The math behind PPACA

In my first article, I talked about how to identify the larger action points for employers and advisors as health care reform becomes a reality. Now, let’s get into the specifics of how PPACA will impact plan design, plan eligibility and plan contributions.

Plan eligibility: the easy part

The rules for group health plan eligibility in this country are usually established by the employer, with certain limits set by their carrier. Most health plans require that an employee work at least 15–40 hours per week to be eligible for coverage. PPACA adds to these requirements, mandating that all plans offer coverage to employees who routinely work a minimum of 30 hours per week. It also establishes a maximum waiting period for coverage of no more than 90 days. Neither of these requirements is very onerous for most employers when you consider the exemption for seasonal workers and the likely non-participation of employees under 26 who remain on their parents’ plans and those over 65 covered by Medicare. Additional rules require employers to assume that employees will take the medical coverage (automatic enrollment) unless they complete paperwork waiving coverage. PPACA also attempts to limit the employer from offering different levels of coverage or contribution that favors highly compensated employees (IRS Section 105h regulations pending). While certain employers may take issue with some of these eligibility requirements, surveys have found that most plan eligibility requirements are either already in compliance or very close to these minimum rules.

See also: What you might not know about PPACA

Plan design: a big to-do about nothing

How many of us have seen the old carnival act where the showman hides a pea under the shell and you try to keep track of where it’s at? Seems like we can do a pretty good job until the bet gets high, then all of a sudden we’re lost. Well, that is a little bit like the plan design game. Over the last 20 years, the easy answer to any group medical premium increase has been to play the plan design game, increasing deductibles, changing provider networks, adding new plan options, etc. The result of this 90-day renewal chaos is that we have all lost track of the real factors that drive healthcare costs: the actual utilization and cost of services.

The simple fact is that there is no magic in plan design. Actuaries are very smart folks, and when a health carrier provides an employer or employee with an alternative plan design at a lower cost, it is because that plan will eventually pay less in benefits to the participant. By changing plans, you may think you have solved your healthcare increase for this year, but if that higher deductible or co-pay discourages even one employee from seeing his doctor about that “little chest pain” that leads to a heart attack two months later, that emergency surgery cost will far outstrip the $5 you saved on a few hundred office visits! The millions of hours carriers, actuaries, underwriters and consultants have spent over the last 20 years talking to clients about plan design have done very little to control plan costs, and in fact has probably done significant damage to our healthcare system and distracted from real problem solving.

PPACA attempts to control the divergence in plan design by defining a minimum credible plan design (Bronze Plan) as a plan that pays at least 60% of the estimated medical charges (estimated as a single plan with a $2,000 deductible and a $6,000 Out-of-Pocket). The deductible requirements include HSA/HRA contributions, so employers that utilize one of these alternative funding mechanisms can still meet this minimum requirement if their high deductible health plan is larger than $2,000. In order to encourage preventive treatment and avoid the costly delays in care, the new minimum credible plan also requires free routine services (from a list of eligible services). Many other key provisions have been added such as unlimited lifetime maximums, phase out of annual plan maximums, elimination of pre-existing condition limitations, and standard plan formats (Summary of Benefits and Coverages) that protect consumers. PPACA establishes exchanges in each state that will allow employees to compare individual medical plans (guaranteed issue, community-rated basis) to the coverage and cost of their group plan to create competition and, hopefully, lower costs. Within the exchange, there will be additional buy-up plans (Silver, Gold and Platinum) that pay a higher percentage of charges for a higher premium. While employers are not required to offer these buy-up plans within their group plans, as a practical matter, most employers will adopt at least one of these higher cost plans for employees that wish to buy one, in order to prevent them from electing to move to the exchange.

While this system may seem new, it is actually a modification of a system that is in place and working today in our Medigap market. Several years ago, the federal government attempted to protect our senior citizens from a few predatory insurance carriers and agents by limiting the old plan design game and defining a range of standard plan designs that all carriers must duplicate. This enabled our older citizens to select a plan design that fit their needs, but to primarily focus on the quality and price of the carrier without all the bickering about “my plan is better than yours.” In theory, this new PPACA marketplace should have the same impact on your group health plan. Since all plans will now fit into one of four boxes, employees and those purchasing through the exchange should be able to easily compare benefits and choose the plan that is best for them with a focus on the quality of the carrier and providers.

Whether or not you like all the aspects of PPACA, this change to the rules of the game should be an effective tool in comparing price and shifting the focus away from ineffective plan design debates and onto quality of care and price. The new marketplace is built with private carriers in mind, not a single-payer system, and maintains plan design flexibility while narrowing the plans to a reasonable range for easier plan comparison.

Plan contributions: Now this is new

In most plans, the simple allocation of the health plan costs between employees and employers is the most important factor in determining the overall efficiency of the health plan. Over the past ten years, we have seen a divergence by employers in cost-sharing formulas and in coverage classes, with as many as three, four and even five or more tiers of rates between single and family coverage. In addition, the percentage of these premiums paid by the employer/employee has changed rapidly in an effort to control the employer’s costs. Unfortunately, these changes in contributions, along with multiple plan design options, have often led to intense adverse selection within the health plan, fueling even more rapid rate increases. PPACA attempts to provide limits to these cost shares, but does it in a very limited and unusual way.

Under the new regulations, employers with over 50 employees who meet the above eligibility and plan design guidelines must also make their plan “affordable” to their employees. To be considered affordable, the plan must limit the employee’s cost share for single coverage to less than 9.5% of their family income. This definition has caused some serious head scratching by employee benefits professionals, who are used to looking at percentage of premiums as employee contributions, not percentage of family income.  In addition, the use of family income creates a new challenge of collecting family income data. Finally, there is no guideline for family or dependent coverage. This section of PPACA is probably the most confusing and the biggest area of concern. The logic behind the definition is defensible since the goal of the overhaul was to close the gap between private insurance and Medicaid, which has always used family income to determine eligibility guidelines.

The final exam: Let’s do the math

By now most employers have read so much about the eligibility, plan design and contribution requirements that their heads are spinning. Some employers may feel that anything this confusing must be bad, so they have decided that repealing the law is the correct approach. Personally, I reflect back on my algebra class and those complicated word problems we used to be assigned. If I had told Mrs. White that I wasn’t going to do one of her three paragraph questions because it was “too complicated,” she would have sent me to the hall for the rest of the day. This was the same response I got during one of the very first teleconferences with Health and Human Services experts, who were peppered with questions around the assumption that every employer would simply drop their group plan. After fielding 20 or more questions on the issue, the HHS expert finally asked, “Have you done the math?” to which the answer was “No.”  As question after question followed, her standard answer was “Do the math.” While it may be nice to offer an opinion, I do think we owe it to our clients to do the math.

The penalties for employers under PPACA are pretty clearly defined in the law itself. In addition, many of the basic questions not covered in the law have been clarified by the regulators, leaving us with a fairly easy math formula to calculate potential penalties. The first question we must ask an employer is, “Do you have over 50 full-time equivalent employees.” If the answer is no, the penalties do not apply. If the answer is yes, then we must determine if the plan eligibility rules meet the definition. Since most employers offer their plan(s) to all full-time employees on a consistent contribution schedule with no greater than a 90-day wait, most employers will pass this test. 

The next requirement is meeting the new minimum credible plan standards. Since most of these rules are already in effect, your carrier/administrator has probably already made the necessary plan changes and passed on the additional cost (estimated at 2-5% by most actuaries).