Despite the continuing legal challenges and political hardball, as well as the delays and technical glitches, it appears that the Patient Protection and Affordable Care Act, more commonly known as Obamacare, is here to stay. As such, companies need to be prepared for certain key provisions of the statute that are scheduled to take effect in 2014 and beyond. Because these provisions will have a major impact on most companies, boards of directors need to be planning how their companies will comply with these regulations and the effect such compliance will have on their company’s cost structure and strategy going forward.
Set forth below is a brief summary of certain key provisions of health care reform that are looming, followed by actions for boards to consider.
State Insurance Exchanges. By January 1, 2014, each state must either (i) implement its own state-run health insurance exchange, (ii) let the federal government run the health insurance exchange for them or (iii) partner with another state or the federal government to implement a health insurance exchange. These health insurance exchanges, among other things, will facilitate the purchase of and make available “qualified health plans” to qualified individuals and employers. Employees of companies with fewer than 50 full-time employees will generally be eligible to purchase insurance within the state insurance exchange (or federally facilitated exchange) and possibly receive a federal subsidy without any penalty to the company. But, as discussed below, larger companies with employees who purchase insurance through these exchanges will be required to pay a penalty. Enrollment under these health insurance exchanges, which began on October 1, 2013, has been anything but smooth, with technical glitches and delays frustrating the masses who have tried to enroll. Because of these issues, the deadline for the uninsured to sign up for health care coverage and avoid paying a penalty has been extended until March 31, 2014.
Play or Pay. Employers are not required under health care reform to provide health insurance to employees. However, employers with 50 or more full-time employees, referred to as “large employers,” will have to pay a penalty if (i) they do not offer health insurance to employees or (ii) they offer health insurance to employees, but the insurance does not meet certain affordability or benefit requirements. This employer mandate, often referred to as the Play or Pay rule, was originally scheduled to kick in January 1, 2014, but has been delayed until January 1, 2015, giving employers an additional year to prepare to provide health care coverage to employees or pay a penalty.
If a large employer does not offer health insurance, and one or more of its employees enroll in a state insurance exchange and receive a federal government subsidy, the employer will be required to pay a fee of $166.67 per month ($2,000 annually) for each full-time employee, excluding the first 30 full-time employees. If a large employer does offer health insurance, but one or more of its employees nevertheless enroll in a state insurance exchange and qualify for a federal government subsidy, the employer will be required to pay the lesser of (i) $166.67 per month ($2,000 annually) for each full-time employee, excluding the first 30 full-time employees, and (ii) $250 per month ($3,000 annually) for each full-time employee who receives the subsidy.
Excise Tax on High-Cost “Cadillac” Plans. Beginning January 1, 2018, certain high-cost group health plans, both insured and self-insured, will be subject to an excise tax of 40 percent on the amount by which the health plan’s annual cost for coverage, including both employer and employee contributions, exceeds $10,200 for single-only coverage and $27,500 for family coverage.
In light of these provisions, there are several actions boards should be taking to prepare their companies for what is to come. These actions include the following—
Assess strategy and costs relating to play or pay. Most companies that currently offer health benefits to employees are expected to continue to do so for the foreseeable future. Because health benefits are often viewed as an important part of an employee’s compensation package, eliminating health care coverage for employees and paying the penalty may not be a viable option for companies. But it will be important for the board of directors to know the company’s options and responsibilities under the statute to best determine whether the company should take the “play” or “pay” approach in 2015. In making this determination, the board should consider, among other things, (i) the costs of the company’s health care programs and what steps the company can take to manage these costs, (ii) the amount of any penalties the company would have to pay under the statute if it eliminated health care coverage for its employees and (iii) the actions taken with respect to health care by other companies in the industry. If the company does elect to “pay” instead of “play,” it will need to carefully consider how to explain its decision to employees and inform them of their options.
Review and redesign, if necessary, current health care programs. The cost for employer health care is high and it is expected to increase another 5.2 percent in 2014. 1 Many companies are using health care reform as a catalyst to review and redesign their health care programs as necessary to slow these rising costs. A growing number of companies are considering private online exchanges to deliver their health care benefits. Some companies, including Walgreens, Sears Holding Corp. Petco, Kinder Morgan and Darden Restaurants, have announced programs where they will give employees a fixed sum of money and require the employee to shop for insurance coverage on a private online exchange. And it looks like more companies are going to jump on the private exchange bandwagon. Accenture PLC projects that approximately one million Americans will get employer health coverage through these private exchanges in 2014, and expects that number to increase to 40 million by 2018.2
Companies are also taking other steps to manage health care costs. UPS recently announced that it is eliminating health care coverage for employee spouses who have other available coverage, and beginning next year, Trader Joe’s and Home Depot are dropping health insurance for their part-time workers and steering them toward the state insurance exchanges. Other actions that companies are taking include increasing the share employees and their dependents pay in premium contributions, implementing higher medical and pharmacy deductibles, eliminating retiree health benefits, encouraging enrollment in high-deductible health plans, providing wellness programs and reviewing the company’s relationship with its providers.
Managing costs will become even more significant for companies as 2018 approaches and the excise tax kicks in for high-cost plans. More than 60 percent of employers believe that they will be subject to the excise tax in 2018 if they don’t make adjustments to their current benefit strategy.3 As such, companies need to review their health care plans in the coming years to control their costs and avoid the excise tax.
Stay abreast of developments. Because of the statute’s sheer volume and complexity, as well as the continuing legal challenges and politics surrounding Obamacare, education is key to ensuring that directors understand the statute’s relevant provisions, their effective date(s) and the implications they will have for the company. While the U.S. Supreme Court largely upheld the constitutionality of Obamacare last year, the health care law is now facing new legal challenges that directors should follow. These new lawsuits, among other things, focus on language in the statute that says subsidies for qualified individuals are available for those who purchase insurance through an exchange “established by the state.” Because many states did not create their own exchange, but instead opted for the federally run exchange, these lawsuits claim that the statute’s wording precludes individuals who have to purchase insurance through a federally run exchange from receiving subsidies.4
Boards also need to be fully informed of any evolving guidance and interpretive regulations relating to the implementation of the law so they can effectively formulate a strategy for dealing with it going forward. Federal agencies have already begun issuing guidance addressing certain aspects of the legislation, and much more is expected.
Encourage a healthy workforce. Having a healthy workforce can give a company a competitive advantage. Attempting to reduce health care costs and improve the health of their workforce, many companies are offering employee wellness programs. These programs, in general, either use financial incentives to motivate employees to participate, or use penalties, such as an increase in premiums and deductibles, for certain unhealthy behaviors, such as smoking, or having high cholesterol or a high body mass index. According to a recent survey by Aon Hewitt, 83 percent of employers offer incentives for participation in health and wellness programs, but only a small percentage exclusively use penalties or offer a mix of rewards and penalties.5 But this is about to change. According to this survey, 58 percent of employers intend to impose penalties in the next three to five years on employees who “do not take appropriate actions for improving their health.”6
This post was excerpted from our Top 10 Topics for Directors in 2014 alert.
1 Towers Watson, Employer Surveys Examine Rising Health Care Costs and Planned Response to the ACA (September 3, 2013).
2 A. W. Mathews, “More Employers Overhaul Health Benefits,” The Wall Street Journal (September 4, 2013).
3 Towers Watson, Health Care Reform Heightens Employers’ Strategic Plans for Health Care Benefits (August 21, 2013).
4 J. Palazzolo, “Health Law Faces New Challenges,” The Wall Street Journal (Oct. 21, 2013).
5 Max Mihelich, “More Employers Looking to Impose Wellness Program Nonparticipation Penalties in 2014,” WorkForce (March 25, 2013).