September 8, 2010
Under the Patient Protection and Affordable Care Act (PPACA) as amended by the Health Care and Education Reconciliation Act, employers will soon have to make changes to their health plans that will most likely have financial implications. This article analyzes the financial implications of some of the provisions and offers employers some recommendations to consider as they adapt to the changes ushered in by the new law.
The following provisions become effective for health plans renewing on or after September 23, 2010:
The cost impact of these particular provisions will depend on a number of factors, including an employer’s current plan design, the employer’s size, employee demographics and health status, insurance carriers or administrators in place, in what state the employees reside, and stop-loss deductibles. Generally speaking, for most plans the effect of these provisions is an increase in cost of a few percentage points.
1) Lifetime and annual maximums. These limits are typically set at relatively high dollar levels where claims rarely occur. As such, removing these limits has a small impact on premiums for both fully and self-funded programs. Employers who self-fund their healthcare programs should weigh the probability of claims occurring over the annual limits prescribed by the Federal government and consider other measures to control this risk, such as preferred healthcare provider pricing with transplant networks or case/disease management programs. Some employers manage this further by designating certain providers as Centers of Excellence who, in return, provide warranties on high-cost procedures such as cardiac, orthopedic, or cancer care. Employers with self-funded plans should also discuss this issue with their stop-loss carriers to determine what coverage is available beyond current annual limits to help mitigate this risk.
2) Coverage of dependents to age 26. The impact of this provision is affected by the interaction of a number of factors: a. Employee demographics – Employers with a majority of middle-aged workers face greater exposure to this risk than those with younger employees who do not have dependents old enough to qualify for the coverage extension.
b. Plan design – Employers with richer plan designs are more likely to attract the additional dependents that the law permits compared with employers with leaner plans, all else being equal.
c. Premium deductions by family tier – Employers who only vary premium deductions on a single vs. family basis face more risk than those that vary premiums according to the number of persons covered, because employees with existing family coverage can add dependents at no additional cost. Employers with deductions that vary based on the number of dependents manage this risk better because the employer realizes more revenue to offset the increased costs as employees change from a single or employee/spouse to a family rate.
d. State of residence – A number of states have already implemented laws extending coverage to dependents up to age 26 (or older). However, some states require that dependents have no other coverage available through their employer. The federal law includes this added provision only through 2013 for “grandfathered” plans (i.e., insurance policies that existed before health care reform became law). Come 2014, all plans must make coverage available to dependents until age 26, regardless of whether dependents have coverage available through their own employer.
Some argue that the publicity brought about by the federal program may result in additional dependents joining their parents’ plan (even in states where dependent extension laws exist). Come 2014 when individual penalties are assessed for those who do not purchase health insurance, employers may find additional dependents joining and/or staying on their plans who may not have done so previously.
3) Full coverage of specified preventive benefits (for non-grandfathered plans). Over the past few years, many employers, large and small, have implemented full coverage of preventive services (i.e., without cost-sharing). This decision has been driven by a general belief that doing so will encourage employees to maintain their health, see their doctors regularly, and identify potentially catastrophic diagnoses at an early stage. All this, it is hoped, will improve employees’ health and well-being, and reduce costs in the long run. Given this trend, many employers will not experience a material increase in their costs due to this new mandate. However, a number of important elements of the law need to be considered: a. Employers will need to work with their claims payers to ensure that their plans are in compliance with the specified covered preventive services on their respective effective dates.
b. Employers will need to remove cost-sharing requirements and this may increase utilization of these services. Many employers who already offer preventive coverage at 100% have not experienced a dramatic uptick in use. Still, medical providers will more than likely counsel employees and their dependents to take advantage of services covered at 100%. This may result in immediate cost increases (regardless of an employer’s existing preventive coverage).
c. Employers will no longer be allowed to place annual limits on the amount of preventive services. For example, plans have often covered a defined set of preventive services up to an annual dollar limit amount (e.g., $500 for all preventive services). Removal of these limits should be carefully evaluated if employers currently have them in place because certain preventive services can be rather expensive. Additional design changes may be required to offset potential cost increases that result from removing any preventive maximums currently in place.
d. For fully-insured plans, some states have mandated coverage of certain preventive services. To the extent an employer offers fully-insured coverage to employees living in one of these states, the federal law should have a more minor impact at renewal this coming year.
For a complete list of the preventive services covered without any cost-sharing provisions, please visit the government website at http://www.healthcare.gov/law/about/provisions/services/lists.html.
4) Elimination of preexisting condition exclusions for children under 19 years of age. This provision could clearly have a material impact for smaller employers where one or two high-cost claims can affect renewal costs. However, by and large, most employers will not see a large increase in their healthcare costs as a result of removing preexisting condition clauses. Employers with high turnover rates who have a high proportion of their annual healthcare expense on new employees are most exposed, but generally this risk should not pose significant additional costs.
Health care reform has changed the game of offering healthcare coverage. Whether employers are offering coverage to active employees or retirees, some important decisions must be made. Beginning in 2010/11, the health insurance landscape starts to change in a manner this country has never seen before. It will be very important for employers to analyze the initial financial implications associated with the first wave of provisions and take necessary action.
The Burnham Benefits team continues to remain on top of this ground-breaking legislation and is in a position to assist you make benefit decisions that will provide the best financial outcome for your company and employees. We would be happy to analyze your benefits and make appropriate recommendations. A Burnham Benefits consultant may be reached at 949-833-2983 or firstname.lastname@example.org.
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For more information about this ACA Pathways or about any other health care reform-related provisions, please contact your Burnham Benefits consultant or Burnham Benefits at:
This ACA Pathways is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.
The information contained in this ACA Pathways includes emerging health care news from a limited perspective and does not encompass all views. The information was selected from a wide range of sources selected on the basis of their potential impact on employers and/or their employee benefit plans. For more information, please contact Burnham Benefits.