Employer-sponsored health plans under the Affordable Care Act
Health Policy Brief: Employers and Health Care Reform
Health Affairs/Robert Wood Johnson Foundation
March 9, 2011
To expand access and strengthen the employment-based health system, the Affordable Care Act of 2010 will require midsize and large companies to make payments to the federal government if they do not offer health insurance to their employees and dependents starting in 2014.
What’s in the law?
Under the Affordable Care Act, beginning in 2014 employers with at least 50 full-time employees (or equivalent full- and part-time workers) will have to provide “qualified” health insurance coverage to their full-time employees and their dependents. Qualified coverage means that plans are comprehensive (pay at least 60 percent of health care expenses) and affordable (cost less than 9.5 percent of employees’ household incomes).
If employers don’t offer qualified coverage, and if their employees purchase coverage instead through a new state insurance exchange with the assistance of federal subsidies, companies will have to make an “assessable payment” of up to $2,000 for every full-time employee beyond the first 30 employees. The amount of the assessment will be adjusted annually to reflect the growth in national insurance premium costs.
If employers do offer coverage, but the coverage does not meet certain parameters, they may still have to pay assessments. First, employers will be assessed if a plan is judged not to be comprehensive. This means the coverage must have an “actuarial value” of at least 60 percent. In other words, the employer pays on average at least 60 percent of health care expenses and the employee pays on average 40 percent of these expenses through deductibles and copayments.
Second, employers will be assessed if the employees’ premiums are considered unaffordable relative to their household incomes. Specifically, the employee’s share of the premium must not exceed 9.5 percent of his or her annual household income.
Starting in 2014, if either of these two conditions is not met, the employer must pay a $3,000 annual assessment for each employee who declines his or her employment-based insurance and obtains government-subsidized coverage through an exchange.
Small businesses with fewer than 50 full-time employees (or equivalent full- and part-time workers) don’t have to meet the requirement and are exempt from having to offer health insurance.
Many companies face payments:
A study by the Mercer consulting firm found that 38 percent of US employers may face paying assessments starting in 2014, because their coverage might not be considered affordable for at least some of their employees.
Employees who earn less than four times the federal poverty level (in 2011, $43,560 for an individual and $89,400 for a family of four) and whose share of the premium is between 8 percent and 9.5 percent of his or her household income, can choose to enroll in an exchange instead of the employer plan. The employer must issue the employee a “free-choice voucher” equal to the amount the employer would have paid under the employer’s plan.
Tax on high-value health plans:
Beginning in 2018, “Cadillac” or high-value health plans will be subject to a 40 percent excise tax on premium amounts exceeding $10,200 for single coverage and $27,500 for families.
What’s the likely impact?
The Congressional Budget Office (CBO) and the Joint Committee on Taxation estimated that provisions of the Affordable Care Act, including the employer requirement, will result in 3 million fewer people having employer-provided coverage in 2019. This would be the net result of a series of big changes.
First, the CBO estimates that 6–7 million people would acquire employer coverage for the first time because the requirement would increase workers’ demand for coverage through their jobs. Second, another 1–2 million who currently have employment-based coverage would instead move to the exchanges because the coverage would be more affordable. Third, about 8–9 million others covered under an employer plan under current law would lose employer coverage because firms would choose to no longer offer coverage. These firms are likely to be smaller companies employing lower-wage workers who would be eligible for exchange subsidies.
In addition, according to the CBO, employers will pay about $52 billion in additional assessments between 2014 and 2019. Under the law, that money will be put toward the new subsidies for millions of workers and their families to defray the cost of purchasing health coverage through the exchanges.
“Pay and walk away”:
Among companies of all sizes currently offering benefits, 76 percent reported they would continue to do so in January 2014. Of the rest, 15 percent reported they would offer coverage to at least some full-time employees, and 9 percent said they would stop offering coverage altogether. Among firms with 200 or more full- and part-time equivalent employees, 7 percent planned to drop coverage. “For some large firms, in particular, there is a desire to pay and walk away,” said Susan McIntyre, senior vice president of Market Strategies International’s health care division, in a statement.
Tempted to drop coverage:
The math could make the idea to drop coverage tempting. In 2010, the average annual premium cost for employer-based coverage was $5,049 for a single person and $13,770 for a family, although employers generally do not pay the entire cost. Many employers might consider paying $2,000 or $3,000 in assessments to be more cost-effective. On the other hand, many large employers say they view offering health coverage to be an important part of their overall compensation strategy, and necessary to attract the best workers.
It is possible that employers will watch closely to see how their peer companies respond. In a July 2010 survey by Fidelity Investments, 65 percent of large employers said they were not seriously considering eliminating health care benefits because of the new law. But when asked what they would do if others dropped coverage, 36 percent said they too would consider eliminating coverage. Another 36 percent said they would not drop coverage and the remaining employers were unsure.
By Don McCanne, MD
What will happen to employer-sponsored coverage under the Affordable Care Act? Perhaps one of the most alarming provisions of the Act is that plans with a 60 percent actuarial value (patients pay an average of 40 percent of their health care bills) qualify to fulfill the employers' obligations to provide coverage or pay an assessment. Thus the Act is establishing under-insurance as the new standard.
Premiums on more generous plans are approaching a level that will trigger a a 40 percent excise tax. One way to avoid that tax would be to reduce the actuarial value of the plans to the minimum requirement. With employers' aversion to taxes, many will surely consider that.
With these low actuarial value plans, employees will surely complain about the high out-of-pocket costs they will face when they need health care. Since employers won't want to make their employees unhappy, they will be motivated to drop their plans altogether and pay the much lower assessments required by the Act. We already know that most employers may not want to lead on this, but a great many will certainly follow once a few do it, and they have said so.
It is frequently stated that employers will want to continue to offer plans in order to attract more qualified employees, but this argument seems rather disingenuous. Employers now have an out.
When employers drop their health plans, there is no assessment on the first 30 employees, and then only $2000 for each beyond the 30. Employers can use some of the savings for pay raises, and then the employees, most of whom will be eligible for government subsidies, can select their own plans in the exchanges. Why would employers use health plans as an enticement - plans that are otherwise readily available in the exchanges - when they can use higher wages to compete in the labor markets?
Our experience shows that plans with low actuarial values - usually high-deductible plans - still frequently have premiums that are unaffordable for many. Combining unaffordable premiums with low actuarial values, it won't be long before middle-income Americans realize that the private insurers have foisted off on us a highly defective product: UNAFFORDABLE UNDER-INSURANCE. You go broke if you buy it, and you go broke if you need to use it!
Single payer, anyone?