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WASHINGTON—No federal law comes close to the 2010 health care reform law when it comes to its potential impact on employer-sponsored health care plans and the issues confronting them.
“The law has shifted health care benefits from a 'nice to have' to a 'have or else' posture that is unprecedented in our previously voluntary approach to employee benefits,” said Andy Anderson, a partner with Morgan Lewis & Bockius L.L.P. in Chicago.
Two years after the passage of the Patient Protection and Affordable Care Act, employers already have felt the impact of the law.
Since Congress approved the bill and President Barack Obama signed the measure into law in March 2010, employers have had to make numerous changes to their health care plans.
Among other things, employers have had to amend their plans to cover employees' adult children up to age 26, eliminate annual dollar limits, provide full coverage for preventive services in many cases, and eliminate flexible spending account reimbursement for nonprescription drugs.
Employers with early retiree health care plans had to set up a claims reporting system to take advantage—before federal funding was exhausted—of a $5 billion program created by the health care reform law that partially reimburses plan sponsors for claims incurred by retirees at least age 55 but not eligible for Medicare and their dependents. That fund already has run dry.
Some issues are ongoing and involve continuing cost/benefit analysis. For example, the law exempts grandfathered health care plans from meeting certain reform law requirements, such as providing full coverage for preventive services.
But to qualify for grandfathered status, employers face limitations on how much they can shift funding cost increases to employees through increases in deductibles and copayments. That will involve economic calculations to determine if the savings achieved through maintaining grandfathered status for their health care plans outweighs financial savings from boosting cost-sharing requirements.
Yet another funding cost/benefit analysis triggered by the law involves a program Congress authorized in a 2003 law that gives hefty tax breaks and financial subsidies to employers that offer prescription drug benefit plans to Medicare-eligible retirees. The intent of the program was to encourage employers to maintain their prescription drug plans rather than flooding the newly established government Medicare Part D prescription drug plan with millions of additional retirees.
However, the health care reform law removes some of those tax breaks provided in the Medicare Retiree Drug Subsidy program, effective in 2013.
With the watering down of those tax breaks, employers will have to decide if it still makes sense to offer those plans or analyze if there are other, perhaps even more financially beneficial programs through which coverage may be provided.
“There may be better ways to do it,” said Dan Levin, a principal with Buck Consultants L.L.C. in Chicago.
But the retiree prescription drug issue pales in comparison with the issues posed by the health care reform law provision of greatest significance to employers: the requirement, effective in 2014, that they offer “qualified” affordable health care plans or face financial penalties ranging from $2,000 to $3,000 per full-time employee.
“This will be a sea change for employers. We will go from a voluntary system to one in which there are mandatory obligations,” Mr. Anderson said.
The law will present an array of financial issues that employers will have to consider. For example, under the law, employers are liable for financial penalties if they don't offer coverage to full-time employees.
Full-time is defined as working no less than 30 hours a week. That will present a problem for employers with large numbers of part-time employees who work more than 30 hours a week but are not eligible for health care coverage.
They could, of course, revamp eligibility requirements so that the part-time employees would be eligible for health care coverage. That approach, though, would significantly increase their health care plan costs.
Alternatively, they could do nothing. But that would be costly, too. If just one lower-paid part-time employee who works at least 30 hours a week were not offered coverage, and was eligible for a health care reform premium subsidy and used it to buy coverage in a state insurance exchange, the $2,000-per-employee penalty would be assessed on all the employer's full-time employees, including those with coverage.
Yet another approach—reducing the number of hours part-time employees work to below the 30-hour threshold—also presents issues.
One issue is whether such action could expose them to liability under the Employee Retirement Income Security Act. “Under ERISA, employers cannot take employment actions for the sole purpose of preventing an employee from becoming eligible under an ERISA-covered plan, such as a health care plan, said Tracey Giddings, a director with PricewaterhouseCoopers L.L.P. in Tampa.
“An ERISA issue could be created if the reduction in hours was taken for the sole purpose of avoiding the $2,000 penalty,” Ms. Giddings said.
Starting in 2018, employers face yet another issue: exposure to a health care reform law excise tax. That 40% excise tax will be applied on health care plans whose costs exceed $10,200 for single coverage and $27,500 for family coverage. The tax will be paid by insurers—or third-party administrators in the case of self-funded plans—but experts expect insurers and TPAs to recoup excise tax payments by imposing additional charges on employers.
While 2018 is years away, employers already now have to decide what actions to consider taking to reduce the likelihood of being hit with the tax.
Yet moving too fast on changing plan design and funding approaches poses yet another issue. Sometime in June, the U.S. Supreme Court is expected to hand down a decision that potentially could make employer actions unnecessary.
Under one scenario, the high court, which is reviewing the constitutionality of the law's individual mandate, could decide that the mandate is unconstitutional and so intertwined with the entire Patient Protection and Affordable Care Act that the justices would strike down the broader law as a result.
“None of this may matter much until we hear from the Supreme Court,” Mr. Anderson of Morgan Lewis & Bockius said.
This story is from the May 7, 2012, issue of the weekly print edition of Business Insurance, a special theme issue featuring an in-depth look at the alternative funding options employers can use to help rein in the costs of health care insurance for their workforce.
Copies of this issue, which includes a data poster that tracks the changes in health care costs and rates of increase for the past decade, are available for $100 by contacting our Single Copy Sales department at 888-446-1422.
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Employers are turning to alternative financing strategies as they face the loss of a federal tax deduction in 2013 for a subsidy they receive for providing drug coverage to Medicare-eligible retirees. While most companies are implementing an employer group waiver plan, many anticipate ending direct sponsorship of the drug benefit by giving a defined contribution to retirees to purchase coverage in the individual market, observers say.