The Guiding Principles of Healthcare Reform

Reprinted with permission from Plante Moran

Since the Patient Protection and Affordable Care Act (PPACA) went into effect nearly three years ago, countless hours have been spent on the evaluation, consideration and implementation of more than half of the reform-related initiatives. Perhaps the reform provisions on the horizon, however, will have the greatest impact on an employer’s overall cost and benefit strategy – provisions such as the “play or pay” mandate and the creation of an insurance Exchange as a means by which individuals and small employers can purchase health insurance. The balance of this article will highlight the most central changes of the PPACA, particularly employer-sponsored plans.

Individuals and small groups

Beginning in 2014, states have the option of establishing a health insurance Exchange in any one of three methods: state-run, partnership with the federal government or ceding the establishment of the Exchange entirely to the federal government. The health insurance Exchanges are designed to increase competition in the individual and small group markets. Employers with no more than 50 employees (or 100 employees, depending upon the specific state Exchange) will be able to purchase private health insurance through the newly formed public Exchanges. In 2017, the public Exchange may be expanded to allow all employers to purchase insurance through an Exchange.

According to the Kaiser Family Foundation, as of Dec. 14, 2012, 19 states have declared for a state-run Exchange, seven states are planning for a state/federal partnership and 25 states have defaulted to a federally-run Exchange.

Requirements of exchange-based plans

Effective Jan. 1, 2014, Exchange-based plans must offer coverage for “essential health benefits” (EHBs), which include items and services in 10 statutory benefit categories – including hospitalization, prescription drugs and maternity and newborn care – that “are equal in scope to a typical employer health plan.” Each state/Exchange is able to choose its benchmark plan to represent the typical employer plan for the purpose of defining EHBs. Additionally, in an attempt to simplify the comparison between plans, all plans offered through an Exchange must be grouped together based on actuarial values (AVs): 60 percent for bronze, 70 percent for silver, 80 percent for gold and 90 percent for platinum plans; collectively, these are commonly referred to as “metal tiers.”

To assist employers in determining the metal tier of a particular plan, the Department of Health and Human Services (HHS) and the Treasury Department developed and released the Actuarial Value Calculator (AVC), which allows an employer to enter plan details regarding plan benefits, coverage and cost-sharing features to determine the minimum plan value and, therefore, its “metal tier.” As an alternative to the AVC, an array of safe-harbor checklists can be used by an employer to compare its plan’s coverage, or an employer may engage a certified actuary to determine the plan’s actuarial value without the use of a calculator.

Play or pay

Perhaps the single most significant change is the implementation of the individual mandate. Beginning Jan. 1, 2014, “play or pay” requires that individuals and large employers must purchase/provide a minimum level of health insurance coverage or pay a penalty for not doing so. Participation in Medicare, Medicaid, TRICARE, insurance purchased through an Exchange on the individual market, employer-sponsored coverage that’s affordable and provides minimum value or grandfathered plans (group coverage in effect on/before March 23, 2010, that meets certain requirements) precludes application of an individual penalty. Individual penalties for failing to obtain coverage are:

  • 2014 – Greater of $95 per person (up to three people/family, or $285) or 1 percent of taxable income
  • 2015 – Greater of $325 per person (up to three people/family, or $975) or 2 percent of taxable income
  • 2016 – Greater of $695 per person (up to three people/family, or $2,085) or 2.5 percent of taxable income
  • After 2016 – Adjusted annually for cost-of-living increases

The “play or pay” mandate also applies to large employers that, in general, employed an average of at least 50 full-time and full-time equivalent employees during the preceding calendar year. Full-time employees are those working 30 or more hours per week, excluding full-time seasonal employees who work less than 120 days during the year. In determining full-time equivalent employees, the hours worked by employees who aren’t full-time employees (those working less than 30 hours per week) are considered solely for purposes of determining whether an employer is a large employer by taking the total number of monthly hours worked divided by 120. For example, an employer with 40 part-time employees that average 90 hours per month would have 30 full-time equivalent employees (40 x 90 = 3,600; 3,600/120=30) that must be added to the number of full-time employees when determining large group status. Large employers are required to offer at least one plan with minimum actuarial value (MAV) and meet the affordability requirement or potentially pay a penalty. The MAV and affordable standards are defined as:

MAV – Plan with at least 60 percent actuarial value

Affordable – Employers will satisfy this requirement if they offer at least one health plan option in which the individual (single) employee contribution level does not exceed 9.5 percent of household income.

A plan is considered a Qualified Health Plan (QHP) when both the MAV and affordability standards are satisfied.

Similar to the Individual and Small Group market, HHS and Treasury intend to develop a Minimum Value (MV) calculator to apply to the large and self-insured market. This calculator will assist in MAV determination after entering cost-sharing information. Employers also may use design-based Safe Harbor Checklists and Actuarial Certification for MAV determination. A large employer that fails to offer at least one QHP and has at least one employee purchase individual, subsidized coverage through an Exchange is subject to the lesser of the following penalties:

  • $2,000 per year per full-time employee (excluding the first 30 full-time employees)
  • $3,000 per year per full-time employee receiving subsidized coverage through an Exchange
  • Interplay of subsidies and play or pay

Federal premium assistance tax credits and subsidies will be available to many low- and middle-income individuals so that they can afford to purchase coverage via an Exchange. Individuals with family incomes between 100 and 400 percent of the federal poverty level will be eligible for sliding-scale subsidies in the form of tax credits and out-of-pocket reductions to help with the cost of cost-sharing (copayments and coinsurance).

Finally, employer-sponsored self-insured and insured large group plans, as defined by the law, aren’t required to offer all 10 EHBs referenced above. Rather, employer groups in this category are required to cover only four broad categories of EHB: physician and mid-level practitioner care, hospital and emergency room services, pharmacy benefits and laboratory and imaging services. Unlike individual and Exchange-based plans, self-insured and insured large group plans are exempt from classifying their plans by metal tier.

Miscellaneous changes and related PPACA fees

In addition to the “play or pay” mandate, EHBs and affordability, once the Exchanges launch, an effective expansion of coverage will occur as insurance carriers no longer will be permitted to medically underwrite applicants, apply pre-existing condition limitations or rate for medical conditions and health status.

Other fees/taxes will be imposed within PPACA that are designed to assist insurance companies that cover higher-cost individuals as the result of PPACA’s expansion of coverage. One such fee/tax is a temporary Reinsurance Program Fee effective Jan. 1, 2014. Each state/Exchange may establish a three-year reinsurance program to help stabilize premiums in the individual market by providing additional payments to insured plans that enroll the highest-cost individuals. HHS will establish a reinsurance program for any state that chooses not to establish its own program and will collect $10 billion in 2014, $6 billion in 2015 and $4 billion in 2016. The Reinsurance Program will be funded by contributing entities, defined as (1) a health insurer and (2) third-party administrators collecting funds on behalf of self-funded group health plans. Reinsurance contributions will be paid on a quarterly basis, with the first payment due by Jan. 15, 2014. While the national per capita (per employee per month) amount has not yet been released, the assessment is estimated at approximately $5 to $7, which will vary by state. This is assumed to equate to approximately 1.5 percent of premiums.

The Patient-Centered Outcomes Research Institute (PCORI) Fee is another fee that is required under PPACA. It applies to plan sponsors and issuers of individual and group policies and is applicable for plan years ending after Sept. 30, 2012. The fee will expire and won’t apply to plan years ending after Oct. 1, 2019. Revenue will fund research to determine the effectiveness of various forms of medical treatment. The initial annual fee of $1 per covered life is for plan years that end before Oct. 1, 2013, and increases to $2 for plan years that end between Oct. 1, 2013, and Oct. 1, 2014; fees then increase to an amount indexed annually to the per capita amount of the National Health Expenditures.

The Health Insurance Tax (HIT), also effective Jan. 1, 2014, applies to most forms of insured health insurance, both grandfathered and non-grandfathered plans. The HIT does not apply to self-insured businesses or stop loss insurance. The HIT is a fixed-dollar amount distributed across health insurance providers: $8 billion in 2014, $11.3 billion in 2015 and 2016, $13.9 billion in 2017 and $14.3 billion in 2018. After 2018, the preceding year amount will increase by the rate of annualized premium growth. Under current law, the fee has no expiration date. The HIT obligation is determined by the federal government, based on each insurer’s portion of total premiums that are impacted by the fee. Research conducted by the National Federation of Independent Business (NFIB) in November 2011 suggests that insurance premiums will increase by two to three percent as a result of this fee.

So what does all of this mean?

And, more importantly, what should you do? Although there are no easy answers given the complexity of PPACA and the number of moving parts and regulatory requirements, Plante Moran offers the following guiding principles:

Seek out relationships with advisors who are knowledgeable about PPACA and can help you assess your situation. If your current broker/agent/consultant/advisor is poorly informed, consider alternate relationships, including engaging tax and/or legal counsel.

For most employers, Jan. 1, 2014, likely will mean continuing to deliver healthcare benefits through the employer-sponsored market. In fact, employers of at least 50 employees, unless specifically allowed by the state Exchange, are precluded from purchasing through the public Exchange.

Employers that continue to provide employer-sponsored coverage will be exposed to increased costs such as the Reinsurance Fee, PICORI Fee and HIT mentioned above. As such, costs will increase beyond normal inflationary trends to absorb the additional fees/taxes that are used to subsidize the delivery of health care to other constituencies.

Perhaps the most challenged employers affected by PPACA are those with a large workforce of part-time help that, when aggregated, meet the requirements of a large employer and therefore are now exposed to the $2,000 penalty for not providing EHBs. This clearly represents a significant cost in the form of a penalty or potentially even greater costs of providing a benefit plan that may not currently exist.

Finally, for those employers considering exiting the employer-sponsored healthcare purchasing market due to penalties or costs, you also should consider:

If you currently have a health plan and opt to drop it, employee attraction and retention are very likely to suffer absent other financial accommodations to compensate for the lost benefits.

It’s very likely that the individual cost to secure benefits through the Exchange at a level commensurate with current benefits will be much more costly.

Purchasing at the individual level versus through an employer-sponsored plan results in greater costs due to the lost tax-favored status of paying for benefits with pre-tax dollars.

A great deal of regulatory guidance is forthcoming, but we do know costs aren’t going down. Now, more than ever, proactive strategic planning is essential and will perhaps have the greatest impact on an organization’s financial viability.

Signed into law on March 23, 2010, the Patient Protection and Affordable Care Act (PPACA) requires perhaps the most sweeping changes with respect to the delivery, taxation and requirements associated with healthcare insurance in modern history. Plante Moran and Plante Moran Group Benefit Advisors are committed to serving as a resource to help its clients understand healthcare reform, its key elements and its potential impact. For more information, visit

UPDATE: Obama Administration Delays ACA Employer Mandate

The Obama Administration on July 2 announced a one year delay of the employer mandate portion of the Affordable Care Act, which had been scheduled to take effect on Jan. 1, 2014. The other two key parts of the ACA – the individual mandate and the government-managed health subsidies and federal/state health insurance exchanges – remain unchanged. Read more …