," Health Affairs, 31(6):1339-1348 (May 2012).
Most employer-sponsored health plans provide good protection against high out-of-pocket expense. Almost all covered employees have plans that exceed the PPACA minimum value standard, and more than 90% of them are in silver, gold or platinum plans. The plan type is a major determinant of actuarial value. Health maintenance organization (HMO) enrollees are mostly in gold or platinum plans, and most ABHP enrollees are in silver or gold plans. Preferred provider organizations (PPOs), the most common plans, have a wide range of values but tend to cluster in the midrange silver and gold tiers. As indicated by Figure 1, the deductible is another significant driver of actuarial value. Actuarial values tend to fall as deductibles rise.
While it has been suggested that many ABHPs would fail the PPACA minimum value standard,12 as Figure 2 shows, more than 90% of ABHP enrollees are in plans that exceed the minimum value requirement by at least five percentage points, and almost 70% of ABHP members are enrolled in silver or gold plans. The ABHP estimates in Figure 2 do not reflect employer contributions to the personal accounts linked to ABHPs, thus effectively treating these contributions as out-of-pocket expense for the employee. HHS has proposed counting much of the employer’s HRA or HSA contribution as plan expense instead,13 thereby recognizing these contributions as employer spending on health benefits. Assuming the proposal is enacted, Figure 2 likely overstates the number of ABHPs that would fail the minimum value test, further suggesting that ABHPs will remain a viable option under the PPACA.
Very few large employer plans do not cover the four core services that the Department of the Treasury has recommended as the basis for calculating actuarial value: hospital room and board, surgical procedures, physician office visits and prescription drugs. A large majority of employer-sponsored plans also cover numerous other services, including emergency room care, maternity care, physical therapy and durable medical equipment. Mental health services are generally covered, but many plans limit coverage for those services.14 Plans in the small-group market tend to cover a similar range of benefits and therefore largely meet the essential health benefit standards.15 The essential health benefit requirements will have greater impacts in the individual market.16
Likewise, the premium affordability standard will have relatively little impact on large-employer plans in the short term. Among companies with 200 or more employees in 2012, the average employee premium contribution was $1,001 for single coverage and $3,926 for family coverage.17 The $1,001 share of the single premium would be affordable for individuals with incomes of $10,537 or more — a threshold almost $1,200 lower than the 2011 federal poverty threshold for a single working-age adult. So most employers will have considerable latitude to reduce their premium contributions while still offering an affordable plan. This is particularly true for family coverage because the affordability threshold applies only to single coverage.
Implications for large employers
The PPACA sets minimum standards for satisfying the employer pay-or-play mandate, and most employers will need to make only minor changes to comply with these requirements and avoid penalties. Nevertheless, the standards set important benchmarks for plan value that can be useful to employers on several fronts:
- Options for employer health benefits: Although most firms intend to continue sponsoring health plans for active employees for the next few years,18 others might encourage some or all employees to explore coverage options in the exchanges. For instance, employers could direct part-time employees currently eligible for coverage to exchanges. Companies with many low-income employees might find it cost effective to eliminate coverage altogether and pay penalties of $2,000 per full-time employee, allowing these low-income employees to obtain coverage and premium assistance tax credits through exchanges. Exchange options will be particularly attractive for early retiree plans where there is no penalty to discourage employers from dropping current plans.
- Employee and retiree communication: Employers might wish to use the PPACA plan value metrics to communicate the value of plan options to employees. These communications could show the employee’s estimated out-of-pocket costs and premium contributions under the employer’s plans and exchange plans. Employers might also want to inform employees about the subsidies for low- and moderate-income people purchasing plans in the exchanges.
- The excise tax on high-cost plans: Beginning in 2018, the PPACA will impose a 40% excise tax on employer-sponsored group health plans with total values above $10,200 per employee for single coverage and $27,500 per employee for family coverage. Plans with higher values can adjust their cost-sharing provisions in ways that will lower premiums and thus avoid the excise tax. The PPACA plan value standards can help employers identify these plans and understand the range of permissible plan changes that can be made to avoid the tax.
- Setting cost-sharing provisions: In 2010, more than 99% of employees with employer-sponsored coverage were in plans that paid 60% or more of the charges for a standard population.19 Nevertheless, many employers might need to adjust cost-sharing provisions to comply with the PPACA standards for core benefits, deductibles and out-of-pocket maximums. For instance, 14% of covered workers were enrolled in plans with single deductibles of $2,000 or more in 2012,20 and many of these deductibles might exceed PPACA limits.
From an overall value standpoint, large employers generally offer health benefits well beyond those required in the exchanges. Consequently, most large employers will need to make only minor changes to their plans to comply with the PPACA requirements on minimum value and premium contributions under the pay-or-play mandate. Nevertheless, some employers might still wish to change their health plan strategies in response to the law. The exchanges will necessitate decisions about plan designs and offerings for both active employees and pre-65 retirees. Moreover, given the relatively high actuarial values of current employer plans, most employers have leeway to further limit their health benefit spending within the constraints of the PPACA.
The Department of the Treasury has provided substantial guidance, but questions remain about the cost-sharing requirements for large-employer plans.
- Group health plans may not impose annual deductibles greater than $2,000 single/$4,000 family for plan years starting on or after January 1, 2014, with these amounts indexed to the increase in U.S. health insurance premiums in subsequent years. Further guidance is necessary to clarify whether this restriction applies to all employers or only to small employers.
- The Patient Protection and Affordable Care Act (PPACA) allows these maximum deductibles to be raised by the amount of any employer contributions to an employee’s health flexible spending account. It is not clear whether future regulations will treat employer contributions to a health savings account (HSA) similarly.
- Group health plans may not impose out-of-pocket limits greater than the maximum limits allowed for HSA-eligible account-based health plans ($6,250 single/$12,500 family in 2013) beginning in 2014. These maximum deductibles and out-of-pocket limits do not apply to “grandfathered” plans, existing plans that were first offered before the PPACA’s enactment.
- The Internal Revenue Service “Minimum Value of an Employer-Sponsored Health Plan” bulletin proposes three ways for a plan to satisfy the minimum value requirement: (1) an actuarial value of at least 60% using a minimum value calculator developed by the U.S. Department of Health and Human Services; (2) plan provisions consistent with one of several checklists of “safe harbor” standards; or (3) certification of minimum value by an actuary, primarily for plans with “nonstandard” features, such as coverage limits on core services.
- Plans that do not cover all four core services would not qualify for safe-harbor treatment, but the bulletin does not specify whether plans must cover all core benefits under the other two options.
This is the first in a series of three articles discussing potential impacts of health care reform on employers. The second article will explore the advantages and limitations of actuarial value. The third article will cover developments in public health insurance programs with implications for employers.
1 The PPACA defines essential health benefits to include “(1) ambulatory patient services, (2) emergency services, (3) hospitalization, (4) maternity and newborn care, (5) mental health and substance use disorder services, including behavioral health treatment, (6) prescription drugs, (7) rehabilitative and habilitative services and devices, (8) laboratory services, (9) preventive and wellness services and chronic disease management, and (10) pediatric services, including oral and vision care.” Affordable Care Act, Section 1302(b)(1).
2 HHS, U.S. Centers for Medicare and Medicaid Services, Center for Consumer Information and Insurance Oversight, Essential Health Benefits Bulletin (2011).
3 HHS, U.S. Centers for Medicare and Medicaid Services, Center for Consumer Information and Insurance Oversight, “Actuarial Value and Cost-Sharing Reductions Bulletin” (2012).
4 The tax credit is benchmarked to the second-lowest-cost silver plan in the individual market in a given rating area.
5 Ryan Lore, Roland McDevitt, Jon R. Gabel and Michael Slover, “Choosing the ‘Best’ Plan in a Health Insurance Exchange: Actuarial Value Tells Only Part of the Story,” The Commonwealth Fund (2012).
6 Individual states have the option to restrict participation in the Small Business Health Options Program (“SHOP Exchange”) to employers with 50 or fewer employees until January 1, 2016.
7 The employer is exempt from the $2,000 penalty on the first 30 employees and may also be exempt on other employees for a limited time during an employer’s measurement or administrative period for determining full-time status of employees and enrolling eligible employees.
8 IRS, “Minimum Value of an Employer-Sponsored Health Plan,” Notice 2012-31 (2012).
9 Pierre L. Yong, John Bertko and Richard Kronick, “Actuarial Value and Employer-Sponsored Insurance,” Office of the Assistant Secretary for Planning and Evaluation, Office of Health Policy, HHS (November 2011).
10 Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits 2010 Annual Survey (2010).
11 Larry Levitt and Gary Claxton, “What the Actuarial Values in the Affordable Care Act Mean,” Kaiser Family Foundation (2011).
12 Tanner, Michael D., “Bad Medicine: A Guide to the Real Costs and Consequences of the Health Reform Law,” Cato Institute (2011).
13 HHS, U.S. Centers for Medicare and Medicaid Services, Center for Consumer Information and Insurance Oversight, “Actuarial Value and Cost-Sharing Reductions Bulletin.”
14 U.S. Department of Labor, “Selected Medical Benefits: A Report from the Department of Labor to the Department of Health and Human Services” (April 15, 2011).
15 HHS, U.S. Centers for Medicare and Medicaid Services, Center for Consumer Information and Insurance Oversight, “Essential Health Benefits Bulletin.”
16 Roland McDevitt, Jon Gabel, Ryan Lore, Jeremy Pickreign, Heidi Whitmore and Tina Brust, “Group Insurance: A Better Deal For Most People Than Individual Plans,” Health Affairs, 29(1):156-164 (2010).
17 Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits 2012 Annual Survey (2012). Most employees currently have access to affordable coverage by the PPACA standard. In 2012, 28% of workers contributed $1,332 or more for single coverage, which would be affordable at incomes of $14,021 or more.
18 Towers Watson, “2012 Health Care Changes Ahead Survey” (2012).
19 Jon R. Gabel, Ryan Lore, Roland D. McDevitt, Jeremy D. Pickreign, Heidi Whitmore, Michael Slover and Ethan Levy-Forsythe, “More Than Half Of Individual Health Plans Offer Coverage That Falls Short Of What Can Be Sold Through Exchanges As Of 2014,” Health Affairs, 31(6):1339-1348 (May 2012).
20 Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits 2012 Annual Survey.
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