In an earlier post, we started to look ahead and consider who will pay for coverage in 2014 – a combination of employers, individuals and the government. We explained that employers may want to consider how the individual mandate may affect their employee population. This post suggests that employers should also consider how government subsidies may affect their employee population.
In order for employers to set a long-term health strategy, they need to understand the potential government subsidies for health coverage. The government subsidies are key to understanding both the individual and employer mandates of health care reform. (We’ll discuss the employer mandates in detail in a later post.)
Government involvement in health care beginning in 2014 will include new state health insurance “Exchanges,” and will also include individual financial subsidies designed to help pay for coverage in the exchanges through premium tax credits and reduced cost-sharing.
Both of these government subsidies are limited to individuals with a household income of less than 400% of the federal poverty level, ($89,400 for a family of four in 2011). Additionally, individuals with a household income of less than 133% of the federal poverty level, or $29,725, are likely eligible for Medicaid or other state-based medical coverage.
Premium Tax Credit
Assuming the income threshold is met, individuals may receive a premium tax credit if they are either ineligible for minimum essential coverage or eligible for employer coverage that is either unaffordable or low-value. (See new Code Section 36B.)
Employer coverage is unaffordable if the employee’s premium for the least expensive self-only coverage is more than 9.5% of the household income. For a household income of $30,000, this means that if the premium is more than $2,850, the coverage is considered unaffordable.
Low Value Coverage
Even if the employer coverage is affordable, an individual may receive a premium tax credit if the coverage is considered low-value coverage. Coverage has a low value if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of such costs. Guidance is needed on how to measure the plan’s total allowed costs and the plan’s share. One possible way to measure a plan’s value is with respect to total claims paid. For example, if a plan’s average total claims are $1 million and if the employer paid less than $600,000 for those claims, the coverage would be considered low value. In this case, assuming the employee meets the income threshold, the employee would be eligible for a premium tax credit, regardless of the amount of the premium. In the most basic sense, the premium tax credit would kick in any time the employees are paying more than 40% of the total costs of coverage.
The premium tax credit provides a government subsidy on the front-end for premium payments. There is also a government subsidy for the ongoing payments for health care in the form of reduced cost-sharing.
Assuming the income threshold is met, individuals may be eligible for reduced cost-sharing if they are enrolled in the Exchange’s “silver” plan. While we don’t know what the Exchange plans will cost or specifically cover, we know that there will be four plan options: platinum, gold, silver and bronze. For those employees who choose the silver plan, cost-sharing subsidies may be available.
The cost-sharing subsidy will reduce the maximum out-of-pocket expenses for an individual and may also limit the amount of total costs that the employee pays based on actuarial value. The cost-sharing subsidy is limited to months that a premium tax credit is available. In other words, reduced cost-sharing is only available when the individual is either ineligible for minimum essential coverage or eligible for “unaffordable or low value” employer coverage. (See PPACA Section 1402.)
In closing, if an employer offers affordable, valuable coverage, then its employees will not be eligible for government subsidies. If the employer does not offer coverage or offers either unaffordable or low-value coverage, the employee population may be eligible for government subsidies. This will cause the employer to pay penalties under health care reform.
We will discuss the penalties, the related employer mandates and vouchers in future posts.