Why the market demand for limited-benefit health plans will grow in 2014 and beyond: a factbased analysis. Timothy L. Cook, Strategic Business Development, Ternian Insurance Group LLC Ternian Insurance Group, LLC, 7310 N 16th St, Ste 100, Phoenix, Arizona 85020, 888.376.5391 www..com
The ACA has not eliminated the need for limited-benefit health plans: Millions of workers will be exempt from the individual penalty but left without any health coverage if large employers discontinue these plans. Throughout the past several decades, individuals have increasingly relied on their employer to provide access to affordable health insurance while helping them navigate through the complexity of the healthcare system. For hourly workers, traditional major medical coverage has typically been much too expensive. As a result, many large employers decided to offer more affordable plans that provide first-dollar coverage for everyday medical costs. These limited-benefit health plans are highly valued by the younger, healthier individuals that typically make up a lower-wage workforce. At the same time, limited-benefit health plans give employers an opportunity to improve their recruitment and retention efforts, while ensuring a positive impact on the morale, productivity and overall wellness of their workforce. Now that the Affordable Care Act (ACA) is a reality, some employers have decided to stop offering this limited-benefit coverage based on two assumptions: 1. Government-sponsored health insurance exchanges and Medicaid will be viable options for employees that need affordable health insurance. 2. The individual mandate will penalize employees that choose a limited-benefit health plan in lieu of more comprehensive coverage. However, these assumptions have not become reality based on a variety of complex issues that will make it extremely difficult for millions of Americans to secure affordable health coverage (while also exempting them from the impact of the individual penalty). This white paper will provide a detailed, fact-based analysis of these issues along with a potential solution for large employers that want to address this growing challenge.
ASSUMPTION 1: Government-sponsored health insurance exchanges and Medicaid will be viable options for employees that need affordable health insurance. The reality: Affordable health coverage will continue to be out of reach for millions of Americans. It is difficult to precisely define affordability given that it can be different from person to person based on their income, financial obligations and expenses. In an effort to develop a baseline, however, the historic rule of thumb has been that for medical insurance to be affordable it must be priced at around 5% of an employee s take home pay. The ACA has set a new standard, stating that medical insurance becomes unaffordable at 8% of gross income. In fact, if the cost of coverage exceeds this rate for an individual, they are able to claim the unaffordable exemption that will remove the individual penalty. However, following that same logic, there are a variety of scenarios where lower wage workers will be subject to 8% or even dramatically higher premium costs that they cannot afford. Consider the following little-known facts about the healthcare law that will create a lack of affordability for hourly workers by penalizing individuals in a variety of common circumstances: A marriage penalty for those with access to employer-sponsored dependent plans. Many employers do not realize that if an individual has access to employer-sponsored coverage through a spouse even if it s not affordable they will not qualify for subsidies. (It is also important to note that people in this situation are not subject to the individual penalty. See page 5 for more details.) Considering that many employers are reducing dependent contributions so that they can maintain the standards set forth by the ACA for employee contributions, premium costs for dependents are sure to rise in 2014 and beyond. The following example illustrates how difficult it would be for such an individual to gain affordable coverage through the exchange: A 25-year-old full-time worker cannot afford the dependent coverage offered to their spouse through an employer. However, because they have access to this coverage, they will not qualify for any subsidies. Pay rate: $10 per hour Salary: $20,800 Take-home pay: $16,910 Health plan cost: $2,535 in plan premiums per year 1 (based on national average) % of income: 12.2% of total income, 15% of take-home pay In states where Medicaid has not been expanded, low wage workers who earn less than 100% of the poverty level will not receive subsidies or access to Medicaid. A vast and unexpected problem has emerged now that half of U.S. states have decided not to implement the ACA s Medicaid expansion. This expansion not only increased the income level available to qualify for Medicaid it also expanded eligibility to individuals and couples without children. In the 25 states
where Medicaid has not been expanded, these people are not eligible for Medicaid, but they are also not eligible for subsidized exchange coverage if they earn less than 100% of the poverty level, which is $11,490. That s because according to the Henry J. Kaiser Family Foundation, The ACA envisioned people below 138% of poverty receiving Medicaid and thus does not provide premium tax credits for the lowest income. As a result, individuals below poverty are not eligible for Marketplace tax credits, even if Medicaid coverage is not available to them. 2 In fact, the Henry J. Kaiser Family Foundation estimates that there will be five million people that fall in this gap where neither Medicaid or subsidies are available. (It is also important to note that people in this situation are not subject to the individual penalty. See page 5 for more details.) The following example depicts how this incredible hardship will impact these millions of Americans: A 25 year-old part-time employee without children earns less than the poverty level but lives in a state without a Medicaid expansion. Pay rate: $7.25 per hour x 29 hours per week Annual salary: $10,933 per year Take-home pay: $10,085 Health plan cost: $2,535 per year 1 (no subsidy available, Medicaid not available) % of income: 23.2% of total income or 25.1% of take-home pay This low-income individual ends up paying more than 3 times the unaffordable hardship amount as outlined in the ACA. An extremely high penalty for smokers. While many people underestimate the prevalence of smoking in today s society, it s important to recognize that, according to the CDC, nearly 44 million people or 19.% of all adults in the U.S. smoke. 3 This percentage is also dramatically higher in low-income populations. Below you will find a chart which illustrates this point: Do you smoke? Among national adults, by annual income % Yes 30 31 30 26 22 21 16 13 13 $5,999 or less $6,000- $11,999 $12,000- $23,999 $24,000- $35,999 $36,000- $47,999 $48,000- $59,999 $60,000- $89,999 $90,000- $119,999 $120,000- or more GALLUP POLL This is also the group that may face the highest premiums now that the ACA is a reality. Because premiums can reflect up to a 50% surcharge for smokers and subsidies only apply to the base premium and not this penalty coverage becomes
unaffordable for many smokers. This applies even to those qualifying for the richest subsidies. The following example illustrates how dramatically this financial penalty will impact a young, low-wage worker: A 25-year old male smoker is a full-time minimum wage employee. Pay rate: $7.25 per hour Salary: $15,080 per year Take home pay: $12,630 Health plan cost: $1,569 per year 1 after subsidies (based on national average) % of income: 10.4% of total income, 12.4% of take home pay A general lack of affordability for many individuals based on their level of subsidy and expenses. Even without these specific circumstances, many individuals will still not be able to enroll in health insurance that costs less than the 8% of income affordability amount. For a couple where both individuals are working fulltime, exchange coverage exceeds this figure at a combined household income of $38,775 per year or just $9.40 per hour. In addition, even 5% to 8% of gross pay may be unaffordable for some employees. Affordability is impacted by a complex array of factors such as the cost of living in an area and a person s financial obligations (such as child support payments) and other expenses. The ACA does not take any of these variables into account when defining affordability. It stands to reason that many workers simply don t have an extra $125-$250 per month to spend on health insurance, even if that number represents a small portion of the overall premium. ASSUMPTION 2: The individual mandate will penalize employees that choose a limited-benefit health plan in lieu of comprehensive coverage. The reality: Less than 2% of Americans are expected to face this penalty. The federal government has acknowledged that very few people will actually be subject to the individual penalty because of the many different exemptions that will ultimately be granted. According to a fact sheet issued by the Congressional Budget Office in January of 2013, less than 2% of Americans are expected to face this penalty. 4 In a related document, the Department of Health and Human Services issued final regulations on the list of available exemptions to the individual mandate requirement. Of the many different exemptions that apply to the individual penalty, the most common will likely be the affordability exemption. Under these regulations, if
coverage costs more than 8% of family income, it is considered unaffordable and no individual penalty applies. For example, the 8% level is reached at the following gross income levels, even when subsidies are applied: Single $28,725 per year or $14 per hour if full time. Couple $38,775 per year or $9.40 per hour if both working full time Family of three $48,825 per year or $11.73 per hour if both adults work full time Family of four $58,875 per year or $15.15 per hour if both adults work full time There are also are other exemptions that relate to many of the scenarios mentioned in section #1. HHS has listed the following as additional grounds for exemption: Individuals who are ineligible for Medicaid solely based on a state s decision not to implement the Medicaid expansion under the ACA. This rule will protect individuals in states that, pursuant to the Supreme Court decision, choose not to expand Medicaid eligibility; Individuals who in addition to one or more employed members of his or her family have been determined eligible for affordable self-only employer-sponsored coverage, but for whom the aggregate cost of employer-sponsored coverage for all the employed members of the family is unaffordable. By including the above as exemptions, lawmakers are essentially acknowledging that it is highly unlikely that individuals in either of these two scenarios will have access to affordable health coverage. While exempting these people from the individual penalty is helpful it still does not address the core issue of unaffordability which may lead many to remain uninsured. THE SOLUTION: Positioning limited-benefit plans as an option for employees that cannot afford exchange plans or an employer-sponsored major medical plan. It has become clear that many individuals will not be able to access affordable major medical coverage in spite of the ACA. Fortunately, large employers can develop a strategic benefit offering to address these issues for their entire workforce both employees eligible for ACA-compliant plans and those not eligible. Limited-benefit health plans can play a key role in both of these scenarios: Employees eligible for ACA-Compliant plans The biggest contradiction in the ACA is the requirement that employers must offer coverage that does not cost the employee more than 9.5% of family income. This requirement means that by definition, the coverage could exceed the 8% unaffordable limit. Therefore, many employees may be forced to decline employer-sponsored coverage due to unaffordability and at the same time, they will still be exempt from the individual penalty. For that reason, many large employers have already announced that they will offer limited-benefit plans side by side with their ACA-compliant plans. 5
In this scenario, if the major medical contribution exceeds the 8% level, employees are free to choose which plans fit their budget and their health needs, with no financial penalty. For example, many younger, healthier individuals may choose a limited-benefit plan if they want affordable premiums plus first-dollar coverage (with no deductible) for more common medical needs. Non-eligible employees Based on all the scenarios above and the various exemptions for the individual penalty, it is evident that many workers may choose to remain uninsured due to a lack of affordable major medical coverage. Fortunately, employers can still provide help to these employees by offering limited-benefit health plans that cover everyday medical issues, including benefits for doctor s visits, prescriptions and more. These plans will help individuals get the care they need for issues ranging from sprains and strains to infections and the flu. In addition, these plans are easier to budget for and maintain for individuals given that they are typically payroll deducted. As a result of this approach, employers can make a minimal investment that will have a large return by ensuring to a healthier, happier workforce. To learn more about how today s innovative limited-benefit health plans can help large employers address all of the issues outlined in this white paper, contact Ternian Insurance Group at 602-216-0006. 1. Henry J. Kaiser Family Foundation Subsidy Calculator 2. The Henry J. Kaiser Family Foundation. The Coverage Gap: Uninsured Poor Adults in States that Do Not Expand Medicaid. October 23, 2010. 3. Centers for Disease Control and Prevention. Current Cigarette Smoking Among Adults United States, 2011. Morbidity and Mortality Weekly Report 2012;61(44):889 94 [accessed 2013 June 5]. 4. Towers and Watson Healthcare reform Bulletin. PPACA Guidance on individual mandate, minimum essential coverage and family members federal subsidy eligibility. February, 2013. 5. Theo Francis. Bare-Bones Health Plans Survive Through Quirk in Law. The Wall Street Journal. January 16, 2014.