Life Science Compliance Update

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April 30, 2010

Study Shows PPACA Shared Responsibility May Cause Employers Difficulties

A recent analysis of data from Mercer’s annual employer health plan survey revealed which employers are most at risk for health care reform's “shared responsibility” penalty. Nearly 3,000 employers with 10 or more employees participated in the survey.

Since its enactment, employers have begun looking at their current benefit strategies – which employees are eligible for health coverage, how much they charge employees for premium contributions, and the amount and type of cost-sharing in the plan design. Companies structure health benefits to reflect size, industry, workforce structure and employee demographics. Mercer noted that large employers with long-service employees, for example, tend to view benefits as a retention strategy and have more generous plans than employers with high turnover.

One of the challenges companies are facing is how to interpret and apply provisions that require employers to provide “affordable” coverage – meaning that full-time employees must generally be asked to pay no more than 9.5% of their household income for coverage. To date, regulations have not been created to explain what levels of coverage the 9.5% affordability standard applies to, what is included in the definition of income, and whether the affordability percentage applies to all plans offered by an employer or just the lowest-cost plan.

Beginning in 2014, if an employers coverage is “unaffordable,” and at least one employee receives government assistance to buy individual coverage through a health insurance exchange, the employer must pay a yearly penalty of $3,000 per full-time employee who gets government assistance and buys coverage in an exchange (to a maximum of $2,000 times the number of full-time employees in excess of the first 30).

Part of the problem for employers is trying to estimate an employee’s household income without access to that information. As a result, employers can use a conservative approach by assuming that each employee’s pay is the total household income. This strategy presents an administrative challenge that comes along with the new requirement. This also creates a problem for employers because what happens when an employee’s total family income changes during the course of a plan year?

Using this estimate, the 2009 report found that more than a third of the nation’s employers – 38% – have at least some employees for whom coverage would be considered “unaffordable” under the newly enacted Patient Protection and Affordable Care Act (PPACA).

Clearly then, despite promises by Congress, President Obama, and Democrats, the employers identified by Mercer are a significant risk for incurring the penalty. In addition, 31% of all employers with 500 or more employees and 20% of those with 20,000 or more employees drew this “red flag” as well.

Another problem the report found is the impact legislation will have on employers with large part-time populations that don’t provide coverage to any part-time employees or require them to work more than 30 hours per week for coverage eligibility. Under the “shared responsibility” requirement, all employees working an average of 30 hours per week or more in a month must be eligible for affordable coverage, or the employer may be subject to a penalty.

Mercer found that only about half (51%) of all large employers currently offer coverage to part-time employees that work 30 or more hours per week. The rest either don’t cover any part-time employees, require them to work more than 30 hours a week to be eligible, or impose other eligibility requirements. As a result, employers will be faced with a tough challenge: can they afford to start, or to raise the minimum hours required for coverage eligibility?

Most likely, company’s costs will rise as a result, and even if employers choose to limit a part-time employee’s working hours to avoid incurring penalties, that may bring other consequences.

A third problem for employers is that they will no longer be able to use mini-med, or limited benefit plans as an option for part-timers or other employees who work an average of 30 or more hours a week. Mini-med plans, which typically limit coverage to $50,000 to $100,000 per year, are currently offered by 7% of employers with 500 or more employees and 20% of those with 20,000 or more. This provision will clearly cost companies money, and potentially jobs.

Accordingly, Mercer noted that only about 38% of employers don’t have any of the three red flags – for unaffordable coverage, ineligible part-time employees, or mini-med plans, while close to half (48%) have one red flag and 14% have two.

Large employers do a bit better, with about half (53%) not having any of these red flags, but 39% have one and 7% have two. Large wholesale/retail employers are the most affected by these three reform provisions. Only 31% of wholesale/retail employers with 500 or more employee have no red flags; 66% have one and 3% have two.

There are other provisions affecting employer plans, such as discontinuing lifetime maximums, most annual dollar maximums, and cost-sharing on preventive care – even something as modest as a $10 copay. About three-fifths of all employers (61%) and nearly three-fourths of large employers (71%) have lifetime benefit maximums in their PPO plans. Lifetime maximums are less common in HMOs, where 25% of sponsors currently use them.

In addition, most employers will have to lower the cap on the amount that employees can contribute to their health care flexible spending accounts. PPACA requires that contributions be limited to $2,500 but the median cap among large employers is currently around $4,500. However, the average employee contribution is currently only around $1,500, so the change will not have a significant impact on most employees.

In the end, it’s going to cost an employer more to offer a generous plan. As a result, an unintended consequence of reform is that employers may adopt “a ’safety-net‘ plan that meets the minimum requirements as their new standard plan and offers a more generous plan at higher cost to employees.”

So, while Congress promised American businesses, employers and employees that health care reform would help small businesses and Americans, Mercer’s recent analysis shows quite the opposite.

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