On November 4, the U.S. Department of Health and Human Services (HHS) and Department of the Treasury (including the Internal Revenue Service) (the “Departments”) released guidance advising that health plans offered by large employers that don’t provide coverage for inpatient hospital services do not provide “minimum value” under Affordable Care Act (ACA) regulations. As a result, employees who are offered these “skinny plans” will be eligible to receive premium tax credits if they elect to obtain coverage through the federal or state insurance exchanges established under the ACA. Employers who fail to offer plans with “minimum value” will be subject to a penalty of $3,000 per year for each employee who purchases coverage through an exchange and receives a federal subsidy.
The new guidance, Notice 2014-69 (“Group Health Plans that Fail to Cover In-Patient Hospitalization Services”), observes that the government’s online “minimum value calculator,” created to assist employers in structuring their insurance plan offerings, may not produce valid actuarial results for “unconventional plan designs that exclude substantial coverage for in-patient hospitalization services.” Using the calculator, a plan could omit basic benefits but still be ACA-compliant as long as it has equivalent actuarial value to the lowest-level ("bronze") plans sold on exchanges. The Departments believe that some of the results that can be produced by the calculator were not intended by the ACA regulations, and said they will propose amendments to the regulations to explicitly provide that plans that do not cover both physician services and inpatient hospital services do not provide minimum value.
The guidance stated, “A plan that fails to provide substantial coverage for these services would fail to offer fundamental benefits that are nearly universally covered, and historically have been considered integral to coverage, under typical employer-sponsored group health plans.”
The ACA requires that health plans in the individual and small-group markets cover 10 “essential health benefits,” including hospital services. Large employers (those with at least 50 full-time employees) and all self-insured employers, however, need not follow that rule so long as the plans they offer cover at least 60% of their employees’ estimated health costs. Skinny plans have been designed to satisfy the literal requirements of the ACA’s minimum value rules, but it has been generally recognized that they do not comport with the spirit of the ACA.
Most employers that have adopted or expressed interest in skinny plans have been in industries with many low-wage workers, such as restaurants and retail stores. By covering preventive services, as required by the ACA, but excluding pricier hospitalization benefits, employers could offer employees a low-cost, technically compliant plan, and thereby avoid the “play or pay” penalties that would be imposed on the employers for failure to offer affordable insurance to their employees.
Existing skinny plans that appeared to comply with the ACA based on use of the online minimum value calculator may be grandfathered if they were adopted before the guidance was issued. The guidance will be the basis of new regulations expected to be issued on or about March 1, 2015, that will apply to all plans that are adopted on or after November 4, 2014, or whose plan years begin after March 1, 2015. The new regulations, which will be effective immediately upon adoption, will also prohibit employers that offer “skinny plans” from stating or implying that their having offered the plan precludes their employees from receiving premium tax credits if they purchase coverage through an exchange.
It should be noted that even after the new regulations are adopted, skinny plans will probably not go away completely. Although they will no longer be a solution for employers seeking to avoid the $3,000 “affordability” penalty by making their employees ineligible for premium tax credits, offering a skinny plan should still allow an employer to avoid the separate penalty of $2,000 per year per full-time employee for failing to offer all full-time employees “minimum essential coverage.” Large and self-insured employers currently need not offer their employees all 10 “essential health benefits” in order for the coverage to qualify as “minimum essential coverage” (the level of coverage that an individual must maintain in order to meet the “individual mandate” under the ACA), and it appears unlikely that the new regulations will change this. And if, notwithstanding the availability of a premium tax credit, an individual employee chooses not to enroll in an insurance plan through the exchange, the employer will not be subject to the $3,000 penalty for that employee. If a skinny plan were offered alongside a low-cost “fixed indemnity” hospitalization plan, employees might be even less likely to go into the exchange in search of more comprehensive coverage.