Don’ Fear The ACA B Penalty

Author’s Note – This informational paper is directed at consultants and employers engaged in the large group market (50 plus full time employees). The strategies discussed focus on issues effecting industries employing primarily a low wage hourly workforce. Most of what is proposed will not be pertinent nor relevant to the under 50 life marketplace or high income “white collar” employers.

Having spent the last 35 years consulting with benefits managers and insurance agents, I doubt there has been a period in our industry that has been more interesting, exciting, disruptive or confusing. Part of the consultative challenges created by the Affordable Care Act are the semantics involved. Dozens of new code numbers and phrases like; Skinny, MEC, ACA, mandates, Minimum Value etc….are vying for our attention, add to this, releases of partial guidance and promises of future clarifications, as yet not delineated. In all of this, no single word has caused more broker/employer trepidation than the word “Penalty”. I personally believe that fear of this word and all of its (imagined) consequences, have had more profound influence on the broker/employer decision making process than all of their collective logic, common sense and past experience combined.

Why a Penalty?
On June 28, 2012, Chief Justice John Roberts announced his vote to uphold the Affordable Care Act’s (ACA) individual mandate provision, in the now-infamous case National Federation of Independent Business v. Sebelius. According to Roberts, the reason the individual mandate is permissible is because the federal government has the authority to levy a tax and the so-called Obamacare “penalty” is actually a tax.

Since Judge Robert’s famous logic bending ruling, the Obama administration has referred to the “tax” as a “tax” on multiple occasions, but it often simply goes with the term “penalty.” Amazingly, the HealthCare.gov website has never referred to the fine as a “tax,” which adds to the confusion and perpetuates this unsubstantiated fear. Insurance professionals are incorrectly counseling employers that failure to comply with ALL of the mandates will result in “penalties” issued by the IRS with all the scary things that implies. I believe it is intellectually and professionally lazy to perpetuate this myth. The fact is, in many cases, the expense of non-compliance (Taxes) is cheaper than the cost to comply.

Remove the Stigma and Get Creative
I have contended that all we need to do to unlock creative and cost effective solutions for our clients is to remove the stigma attached to the word “Penalty”. It takes a lot of creative energy to explain the counterintuitive nature of incentives built into ACA. For instance, there is a natural aversion to deliberately failing to comply with a major element of a law (minimum value) yet that is what is most cost effective and more importantly allowed in Obamacare. Everyone is looking for the silver bullet, it this case, the plan design that meets minimum value, yet carries less risk and expense than a Bronze level plan design. Many of us have taken to calling this mystical solution a Unicorn, beautiful and desirable, yet not in existence in the real world.

Our firm has taken the lead in educating clients to other out of the box strategies. Below are some of the more creative and marketable solutions adopted by employers in the last two years. Some of these strategies could be considered aggressive. One, in fact, is no longer even legal in its original form, but once you understand that the regulators not only accepts selective non-compliance, they often encourage it (referring to it as Pay or Play). The door to enlightenment will open for you and your clients.

Recent History: Three Most Marketable Solutions in 2014/15
Targeting the low wage hourly work force, the following were the most cost effective and creative marketplace (low wage hourly) solutions adopted last year:

• MEC Only – This option utilizes self-funding to take advantage of the lesser federal requirement for compliance with ACA, by offering what the government has defined as minimum preventive care benefits aka minimum essential coverage (63 preventive and wellness services mandated U.S. Preventive Services Task Force USPSTF).
• Cost Range – $50 to $70 pepm
Satisfies – PPACA “A” Requirement ($2,000) AKA the “Sledgehammer”
Satisfies – PPACA “Individual Mandate” by providing MEC
Does Not Satisfy – PPACA “B” Requirement for Minimum Value
Opinion – The least cost effective of the pay or play options. These plans are usually loaded with far too much administration (often over 50% of the required funding levels) and are not particularly popular among employees, due to limited benefits (preventive and wellness only) Because these plans are considered extremely minimal by those they cover, there is a much higher tendency for qualifying employees to opt out and seek coverage from the exchanges (costing the employer the B tax or $250 per month)

• MEC Plus Indemnity – This is a hybrid of the MEC Only approach that adds low cost first dollar benefit coverage to the MEC. Sanctioned by HHS under conditions laid out for these plans (designated as Excepted Benefit Plans under ACA) They offer access to basic (health and accident) medical care without deductibles, coinsurance or co-pays, thus making them substantially more popular, particularly for lower wage earners.
Cost Range – $95 to $120 pepm (100% paid by employer)
Risk – Minimal, if employer auto enrolls all eligible employees. Likely exposure to B tax ($250 per month) has historically been under 5% (of eligible employees) likely much less. Note – Auto enrolled participation precludes Medicaid and other legal waivers and likely will be effect under 70% of all eligible employees.
Satisfies – PPACA “A” Requirement ($2,000) AKA the “Sledgehammer”
Satisfies – PPACA “Individual Mandate” by providing MEC
Does Not Satisfy – PPACA “B” Requirement for Minimum Value
Opinion – Most cost effective of all of the solutions. By including first dollar benefits in this option and contributing 100% of the combined contribution (premium and self-funding) the employer can effectively reduce the percentage of employees inclined to go to the exchange and possibly receive subsidies (actual experience is in the low single digits). Also, since this approach does not block high risk employees from going to the exchange, it provides a very affordable catastrophic option, far below market rates for a major medical option.

 Minimum Value Light or Skinny MVP (Not allowed after 2015) – These plans initially provided enough outpatient coverage to meet the safe harbor test for Minimum Value, but because they were designed not to cover any hospital claims and were often coupled with a 9.5% employee payroll deduction, they obviously appealed to the employer looking to comply for the least expense. Furthermore, these plans were designed to discourage employee participation, yet block access to subsidized exchange benefits (rectified in 2015) Due to low risk and low employer contributions, MV Light and MVP’s plans initially gained significant market share in 2014. That was until they were ruled non-compliant (“Final Notice of Benefit and Payment Parameters for 2016,” issued by the Department of Health and Human Services HHS) After the Nov. 4, 2014 notice, any plans that did not meet the new criteria (include significant hospitalization benefits) will no longer be allowed and all such arrangements will be illegal after 2015.
Cost Range (New in 2016) – $350 to $500 pepm Participation will need to be driven by a higher employer contributions and a reductions in the allowable 9.5% employee pass through.
Risk – Do to the above, employers (and reinsurers) must assume substantial hospitalization risk (without limit). Risk will be unacceptably high, in my judgement
Satisfies – PPACA “A” Requirement ($2,000) AKA the “Sledgehammer”
Satisfies – PPACA “Individual Mandate” by providing MEC
Satisfies – PPACA “B” Requirement for Minimum Value (2015 Only)
Opinion – In 2016, in order to appeal to any reinsurer, these plans will need significantly higher participation to absorb the far greater amount of claims risk. I think this is unlikely to be marketable, particularly in comparison to the exchange option.

One More Argument for Ignoring the B Penalty (Tax)
One of the more unexpected (and welcome) effects of employers funding the MEC account at 100%, is the value of the unused claims reserves at the end of the year. In our own accounts, we have observed a lower than expected utilization, this frees up thousands of dollars that can be used in any way the employer sees fit, why not apply them to part B fines levied? I believe this further supports the tactical value of a strategy that ignores the minimum value tax.

With Health Care Reform, Has Risk Assumption Really Changed?
It seems that no matter how hard we try to make it not so, large group risk assumption remains the same today as it was 100 years ago. (1) A risk pool needs to have more non claim filers than claimants and (2) Participation levels need to be greater than 10%/15% or even 20%. Passing 9.5% cost to service sector hourly employees will never yield a healthy risk pool (the individual mandate has also proven to be a poor motivator) add to this, the new Minimum Value rules (now must include high risk inpatient benefits) and employers who self-fund bronze level plans, will likely be unable or unwilling to live with the downside risk.

 

The fact is government regulators do not much care which option you choose, as long as you either play (offer a fully or partially compliant plan) or pay (pay one of the taxes under 4980H) or do a little of both – Play to avoid the A penalty and pay allowing needy (high risk) employees to waive coverage for Medicaid (which will cost the employer nothing) or to receive tax credits in a State/Fed exchange, which will cost a relatively small contribution (Tax) of $250 month.

Pay & Play Strategy
Play – Employer Sponsored MEC Plus (Limited Supplemental Indemnity plan also known as an Excepted Benefit) that provides first dollar coverage that low wage hourly employees both understands and prefer. Major Medical or employer sponsored High Deductible plans are not designed to benefit low wage workers with little or no tangible assets to protect.
(and) Pay – Minimum Value 4980Hb Tax – A low wage employee (if qualified) can fall back on Medicaid (as they do not have assets to protect). Also, if the employee does not qualify for Medicaid and has health issues, or simply wants to be enrolled in major medical coverage, the exchange-based plans remain available for them and, more importantly, their family. Employers who offer a MEC are still subject to the “B” Tax, Historically, employer exposure to this tax has been extremely limited (under 1% when the employer pays 100% of the MEC Plus contribution)

Bonus Strategy for Executives or Salaried Employees?
Why Not Consider the Exchanges Virtual (inexpensive) Executive Carve-outs – Many employers have come to the conclusion that senior executives, even salaried employees, are better off accessing the Sate/Fed exchanges. There are no pre-existing limitations and the benefits are typically better than the employer can acquire through traditional sources. (Exhibit 1 above) Contribution strategy? Although you cannot require this, simply gross up salaries for selected key employees and let them shop for whatever level they prefer (Bronze, Silver or Gold). Exchange plans are typically a better value, require no risk or billing activity from the employer and they are portable.

Note of Caution – Offering an executive carve out to the management group is still allowable under IRS Advisement 2011-1. So having a different plan for executives is legally allowable. Some brokers and decision makers will have an issue with suggesting that executives “go to the exchange” or at least avoiding the water cooler talk that they do not provide benefits to key people. If handled properly and legally, it remains a viable alternative to the employer sponsored carve out.

Conclusion: Remove Fear of the Penalty. Everyone Wins

1. Low wage employees, Have an option of first dollar coverage at work for little or no cost, or if they perceive a need for greater coverage, go to the exchange and receive a plan that is subsidized as much as 90% (based on their family’s income). Also, these plans are portable (not employer-based) if they leave their jobs they can take them along, including the subsidies.
3. Employers pay less than market rates (rates charged for a catastrophic high deductible group plans) for those actually enrolled in subsidized coverage. (Employer contributes only $250 while the employee works for the company and nothing when he/she leaves)
5. Employers avoid the most costly penalty ($2,000 per employee) and incur a small tax and no risk for high claims employees who are freely allowed to go to the exchange for subsidized major medical coverage

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