Implications of the Affordable Care Act Employer Impact & Changing Value Proposition for Self-insured Groups

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Implications of the Affordable Care ActEmployer Impact & Changing Value Proposition for Self-insured Groups

Blue Cross of Northeastern PennsylvaniaThursday, July 25, 2013

This presentation is not intended to be a comprehensive review of the content of the legislation, nor should it be interpreted as authoritative and/or legal advice on implementation. The presentation represents our best understanding as of the date of the presentation. In the event you have questions applicable to your business or employees, we recommend you request the advice of competent legal counsel.

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Key Considerations

1. Incentive to Offer Coverage

2. Regulatory Changes to Large Groups

3. Emerging Exchange Markets

4. All Aspects of Pay or Play Evaluation

5. Changing Value Proposition for Employers and Employees

Presentation will focus on 5 key considerations of the Affordable Care Act (ACA)

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As employers develop their benefits strategies for 2014 and beyond, it is important to consider the reasons for sponsoring coverage today

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Why employers offer coverage

• Financial advantages to sponsor group health care coverage

• Talent acquisition, retention and employee engagement

• Company culture and the nature of the social contract with employees

• Industry trends and competitor positioning

• Employee health and wellness

There are many important considerations to choosing the right benefit strategy:

Economics IndustryTrends

CompanyCulture

TalentManagement

Incentive to Offer Coverage

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While all employers share similar incentives to offer coverage, there are several unique qualities pertaining to self funded employers

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Unique Aspects of Large Employers

Economics IndustryTrends

CompanyCulture

TalentManagement

Incentive to Offer Coverage

• Significant tax advantages to sponsoring group coverage

• Self funded groups achieve cost savings by not paying risk bearing premiums and attain negotiating leverage

• Health benefits reinforce companies’ wellness efforts

• Large employers are frequently held to higher public standard due to large community presence

• Employer’s benefits help compete for talent between other large firms within industries

• Certain industries, e.g. retail and food services, offer more limited benefits

• Offering health benefits is typically table stakes for most large employers1

• May offer different benefits to classes of employees

1) 95.5 % of employers over 50 employees offer coverage to employees in PA (2012 Medical Expenditure Panel Survey)

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Individual / Employee

Employer Average Premium

Government Subsidies

Employer "Make Whole" Payment

Individual / Employee

1100 1100

400

$3,700

$2,300

7500

2700

3700

Employer-Sponsored(Pre-tax)

$6,000

Individual Market(Post-tax)

The tax implications of Group coverage and Individual market subsidies available to employees are key economic factors to consider

Tax Deduction

$1,500

Subsidy and Tax Implications

Equivalent pre- and post-tax costs for each stakeholder

IllustrativeIncentive to Offer Coverage

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Requirement/ExpenseSelf-Insured Plans (ASO)

Fully-Insured Large Group Plans

Fully-Insured Small Group Plans

Elimination of Lifetime Caps1

Dependent Coverage to Age 261

Preventive Services1

Out of Pocket Maximums

Minimum Actuarial Value

ACA Fees2

Affordable Coverage Penalty

Compliance with State Mandates

Insurance Premium Taxes

Essential Health Benefits

Modified Community Rating

New Requirements and Fees

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1) In effect prior to 20142) Reinsurance Fee, PCORI fee

Changing Value Proposition

ACA requirements will impact employers differently based on size and funding type

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Bene

fit Le

vel

Benefit FlexibilityRegulatory Changes

Self-funded groups retain the most flexibility in terms of benefit design

Individual and Small Group plans restrained by regulations

Significant flexibility in benefit design for self-funded groups market

Products Requirements:• Metallic Levels• Essential Health Benefits (EHBs)• 3:1 Age Banding• Community Based Rates• Guaranteed Issue

Actuarial Value

Pricing

PlatinumGoldSilverBronzeASO

SG

Ind

SG

Ind

SG

Ind

SG

IndASO

ASO

ASO

ASOASO

ASO

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Employees may seek out options on Public Exchange

Traditional Group

Products

Private Group

Exchanges

ACME Inc.

Employer Options

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Post-2014 Large employers will have emerging private exchange market to enable employees to take on more responsibility of purchase decision

Pre-2014 Typically shop for health benefits by comparing fairly standardized products from different carriers

Cost Per Employee Consistent Cost Per Employee Differs

Emerging Exchange Market

1CARRIER 2

CARRIER

3CARRIER

ACME Inc.

Emerging exchange markets will likely provide increasing options to attain benefits for employees

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Employer Incentives

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Make Whole

PaymentPayroll

Tax

Corporate Tax

DeductionPenalty Expense

Premium Contribution

Post-reform Environment

Per Employee Expense or Savings$

ACA Fees

Pay or Play

To make an informed financial assessment on the impact of not offering coverage, all costs should be considered

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Employer Incentives

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Employers that no longer sponsor coverage can save the funds previously allocated to premiums

Premium Contribution:• Employers are able to purchase group

coverage with pre-tax dollars

• Employers that shift a large share of premiums to employees already, have less to gain from dropping coverage

• Underwritten group premiums will likely face premium pressure under ACA due to:– Increased product requirements– Additional taxes and fees

Make Whole

Payment

Premium Contribution

Payroll Tax

Corp.Tax Ded.

Penalty Expense

ACA Fees

Pay or Play

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Employer Incentives

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Employers that no longer sponsor coverage may also save funds set aside allocated to various new fees under the ACA

ACA Fees:• Patient-Centered Outcomes Research Institute

(PCORI) Fee. Issuers of individual and group health insurance policies are required to pay a new fee to help fund the new organization.

$1 PMPY (‘14) / $2 PMPY (‘15)

• Transitional Reinsurance Program Fee. Program to help stabilize premiums for coverage in the individual market during calendar years 2014 through 2016

$63 per covered life for 2014

Make Whole

PaymentPayroll

TaxCorp.Tax

Ded.Penalty Expense

ACA FeesPremium

Contribution

Pay or Play

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Employer Incentives

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Employers are anticipated to provide employees with additional compensation to offset costs of purchasing Individual coverage

Make Whole Payment:

• Employees will need varying levels of make whole payments depending on the amount of subsidies available to them

• Employers will likely consider labor market conditions when estimating amount to make employees ‘whole’

• In order for employees to be eligible for subsidies on the Individual Exchange, employers cannot provide a compensation increase through a tax exempt savings account such as an HRA

Make Whole

Payment

Premium Contribution

Payroll Tax

Corp.Tax Ded.

Penalty Expense

ACA Fees

Pay or Play

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Employees with similar salaries may require vastly different make-whole payments

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Make Whole Payment Example

Employee A: Single Individual Employee B: Family of 2

Employee Age: 50 30

Employee Salary: $35,000 $35,000Spousal Salary: None $35,000Household FPL: 298 444Estimated Premium: $4,940 $9,010

Government Subsidy: $1,046 None

Scenarios: Employee Subsidy Eligibility in the Individual Market (2014)

Estimated Cost of Coverage: $2,415 (premium cap1) $9,010 (full premium)

(1) Estimate of premium cap as described in ACA bill, based on Silver level plan

Subsidy Eligible

Non-Subsidy Eligible

Pay or Play Illustrative

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Employer Incentives

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The tax implications of employer sponsored coverage make dropping coverage potentially more costly than realized

Payroll Tax:• Employer must take into account additional

payroll taxes when making employees whole through a salary increase

Corporate Tax Deduction:• Will depend on tax status of employer• If make whole payment is larger than previous

premium contribution, employer tax deduction would increase

• Employer tax deduction will be based on employer’s decision to apply savings to profits or to business expense

Make Whole

Payment

Premium Contribution

Payroll Tax

Corp.Tax Ded.

Penalty Expense

ACA Fees

Pay or Play

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Employer Incentives

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As small employers are exempt, the penalty will most likely not be a factor in the decision to offer coverage

Penalty Expense:

• Employers that have 50 or more full time equivalent employees will be evaluated against criteria for a penalty

• The penalty is applied to each full time employee minus the first 30 employees

• Penalty is assessed as an excise tax, meaning that it is levied after corporate taxes are paid

Make Whole

Payment

Premium Contribution

Payroll Tax

Corp.Tax Ded.

Penalty Expense1

ACA Fees

Changing Value Proposition

(1) Employer Shared Responsibility Payments (ACA Penalty) delayed until 1/1/2015

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Employee

Employers must take into account several variables before making final benefit decisions

Factors that Will Impact Employer Decisions to Sponsor Coverage Post-reform

Employer Specific:

• Employer size

• Employer premiums

• Premium cost sharing with employees

• Employee participation rate

Employee Specific:

• Distribution of employee incomes

• Workforce demographics (e.g. family sizes and ages)

• Premium contribution to group plan

Market Based:

• Individual market premiums

• Exchange viability

• Penalties and subsidies

Changing Value Proposition

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Evaluating Economic Factors

Changes in consumer incentives to purchase in the Individual market may change employers’ value proposition to offer coverage

Post-ReformPre-Reform

Changing Value Proposition

Group Market

Individual Market

Tax Deductions

Pre-tax Dollars

Risk Pooling

Low-Income Programs

Emerging Individual Market Incentives

Guaranteed Issue Age Banding

Premium Subsidies

Cost Share Subsidies

State Exchanges

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Consumer Value Proposition

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Consumers may reassess the value of group coverage due to ACA regulations creating a more consumer-friendly individual market

Changing Value Proposition

• Provide richer benefits at a lower cost than in Individual market

• Employer reduces exposure of premium cost to employee

• Burden of payments and product selection taken care of by employer

• Health insurance is differentiator to attract and retain talent

Group Market Value Proposition

Individual Market Value Proposition

• Possible increase in salary due to lack of group coverage

• Government reduces exposure of premium cost to employee

• Benefits are portable and not tied to specific employer

• Much broader range of potential options that fit personal needs

• Health insurance is not a differentiator for targeted jobs