Fuzzy Math: Calculating the Compliance Costs

Most companies expect healthcare reform—a.k.a. Obamacare—to escalate costs; the question these days is just how much those increases could be.

So far, it's a difficult question to answer. The costs associated with the Affordable Care Act have come in trickles rather than torrents: expanded eligibility for dependents one year, changes to Medicare Part D another, a new tax to fund research popping up along the way, not to mention the compliance and legal costs of assuring everything is up to snuff. And costly portions of the reform have been put on hold for a year.

Still, many companies have not yet seen the increases they expected in their insurance premiums and some even report decreases. “It's hard to put your finger on what it will all look like,” says Margaret Shaw, global benefits director at semiconductor maker Marvell Technology Group, a self-insured company that experienced a drop in claims last year.

Thanks to the surprise delay of the ACA's employer mandate in July, many companies may be tempted to stop running and take a breather on health reform compliance, at least for a while, but they shouldn't, say benefits experts. “Many otherwise sophisticated employers believe that a large part of the ACA has been delayed or withdrawn, when in fact, they still face a host of compliance obligations,” says Patrick Hurd, a lawyer with law firm LeClair Ryan.

Taxes and fees are one part of the ACA that is kicking in as planned, creating new bills for companies and insurers to pay and likely higher insurance prices down the road. Employers still face multiple reporting obligations, including a notice that was due to employees on Oct. 1 about how corporate insurance offerings compare to those of the health exchanges.

Most should start thinking about how they will handle the massive report to the IRS that was delayed to January 2015, which includes a list of all employees, their hours, wages, and any health insurance the company offers. That date will come fast, say benefits consultants, and companies will want to plan for the rules now to minimize disruption to employees. Put all those together, and “many employers are realizing that this will be a really costly thing to comply with,” says Amy Gordon, a lawyer with the law firm McDermott Will & Emery.

“Many otherwise sophisticated employers believe that a large part of the ACA has been delayed or withdrawn, when in fact, they still face a host of compliance obligations.”

—Patrick Hurd,

Lawyer,

LeClair Ryan

Penalty Box

The “pay-or-play” provision that requires employers with 50 or more full-time employees to either offer healthcare or pay a penalty is what will pack the biggest punch for employers. At this point, most employers are still planning to play. “Here in Silicon Valley, you won't be competitive if you drop insurance,” says Shaw.

Most companies that might be interested in paying for employees to join the state healthcare exchanges are also holding off until those exchanges are operational. “We're still not sure what they'll offer or how good they'll be and don't want to put employees at a disadvantage,” says Ed Morgan, CFO of 250-employee Guaranty RV, a large recreational vehicle dealer in Oregon.

Playing will not necessarily be easy, however, even with the extra time, and for some employers it still means changes to their healthcare offerings. Employers must offer insurance plans that meet minimum value standards and ensure that at least one is deemed affordable by federal standards, meaning it costs less than 9.5 percent of the lowest-paid employee's W-2 income. That's not always a straightforward metric, particularly for companies with hourly or seasonal employees.

Adding to the burden is that the ACA redefines full-time employees to include those that work a minimum of 30 hours per week, rather than the standard 40, creating difficult calculations and choices for some, particularly those in the retail and healthcare sectors. “Employers are taking steps right now to make sure that their coverage is not so rich and costly that someone who was previously considered part-time at 30 hours but who is now considered full-time could not afford it,” says Gordon.

The issue is widespread, though far more acute, for those in particular industries and at small businesses. According to a recent survey by consulting firm Mercer, one-third of companies don't currently offer coverage in a plan that meets the federal standards to employees who work 30 hours or less per week; that number rises to 46 percent for those in the retail, hospitality, and healthcare industries. At a hearing held this summer by a House sub-committee, businesses with up to 250 employees expressed their frustrations with their compliance options, which in some cases equated to cutting hours, cutting staff, or ponying up much more to pay for healthcare.

New Rules—and Costs—for Self-Insured Plans

Self-insured health plans traditionally have benefitted from lower costs and fewer regulations concerning what the plans cover and who they have to cover. That is changing as the Affordable Care Act opens up most self-insured plans to added costs and new requirements.

“Taken as a cumulative, it's fairly significant,” said Mike Ferguson, chief operating officer of the Self-Insured Institute of America.

Companies with more than 1,000 employees have long used self-insurance, but in recent years smaller employers also have been taking the go-it-alone approach. Ferguson said companies are moving toward self-insurance not to sidestep the new regulations, but rather because it is more affordable.

“A lot of companies are moving toward self-insurance because the ACA has created a lot of instability in the health insurance marketplace and a lot of escalation in cost,” he said.

Beginning Jan. 1, 2014, self-insured plans will have to automatically enroll new full-time employees in their health benefits, and waiting periods are limited to 90 days. A previous ban on preexisting condition exclusions that applied only to enrollees under the age of 19 will be extended to all enrollees. Self-insured plans will face new non-discrimination rules, have to abide by annual out-of-pocket maximums, and provide coverage for a list of preventive health services, and pay some fees, like the Patient-Centered Outcomes Research Fund, that their fully insured counterparts also have to pay.

Self-insured plans do not have to comply with certain medical loss ratio requirements or pay the health insurer annual fee, a fee expected to be passed on by insurance companies to insured plans. They also will not have to meet provisions on fair health insurance premiums or guaranteed availability of coverage.

Self-insured plans also have an advantage when it comes to the 2018 excise tax, said Julie Stone, a senior consultant with Towers Watson. Because of their plan design, fully insured plans are generally projected to hit the tax thresholds sooner. And most self-insured plans have their pharmacy benefits separate from medical benefits, which will give them an extra year before complying with new integration of out-of-pocket maximums.

—Roberta Holland

Whether paying or playing, employers will have to report hours worked, wages paid, and insurance offered for every single employee on an annual basis to the IRS. How detailed the report will be is still unknown, since the Treasury Department still has yet to propose reporting rules. But the penalties for getting any of the affordability calculations wrong “could be pretty steep, and unexpected,” says Gordon. If an employer offers insurance but it is not affordable for some, the fine is $3,000 for each affected employees. The surprise may be in the timing. The IRS will only impose that penalty if an employee receives a subsidy through an exchange, and then only after checking the employee's claims against the employer's report for the relevant year, says a lawyer familiar with the process, ensuring that there will be a lengthy lag. (If an employer with more than 50 employees does not offer insurance at all, the fine is $2,000 per employee, minus the first 30; that is also triggered by an employee approaching an exchange.)

New Taxes for All

But avoiding—or absorbing—penalties is only the first part of the ACA cost equation. Employers that offer insurance will also face taxes mandated by ACA, which hit in a variety of ways at different times.

And the payment processes themselves can create headaches. In late June, for example, Marvell's Shaw went to pay the ACA's Patient Centered Outcome Research Institute (PCORI) fee for the first time. It was not an easy task. Besides the approximately $6,000 payment to the IRS—$1 for each person covered by Marvell's self-funded health insurance—Shaw spent hours trying to get the necessary sign-offs. With many unknowns surrounding the calculation of the payment, neither the legal department nor the tax department at the $3.4 billion semiconductor company wanted to bless it, says Shaw, so she ended up consulting with an outside lawyer. “I had to run in circles,” she says, “and I think there will be more of that.”

The PCORI fee, which was designed to fund research to improve medical outcomes, starts at $1 per head for employees and dependents this year. It doubles next year, and then rises based on medical inflation rates until 2019, at which point it will be phased out. The transitional reinsurance program assessment fee, aimed at helping insurers who take on high-risk individuals, takes a sharper bite at $63 per head. That comes due in January 2015, but it ends after the 2016 plan year. In both cases, self-funded employers will pay the taxes directly, and other employers will pay them indirectly as insurers pass them on.

Insurers then face several other permanent taxes thanks to the ACA, including a broad health insurance industry tax and one to shore up the healthcare exchanges, all of which will likely boost future health insurance premiums. Perhaps the most irksome one is a new cap on the tax deductions health insurers can take for executive compensation: $500,000 per executive for all forms of compensation, including stock option exercises. That compares to a standard $1 million cap—including performance-based items such as stock options—for all other public companies. “If insurers want top talent, they'll just pay more and pass more costs along to the consumer,” predicts Gordon.

WHO OFFERS BENEFITS?

Changes in Healthcare Inflation Rates to Employers

From 2009 to 2013, the cost to employers of providing health coverage to their employees has gone up each year, but at a slowing rate. Costs have actually increased at a lower rate since the Affordable Care Act was passed in 2010, bucking conventional wisdom that health costs for employers would escalate more rapidly. They have, however, gone up more than the rate of inflation each year, continuing a long-term trend.

Sources: Towers Watson.

The ACA costs to insurers that they are likely to pass on to consumers and corporate purchasers could be significant. “I think you'll see increases greater than what people expect from insurance companies,” says Bill Chorba, CFO of innovation services provider NineSigma, echoing a commonly-held belief. That may be especially galling in light of the looming Cadillac tax. In 2018, the ACA calls for an excise tax, at 40 percent of plan value, to come down on employers who offer plans that are too rich. Currently, the threshold for triggering the tax is set at $10,200 for individuals and $27,500 for families, levels which many companies project they would hit absent radical measures.

Cost-Slimming Techniques

So, how are employers aiming to contain these costs? Many are considering offering health insurance in ways that minimize fixed costs, such as high-deductible plans with health reimbursement accounts that can be funded as needed. About 80 percent of large employers will offer an account-based plan along these lines in 2014, up from 50 percent in 2009, according to a recent survey by Towers Watson. Jeffrey Ingalls, president of The Stratford Financial Group, an insurance broker for small businesses, says they're equally popular among his clients. Even if companies commit to fund the entire deductible for all employees on an as-needed basis through an HRA, they'll often end up spending less than 50 percent of that amount thanks to healthy employees who don't need much medical care, he says.

                     ABOUT THIS SERIES

Compliance Week's exclusive four-part series on healthcare explores how corporate compliance will intersect with healthcare reform. It examines both the pragmatic and the philosophical sides of healthcare reform for businesses—both public and private—outside the healthcare sector.

Part 1: Fuzzy Math: Calculating the Compliance Costs, Oct. 1Part 2: Healthcare Reform: Prepare for a Reporting Onslaught, Oct. 8Part 3: How Healthcare Reform Is Affecting Coverage Options, Oct. 16Part 4: Meet the Enforcers of Health Reform Regulations, Oct. 22

Others are considering borrowing the defined contribution approach from the retirement savings world. The basic idea is that companies give employees a set amount of money for buying whatever insurance they want, though under the ACA it must be attached to some type of group plan to protect the employer from penalties. Until now it hasn't gained much traction because there weren't always good options for spending those dollars, notes Chris Calvert, leader of Sibson Consulting's health practice, but with some of the new private exchanges emerging, “it becomes much more palatable.”

Still another route to driving down healthcare costs is changing employee behavior. Wellness programs are the most established in this realm, and one boon of the ACA is that employers can charge employees who refuse to participate in them as much as 30 percent more for health insurance than those who do, up from 20 percent now. Already, 37 percent of employers are varying employee contribution based on such behaviors, and another 27 percent plan to this year, according to the Towers Watson survey. Offering cheaper ways to get care may also prove effective. Marvell, for example, is investing in a telemedicine service from Live Health Online that employees could use for minor health problems, rather than visiting a doctor.

Some executives, however, say they have found an easy way around the whole issue: outsourcing all benefits to a professional employer organization. “There is a higher cost to the company in paying for the PEO, but we believe this is the most effective way to avoid much of what people are worried about related to exposure to higher medical plan costs and the additional cost of making sure you are compliant,” says Babyganics CFO Mark Ellis, who recently transitioned his firm to a PEO. With costs running well below .5 percent of payroll, “when all is taken into account, we may find out that we end up saving.”