BYOC: Bring Your Own Coverage

The Patient Protection and Affordable Care Act (PPACA) might create a benefits world in which typical employers pay penalties and send employees streaming into government and private exchanges to buy individual health insurance.

If Mitt Romney gets into the White House and kills PPACA, employers might still move on their own to create a similar “bring your own coverage” (BYOC) system.

What would a BYOC system mean for the employers, their health insurers, and their benefits brokers and plan administrators?

One way to analyze the question is to look at Web forums for owners and would-be owners of nightclubs.

New participants often ask about the idea of setting up a “bring your own bottle” (BYOB) club. Other participants quickly ask whether some customers will bring in low-quality, or even lethal, grain alcohol; whether the BYOB club owner will face liability problems; whether the BYOB policy will affect the club’s ability to attract and retain patrons; and whether the BYOB policy will lead to ferocious administrative hassles. Such as: What happens when some patrons’ bottles go dry? What happens when some patrons are jealous of other patrons’ bottles?

Similar questions can come up in discussions about a possible BYOC health benefits universe.

Shawn Pynes, a partner at Barney & Barney, an independent brokerage in California, chuckles when he thinks about the proposition that a BYOC system could make business managers’ lives easier.

“It’s going to be more complicated,” Pynes says. “It’s not going to be easier.”

The U.S. government got employers into the health benefits business after World War II, when it tried to control inflation by imposing controls on wage increases. To get around the restrictions, employers began offering workers non-cash benefits.

Rita Numerof, a St. Louis management consultant, says employees — and many employers — have come to expect employers to provide group health coverage,

“The benefits have gotten richer and richer,” Numerof says.

The latest federal Bureau of Labor Statistics survey results show that 73 percent of U.S. civilian workers have access to employer-sponsored health coverage and that 54 percent of workers participate in their employers’ health plans.

Health policy specialists once hoped health maintenance organizations (HMOs) and tough care utilization managers could rein in skyrocketing health benefits costs. A few bad utilization management decisions later, benefits experts mostly gave up on the idea that the savings from aggressive utilization management programs were worth the risk of creating more HMO horror stories.

In 2000, National Underwriter Life & Health began writing about a new cost-management concept: The defined contribution health plan. Consultants suggested that an employer could give each employee a fixed amount of cash. Employees could use the cash to buy their own coverage and get the employer out of the plan selection business.

In the real world, medical underwriting got in the way.

In the group market, underwriting has little effect on whether employees can get coverage. In the individual market, however, carriers in the states with reasonable health insurance rates use medical underwriting to control risk and keep rates reasonable. In most states, employers that shifted to pure defined contribution health plans had no way to ensure that their employees could get affordable coverage.

If PPACA survives its many foes, takes full effect in 2014, and works more or less as drafters expect, it could breathe new life into the defined contribution health plan concept, by requiring health insurers to sell coverage to individuals on a guaranteed-issue basis. Insurers could charge three times as much for the oldest enrollees as they charge for the youngest enrollees, but they would not be able to consider health problems, such as cancer or kidney disease, when setting rates.

PPACA is supposed to create a new health insurance purchase tax credit for people who have no access to affordable employer-sponsored health coverage and earn from 133 percent to 400 percent of the federal poverty level (FPL), or about $29,000 to $88,000 for a family of four.

Suppose John Doe has a family of four and earns $29,000 per year. The full cost of his coverage is about $700 per month. Analysts at the Congressional Research Service say the PPACA tax credit could cut Doe’s share of the monthly premium to $83. Doe’s share would rise to $230 if he earned $44,000 per year, and to $524 if he earned $66,000 per year. If he earned more than $88,000 per year, he’d have to pay the full cost of the coverage.

A PPACA employer responsibility provision will require employers with more than 50 full-time workers to provide a minimum level of affordable health benefits or else pay a penalty.

Small, cash-strapped employers may be quick to send their employees to the exchanges, but larger employers may have more trouble deciding what to do, Numerof says.

Dan Maynard, president of Connecture, a company that develops Web-based health insurance sales and exchange systems, says it’s not clear whether employers really want to get out of providing any health benefits, or if they simply want to escape from the cost of insuring against health care claims risk.

Pynes notes that, in most of the United States, employers provide health benefits today because they want to attract and retain the best employees, and to maximize workers’ productivity, not because any law requires them to provide health benefits.

The PPACA tax credit would do nothing for higher-income workers, Pynes adds.

At employers that offer good health benefits today, the result may be that health plans will continue to look about the same, Maynard says.

For employers that do decide to shift to a BYOC system, insurance costs might be much lower, but administrative costs and administrative headaches could grow, benefits specialists warn.