Ann Conway

Ann M. Conway

Specializes in risk consulting and software.

Towers Watson, Boston

Incredible as it may seem, it's already more than five years since America's game-changing health care legislation was signed into law by President Obama. At the time of its passage on March 23, 2010, the Affordable Care Act (ACA) had been intensely and exhaustively debated. But for employers and insurers, it was really just the beginning of a major recalibration of their businesses.

The full impact of these changes continues to emerge as the law is rolled out in phases through 2018 and well beyond (see figure). It might be several years after the final phase launches before we really know how it has changed the way we do business. This article examines some of the potential impacts on P&C and health insurers from the perspective of their roles as employers and insurers.

Timeline to Triple Aim: Although the ACA was enacted in 2010 the real impact began in 2014

Timeline to Triple Aim: Although PPACA was enacted in 2010 the real impact began in 2014

The ACA's Impact

The ACA's guaranteed issue and individual mandate provisions, which require individuals to have insurance and guarantee that they can enroll in a plan, have reduced the number of uninsured. A recent Rand Corp. study estimates that approximately 17 million more Americans have health coverage since the act took effect.

Broadly speaking, the ACA's emphasis on preventive medicine and greater access to coverage is intended to create a healthier population. These intentions, along with the greater focus on primary care and an aging population, will increase the demand for health care services. However, changes to the cost-sharing design of private health plans may have differing demand impacts.

Health Care System Dynamics

Health care systems are expected to become larger and more integrated, and the employment model for physicians is expected to continue to evolve. Over time, the solo practitioner will represent a decreasing portion of the physician population. The American Medical Association reported in September 2013 that 18% of physicians were in solo practice, down six percentage points over five years. And that number could increase, as younger physicians may be more receptive to working for institutions, accelerating the move away from solo practices.

Medicine and Technology

Greater demand for health care and technology advancements will change the way health care is delivered and monitored. Telemedicine, using devices such as smartphones and tablets, will enable health care professionals to evaluate, diagnose and treat patients remotely rather than in clinical settings. Telemedicine will be facilitated by the growing acceptance and use of electronic health records (EHRs), portable data collected and stored from all of a patient's providers that is readily accessible by authorized medical professionals and health care organizations. EHRs have the potential to prevent overlap or missed information that can seriously impact a patient's care.

The ACA's reduction of the fee schedule for Medicare professionals not using EHRs pushed the technology's implementation. However, EHRs' own merits — reduced miscommunication and the improved quality of outcomes — will encourage widespread adoption over time.

The Impact on Employers

Affordable Coverage

The onus is on large employers to provide affordable minimum essential coverage for full-time employees, defined as those who work 30 hours or more per week, and their dependent children under an eligible employer-sponsored plan. A plan is considered affordable if the required contribution for the lowest cost option for self-only coverage does not exceed 9.5% of the employee's annual household income. Failure to meet these provisions can lead to a penalty of up to $3,000 for each full-time employee who applies for and receives coverage but doesn't meet the requirements for affordable minimum coverage. Penalties could also be applied if low-paid workers have access to affordable employer coverage but still need to receive federal subsidies to afford health care.

Given this mandate, we expect that employers will critically evaluate their provision of health care benefits. However, it is unlikely that they will stop providing subsidized coverage in the near future. In fact, 98% of large employers surveyed intend to continue providing subsidized health care benefits to active full-time employees, at least for the short term, according the Towers Watson/NBGH 2013/2014 Employer Survey on Purchasing Value in Health Care. These employers, though, will continue to consider plans with greater out-of-pocket employee costs, more limited networks and greater emphasis on wellness programs as they assess the 2018 excise tax risk.

Excise Tax

A 40% "Cadillac tax" will be imposed on coverage provided by insurers or self-funded plan sponsors with health plan values that exceed certain dollar thresholds in 2018 and beyond. Cost thresholds will be $10,200 for individual employees and $27,500 for a family in 2018. The excise tax is based on both employer and employee premium contributions, not just what the employer pays for coverage. The definition of what's included for calculating the tax extends to tax-advantaged health care accounts such as health flexible spending accounts, health reimbursement accounts and pretax contributions to a health savings account. Ultimately, the tax is determined by the aggregate value of the programs an employee elects, not just the medical plan value itself.

Annual increases in the excise tax thresholds are not based on health care plan cost growth, but instead on the Consumer Price Index for all Urban Consumers (CPI-U) — far less than medical cost trend and considerably less than the roughly 4% annual health care cost increase that the better-performing employer health plans are expected to achieve in 2015 after plan changes. In 2019, the excise tax will be indexed at CPI-U plus 1%, and beginning in 2020, at CPI-U only.

Based on current plan structures, roughly half of large U.S. employers will begin to hit the excise tax in 2018, and the percentage is expected to rise significantly in subsequent years, according to an analysis of large employer health care programs conducted by Towers Watson. Clearly employers will need to address this issue in the very near term.

Strategy Is Imperative

Large employers need to base important employee health plan decisions on their overall corporate strategies. They should ask themselves:

  • Do we have a strong grasp of the current and projected costs of our company's health programs?
  • What plans do we have in place or are we developing to improve health program performance and achieve or maintain a high-performance health plan?
  • In addition to the ACA's health benefit management implications, are we adequately prepared for broader administrative, systems and reporting challenges?
  • Have we sufficiently considered how our role as employers in health care delivery will change?
  • How will we position health care within our total rewards strategy, workforce planning and, ultimately, our employee value proposition?

Action Items

With a clear vision of what is needed, an employer can then begin to take important actions. For instance, since large employers must provide coverage to full-time employees (those who work 30 or more hours a week), companies may want to reevaluate their workforce needs to determine whether the current staffing model makes sense or if a greater weighting of part-time staff is warranted.

Companies will also need to weigh whether to retain affordable plans or have employees seek coverage through private and public exchanges. When a private exchange option is feasible, employers will need to balance the cost of penalties against administrative cost savings; determine whether the employee population, when eligible, will benefit from federal employee premium subsidies; and decide whether they are willing to cede control over items such as plan design and wellness.

Implications for P&C Insurers

Insurers, as well as employers that self-insure P&C exposures, may also need to adjust their businesses to reflect how the ACA requisites reshape their markets. In particular, several lines could be affected:

Workers Compensation

Workers compensation, which represents about 2% of U.S. medical costs, is one of the coverages most likely to feel the ACA's impact, and the provisions of the act will have positive and negative impacts for carriers. Coverage expansion will reduce the number of uninsured, and greater access to care may result in healthier workers, with fewer and/or less costly injuries. Also, there may be some shifting of costs to the group health market, as it may be easier to access administratively and now covers preexisting conditions that may previously have been absorbed by workers compensation because of a lack of any alternative.

Greater access to care could tax the demand for health care professionals' services and actually make access to care more difficult, particularly with specialist providers. Ultimately, the duration of workers compensation claims could increase. Pressure on the Medicare fee schedule could also increase the level of treatment and complicate an employer's efforts to accelerate a return to work.

Other structural changes may have negative implications for workers compensation. First, as employers seek to restructure their health care benefits to minimize their exposure to the Cadillac tax, it is likely that employees will be subject to greater cost sharing and more limited networks, which may result in more employees seeking care through workers compensation. Second, if employers rely more heavily on a part-time or contracted workforce, the frequency and severity of workplace injuries could change. And finally, the movement of employees to public exchanges may add distance in the employer/employee relationship and encourage workers compensation claims.

Medical Professional Liability

The ACA's provisions could reduce claims associated with medical professional liability (MPL) insurance. Greater access to health care with its promise of earlier detection and treatment of illnesses may yield better outcomes; it could also reduce future economic losses. Additionally, the increased focus on coordination of care and the greater use of EHRs, along with the ACA's disincentives for unnecessary care, could improve overall health and reduce MPL costs.

However, the likely changes in the provider model that will result from the ACA place greater emphasis on medical professionals who are not physicians, and could increase the number of misdiagnoses and the number and costs of claims.* Greater pressure on the system from increased usage could produce a capacity shortage that will exacerbate errors and cause delays in treatment. And providing more care to greater numbers of the newly insured adds more risk exposure, particularly if the newly insured are less healthy than average.

MPL insurance could also be impacted by shortages in certain specialties affected by changing fee schedules. EHRs are a significant source of uncertainty around the MPL exposure, either from the impact of data breaches or their potential to be used against defendants in litigation.

Newly created accountable care organizations, which are large networks of health care providers, are another potential concern. Their mission will be to provide complete care to their insureds, and they will be reimbursed on a per patient basis (very similar to the 1990 capitation model, for those with long-term industry experience). While the focus on quality of care rather than volume of care could be positive, the change in organizational structures may result in organizations with significantly higher limits of liability (and potential MPL exposure) than their component pieces. And as telemedicine becomes an integral tool in providing health care, the gathering, storage and transmission of confidential patient information may increase MPL exposure.

Directors and Officers (D&O) Liability/Employment Practice Liability (EPL) Insurance

As new systems are built from the merger or acquisition of smaller health care entities, senior managements and boards face the potential for antitrust action by the Federal Trade Commission as well as private actions. At a minimum, the process adds extra cost to the creation of these larger entities. To the extent that mergers are unsuccessful, the formerly merged entities will not only absorb the costs of dissociating but may also be subject to significant litigation risk that may expose their D&O insurers. Also, as health care systems reorganize to the cost imperatives dictated by the ACA, they may have an increased exposure to EPL claims. However, EPL exposure is likely not limited to health care systems; other employers reorganizing their staffing model may also experience an increased number of employment practice actions.

Fiduciary Liability

The ACA could significantly increase employer liability and, subsequently, fiduciary liability. ERISA legislation imposes personal liability on fiduciaries and parties of interest for discretionary judgment authority related to the establishment and maintenance of employee benefit plans. The complexities of the ACA for employer-sponsored health care plans could increase the liability exposure with respect to the decisions made and the communication of those decisions to employees.

Automobile Liability

We would be remiss in not mentioning automobile liability, the largest coverage line written by U.S. P&C insurers. The impact of the ACA is likely to be positive (i.e., cost reducing), as medical costs previously covered under an automobile policy may shift back to group health. And if the ACA is effective in reducing medical costs, associated economic damages may ultimately decline.

Time Is Short

Although the ACA's changes will be implemented in stages through 2018 and beyond, insurers and employers need to assess the potential impact now. For employers, the ACA could alter their HR strategies, the composition of their workforces, and talent attraction and retention. P&C insurers and employers self-insuring these exposures will experience these changes in their roles as employers, but their own business models may be impacted as well. While it is too early to determine the full impact of this legislation, it is important to continue to assess the ACA and begin to collect, analyze and monitor data to better understand its consequences.

For comments or questions, call or email
Ann M. Conway at +1 617 638 3774,


*This is much debated. While some believe this will reduce frequency since non-physician providers are expected to follow care algorithms more carefully, others believe the reduced level of training will have a negative impact on patient outcomes.