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WASHINGTON—A provision in the new health care reform law requiring employers to give low-paid employees vouchers to purchase coverage in state health insurance exchanges could sock employers with even bigger health insurance cost increases.
The provision, which has gotten little attention, would have its biggest impact on employers with large numbers of low-paid workers who are required to pay a high percentage of the premium.
Under the provision, employees would have to meet two conditions to be entitled to the employer-funded vouchers: their family income could not exceed 400% of the federal poverty level; and the premium contributions their employers require them to make must be between 8% and 9.8% of their income. Some experts believe the 9.8% figure was a drafting error and will be changed later in a technical corrections bill to 9.5%.
If those conditions are met, those employees would be entitled to receive a voucher from their employers, and the value of the voucher would not be tied to the plan in which the employee was actually enrolled.
Instead, the voucher's value would be equal to what the employer would pay if the employee were enrolled in whichever of its plans offered the largest premium contribution by the employer. Experts say it isn't clear whether “largest” refers to the percentage of the premium paid by the employer or the dollar amount of the contribution.
Then, the employee could use the voucher to purchase health insurance coverage from a state health insurance exchange. The exchanges are authorized under the reform law and are supposed to be set up by 2014.
If the cost of a policy purchased by an employee through the exchange is less than the value of the voucher, the employee could pocket the difference in cash, which would be considered income and taxed.
The voucher feature could prove costly to employers, especially those that have a heavy concentration of low-wage employees—such as retailers—and require employees to make hefty employee premium contributions, relative to their incomes.
And depending on how the legislative language is interpreted in subsequent regulations, it also could prove costly to employers that offer employees a choice of health care plans ranging from relatively low-cost to very expensive plans.
Experts say the provision is almost certain to result in adverse selection, inflating employer costs.
For example, a young, low-paid employee working for a company with a high concentration of older, less healthy and expensive-to-insure employees likely would receive a voucher whose value would be much higher than the cost of buying coverage in an exchange, especially if the employee purchased a lower-cost high-deductible plan. Under the reform law, exchanges can base premiums on the age of policyholders.
As a result, employees remaining with the employer's plan would be the most costly to insure, pushing up the employer's insurance premiums.
“We are talking about something that could be very costly to employers,” said Chantel Sheaks, a principal with Buck Consultants L.L.C. in Washington.
“As I read it, any employer that offers comprehensive benefits and has low-wage employees could be impacted,” said Helen Darling, president of the National Business Group on Health in Washington.
Despite the potential financial impact of the provision, few employers have focused on the voucher provision, noted Jennifer Henrikson, a legal consultant with Hewitt Associates Inc. in Lincolnshire, Ill.
The likely reason for that, Ms. Henrikson said, is that employers now have to concentrate on reform-related issues that are more pressing. The voucher provision does not go into effect until 2014, while numerous others, such as elimination of lifetime dollar limits, go into effect beginning in 2011.
The intent of the provision isn't clear, experts say. A much broader version of the provision was backed by Sen. Ron Wyden, D-Ore., who has sponsored a proposal in which employers no longer would offer coverage to their employees, but instead would give them cash that they would use to purchase health care coverage on their own.
Many issues involving the provision itself are not clear. “There is a lot of complexity here that has to be figured out,” said Sandi Hunt, a principal in the San Francisco office of PricewaterhouseCoopers L.L.P.
For example, the provision says the voucher contribution would be equal to the amount the employer would have paid if the employee had been “covered under the plan with respect to which the employer pays the largest portion of the cost of the plan.”
That legislative language is about as “clear as mud,” Ms. Henrikson said. For example, it isn't clear whether the largest portion of the premium refers to the percentage of the premium paid by employers or the actual dollar amount employers pay, though experts say it likely is the latter.
If the latter interpretation is adopted through regulation, the provision could have a costly impact on employers that give employees a choice between lower-cost plans, such as consumer-driven health care plans and much more costly plans, such as traditional preferred provider organizations.
Take the case of a young employee enrolled in a high-deductible plan with a premium of $10,000, of which the employer paid $7,000. The employer also offered a more traditional PPO plan costing $15,000, of which the employer paid $10,000.
In that example, the employee would be entitled to a $10,000 voucher, funded by the employer. If the employee then found coverage in the exchange, perhaps similar to the high-deductible plan in which he was enrolled, for $8,500, he could purchase the coverage and then have $1,500 in additional cash. But his employer's health insurance cost would be $1,500 higher.