Last week, the first of the Executive Alerts in the Special Health Care Reform Series discussed the employer mandate provisions of the Patient Protection and Affordable Care Act (PPACA) and provided a timeline for employer compliance initiatives which begin later in 2012 under PPACA. This Alert, the second in the series, examines and provides some perspective on the new health insurance exchanges mandated by PPACA.
Substantial media attention has been given to the efforts being made to establish, or resist the establishment of, the new public health insurance exchanges mandated by PPACA. However, little or no attention has been paid to examining what those new health insurance exchanges are, or how they function, or -- perhaps, as important -- whether the new health insurance exchanges will supplement or displace the agent and broker-dominated methods individuals and businesses now use when they attempt to purchase individual or group health insurance coverage.
PUBLIC HEALTH INSURANCE EXCHANGES: WHAT THEY ARE AND WHAT THEY ARE NOT
For employers that want to -- or will have to -- offer health insurance coverage to their employees, PPACA creates new marketplaces where individuals and certain employers can purchase individual or small group health insurance coverage, effective January 1, 2014. PPACA identifies two types:
- An exchange where individuals can shop for individual coverage; and
- An exchange where employers -- initially, only employers with small employee populations -- can shop for group coverage, provided that they commit to offering coverage to all their full-time employees.
For Exchange purposes, an employer with a small employee population generally is one that employs less than 101 employees. However, special rules complicate the employee-counting process, and individual states can reduce the cut-off point from 101 employees to 51 employees. The process of determining who qualifies as an employer with a small employee population is discussed below, under Size Matters.
Both exchange types fall under a broader heading: "American Health Insurance Exchanges." Individual states are left to determine whether to maintain these programs as a single Health Insurance Exchange (HIX), or operate parallel Exchanges (one for individuals, and one for certain employers.)
While the term "Exchange" conjures up the image of a physical location like the New York Stock Exchange where insurers, brokers and agents might gather to promote, and buy and sell, different types of coverage, PPACA makes clear that the new HIXs are intended to function as on-line marketplaces. (Whether an on-line system will effectively provide access for individuals who are not computer literate, or who lack computer access, remains to be seen.) However configured, the new HIXs are intended to serve as clearinghouses through which individuals, employers with small employee populations, and -- if the operator of a given HIX permits it -- beginning in 2017 employers with larger employee populations may review, compare and purchase health insurance coverage.
Operationally, each HIX will maintain an Internet website and toll-free telephone assistance hotline, to enable potential enrollees to review and compare standardized information regarding the types of coverage made available for sale through the HIX. Each HIX also will provide educational information and tools and publish standardized enrollment forms for purchasing medical coverage. The HIXs also will be responsible for determining whether an individual is eligible for taxpayer-subsidized coverage under one of PPACA's insurance affordability programs.
Most important, the HIXs are designed to make available to individual consumers and eligible employers individual and group health insurance policies (under PPACA they are referred to as "qualified health plans") which are required to provide a standardized benefits package ("essential health benefits"). Those qualified health plans are to be grouped into four broad classifications (bronze, silver, gold and platinum) based on the percentage of the covered health care expenses the plan is actuarially expected to pay according to its terms. While pricing for qualified health plans offered for purchase will vary by insurer and will be able to take into account a handful of individual characteristics such as age and tobacco usage (subject to other limitations; see the discussion of PPACA's new "community rating" rules, under Workforce Composition Also Matters ), coverage will be guaranteed and no pre-existing conditions can be imposed. Ultimately, PPACA leaves to those operating each HIX to decide which insurers' coverages will be permitted to be offered for sale by providing each HIX with oversight and certification authority. The HIXs technically are designed to supplement the channels through which individuals and employers currently purchase health insurance coverage and are not intended to replace them (at least, not as a matter of federal law; what individual states do remains to be seen). Thus, those employers not able to purchase group coverage through a HIX, and those that do not wish to do so (perhaps, because they are satisfied with their present arrangement(s)), at least nominally will be able to continue to maintain those present arrangements -- so long as the commercial marketplace continues to make them available.
Again, these new on-line marketplaces are scheduled to become available on January 1, 2014, at least for individuals and employers with small employee populations.
State or Federal Government -- Who Sponsors HIXs? According to PPACA, a HIX is intended to be structured as either a government agency or a state-established non-profit entity subject to state supervision. However, to date, only 13 states reportedly are making active progress on the establishment of HIXs. (See Review & Outlook: 'Exchange' for the Worst, The Wall Street Journal, July 31, 2012, page A12.) A state-organized HIX must be approved by the U.S. Department of Health and Human Services (HHS) by January 1, 2013, in order to be ready to offer qualified health plans effective January 1, 2014. In any state where state officials are not in a position to timely establish a HIX, HHS will establish and operate the HIX. States that wish to operate their own HIX in 2014 only have until November 16, 2012 -- slightly more than three months from now -- to apply, and HHS will make its determinations by the end of this year (December 31, 2012).
THE GENERAL IMPACT OF HIXS ON EMPLOYERS
The presence of HIXs will affect all employers, if only because they will provide all workers and would-be workers, without regard to their employment status, with access to immediate, guaranteed-issue coverage. However, the impact that the HIXs will have on any given employer will depend on the size and composition of that employer's employee population, and whether that employer has a legal obligation to offer (or continue to offer) health coverage to its full-time employees and their dependents. (The article "Employer Mandate 101: Deciding Whether to Pay or Play in 2014" which appeared in the initial edition of the Special Health Care Reform Series, broadly describes which employers are subject to this new legal obligation and the penalties that can apply under PPACA's employer mandate.)
For an employer, the size of its employee population is perhaps the most critical factor used to determine whether it will have an opportunity to purchase group health coverage on a HIX, beginning January 1, 2014. For some employers, the ability to purchase group coverage on a HIX could be very advantageous so the size of an employer's employee population can matter. As noted above, the basic cut-off point is 101 employees, but counting can be tricky.
So what constitutes an employer with a "small" employee population for purposes of shopping for coverage on a HIX, and where is the cut-off between a "small" employee population and a "large" one? Two factors come into play:
- How the "employer" is defined (special rules require separate organizations to be combined and treated as a single "employer"), and
- The actual number of employees that the (combined) employer is found to have.
PPACA generally provides that all organizations linked by a high degree of common or overlapping ownership -- even organizations that are operationally unrelated but have common owners, such as members of the same family -- are considered a single "employer" for this purpose. PPACA uses the "controlled group," "common control" and "affiliated service group" rules which are well known to any employer that has ever sponsored or maintained a tax-qualified pension or profit-sharing plan. That means there are many employer organizations which are larger than their owners and managers may think.
The rules are also confusing when it comes to counting the number of employees for this purpose. According to the statute, an employer is considered to have a small employee population if it employs an average of at least one but less than 101 employees on business days during the preceding calendar year, and employs at least one employee on the first day of the current year; however, individual states can elect to temporarily reduce this 101-employee cutoff to 51 employees for 2014 and 2015.
As for why the size of an employer's employee population can matter, that at least is a little clearer. When HIXs first become operational in 2014, only employers with small employee populations which commit to offering coverage to all their full-time employees will have the opportunity to purchase coverage for their employees either through a HIX, or through a separate, HIX-maintained program called a Small Business Health Options Program ("SHOP"). Access to coverage through a HIX or a SHOP is intended to provide those employers with the opportunity to easily purchase heavily-regulated and well-explained group coverage on a community-rated basis. Access to coverage through a HIX or SHOP may also provide those employers with more coverage choices, since HIXs (and SHOPs) are intended to provide the same bronze, silver, gold and platinum levels of coverage -- on a group basis -- that individuals are able to purchase individually. Employers with small employee populations may not have previously had such coverage choices made available to them.
In contrast, employers with large employee populations simply cannot purchase coverage on a HIX until at least 2017. PPACA currently contemplates that in 2017, each state agency will decide for itself whether to permit such "large" employers to shop for insured coverage on its HIX or under its SHOP -- although a large employer will only be permitted to shop for coverage on a HIX if it commits to offering coverage to all its full-time employees. Presumably, HHS will make a similar determination with regard to any HIX that remain subject to federal supervision.
More Devils, More Details
The rules PPACA uses to count "employees" for this purpose -- determining whether an employer can shop for coverage on a HIX or a SHOP -- are different from those used to determine whether the employer is subject to the new employer mandate (discussed in "Employer Mandate 101: Deciding Whether to Pay or Play in 2014" ). For example, the employee-counting rules used to determine whether an employer can shop on a HIX (or a SHOP) do not have a special rule for identifying and handling part-time employees; by contrast, the employee-counting rules used to determine whether an employer is subject to PPACA's new employer mandate rule have very extensive "part-time" employee rules (again, as discussed in "Employer Mandate 101"). In addition, different government agencies are involved. While the Internal Revenue Service (IRS) has indicated (in Notice 2011-36) that the IRS plans to use a "common law" standard to determine how many employees an employer has when testing for compliance with the new employer-mandate rule (which means partners, proprietors and self-employed individuals don't count), that is because the IRS is interpreting a federal tax statute (there, Section 4980H of the Internal Revenue Code). It is entirely possible that a different standard could apply for HIX and SHOP purposes, in part, because HHS and the individual states (not the IRS) will define who qualifies as an "employee" for HIX (and related) purposes, and in part because the PPACA provisions which create HIXs and SHOPs are not part of the Internal Revenue Code. (If codified anywhere, those provisions most likely will be added to the Public Health Service Act, which generally is used when federal standards are enforced against the states.)
What does this mean for employers? That there are parallel rules which are used for counting "employees." Simply stated, an employer's employee population can be one size for purposes of PPACA's new employer-mandate -- where part-time employees only count for certain purposes, partners and proprietors and other self-employed individuals don't count at all, and seasonal employees can be virtually ignored -- while that same employer's employee population will be a completely different size for purposes of determining whether that employer can participate in the new HIXs and SHOPs. In short, coping with PPACA (and the HIXs) will pose many challenges -- even for those employers which discover that they are not subject to the employer mandate. Some employers may be too small (or, have too many non-employees or part-time employees) to be subject to PPACA's new employer mandate obligation; at the same time, they may be too large to shop on its HIXs and SHOPs and will have to find group coverage -- if they can (assuming they still want to) -- through one of the "off-Exchange" distribution channels that survives all of the market turmoil. So stay tuned.
Who can purchase insurance coverage on a HIX? Beginning January 1, 2014, individuals and employers with small employee populations will be able to purchase health insurance on a Health Insurance Exchange or an affiliated SHOP Exchange.
Individuals will be permitted to purchase insurance through a HIX if they are (a) a citizen or lawful immigrant, (b) not incarcerated, and (c) living in the HIX's service area either (i) with an intent to reside within that service area, or (ii) employed or are seeking employment within that service area.
Employers with small employee populations (generally, with fewer than 101 employees) will also be able to purchase coverage for their employees. Prior to 2016, HIXs may limit access to employers with more than 50 but fewer than 101 employees. Beginning in 2017, states are allowed to choose whether to allow employers with more than 100 employees to purchase coverage through a HIX or a SHOP.
Workforce Composition Also Matters
Comparatively little media attention has been given to the new community-rating rules, but when it comes to providing individual and small group coverage -- which are what HIXs and SHOPs are designed to do -- community rating plays a potentially dominant role, depending on the demographics of an employer's work force. And PPACA requires each insurer doing business in a given state to maintain separate, common risk pools for (i) the individual market, (ii) the small employer group market, and (iii) the large employer group market. Here, again, PPACA draws the line between "small" and "large" employers in the same general way as the line gets drawn for HIX and SHOP purposes.
Within two of these three state-wide community risk pools -- the individual market and the small employer group market -- insurers are only able to take into account four ratings factors: (1) whether the coverage is individual coverage or family coverage, (2) the covered individual's age, but subject to a maximum disparity of 3-to-1 (and in accordance with yet-to-be-announced age bands/brackets), (3) tobacco use, but subject to a maximum disparity of 1.5-to-1, and (4) the "rating area" involved. (PPACA essentially requires states to establish geographic regions within their borders, called "rating areas," to recognize cost and treatment disparities that exist within the state.)
What do these new community-rating rules mean to employers? That the old insurer practice of rating individuals and small employer groups for underwriting purposes is a thing of the past, and in any event will not be present -- or permitted -- in any group coverage made available for purchase on a HIX or a SHOP (at least, not when it comes to the individual and small employer group markets). Notably, PPACA's new community-rating rules won't apply to the "large" employer group market, which could be hugely important to both insurers and employers considered to have larger employee populations -- depending on where the states decide to draw the small employer/large employer line, and depending on who qualifies as an "employee."
And for those small(er) employers subject to the new community-rating rules, what will this mean? That demographics also play a huge role in whether PPACA -- and the new HIXs and SHOPs -- constitute good news, or bad news. For a long-established employer with 25 employees in their 50s and 60s, the new HIXs and SHOPs may well be viewed as a Godsend; for a start-up employer with 25 employees in their 20s and early 30s, though, the new HIXs and SHOPs may well be viewed as a colossal waste of time and effort -- or worse, as a reason for discontinuing coverage. Indeed, a start-up employer with comparatively young and healthy employees may have an incentive to actually add employees -- at least enough to enable the employer to no longer be considered a "small" employer that can only buy community-rated insured coverage, since a "large" employer will at least be able to still to get credit from an insurer for having favorable demographics.
And Then, There's Employee "Choice"
Regardless whether an employer is -- or isn't -- too big to purchase group health insurance coverage on a HIX or a SHOP, all employers need to be mindful of the fact that their employees (and, their employees' dependents) will be eligible to shop for individual coverage on the HIX, starting January 1, 2014. For all employers, this is an entirely new concept. Soon, all of their employees (and their dependents) will have a choice of coverage: what the employer is offering, and what the new HIX might be offering.
For those employees now required to pay for part (and in some instances, most) of the cost of their employer-provided coverage, the presence of this new choice will require employers to be as accurate as possible when describing any coverage that is contributory. (To do otherwise could expose the employer to some form of tort or fiduciary liability.) And as noted in the timeline that appeared in last week's Special Health Care Reform Series, in the first calendar quarter of 2013 all employers will have to provide written notice to all their employees, to ensure they know about and understand the basic functions of the HIX. These new notices are to be issued within the next seven months -- by March 1, 2013.
The presence of this new choice will mean different things to different employees -- and the impact of that new choice on a given employer will depend on the coverage the employer decides to offer, what the employer decides to charge for that coverage and the demographics (household income, health, age, etc.) of the employees and dependents to whom that coverage offer is to be made.
For example, if an employer has a significant number of younger, healthier employees, and they opt to purchase individual coverage through a HIX, rather than from the employer (whether because of the cost the employer is charging, or because the employment-based coverage is seen as less attractive than what is available on the HIX), that activity could adversely affect the employer's plan's claims experience. In addition, if the employer's coverage offer fails to meet PPACA's new affordability, minimum value and essential health benefits standards (again, covered in last week's Health Care Reform Series, in the "Employer Mandate 101" article), the employer could be assessed a $3,000 per year penalty for each full-time employee who is able to purchase taxpayer-subsidized coverage through a HIX.
MANY UNANSWERED QUESTIONS
Not surprising, and as noted earlier, numerous questions remain with regard to health care reform. And as the above discussion makes apparent, the rules which provide for the creation and operation of the new HIXs are a key source of such questions. Many of them cannot be answered at the present time. Nonetheless, employers would do well to compile and keep a list of questions they may have regarding the new HIXs, and the impact that HIXs will have on them and their employees, to avoid being caught out of position when the Exchanges begin to enroll individuals (and some employers) little more than a year from now.
For those employers that do decide to compile such a list, at least the following four questions should be put on it:
- What impact might the presence of the HIXs have on the ability of individuals and employers to purchase health insurance outside of the Exchanges?
One of the supposed hallmarks of PPACA is the voluntary nature of the HIXs. PPACA does not prohibit individuals, or employers, from purchasing health care insurance directly or through some other arrangement, without going through a HIX. What cannot be doubted is that the presence of HIX will almost certainly force changes in the broader health insurance marketplace and cause some presently-available sources of coverage to be abandoned or discontinued. Inded, the Congressional Budget Office has estimated that by 2019, approximately 29 million people will either obtain their health care coverage directly from a HIX or through an employer-sponsored plan which has purchased group coverage through a SHOP or a HIX. Only time and market forces will tell whether there will come a point when other distribution channels, such as group coverage available through trade associations and local chambers of commerce, or an amalgamation of school districts, are no longer viable (or, considered viable).
- How will HIXs address multi-state and overlapping service area issues? How will SHOPs respond to employers with employees in multiple locations?
Employers operating in certain areas (e.g., New York City, the District of Columbia, Chicago, Cincinnati-Northern Kentucky, etc.) invariably have employees (and dependents) who reside in different states. How will state-based HIXs take such cross-border communities into account when determining their service area? And where an individual is eligible to purchase coverage from more than a single HIX, will it change an employer's obligation to explain HIXs generally? And what about employers with multiple offices or facilities, scattered throughout a multi-state region? While the HIX rules address at least some of these issues, such as permitting the creation of regional and interstate HIXs, and even "subsidiary" HIXs to serve geographically distinct areas, cross-border HIXs clearly require cross-border political cooperation in an era where political cooperation is hard to come by.
- For those states that elect not to provide expanded Medicaid coverage, how will HIXs handle those individuals who otherwise were thought to become covered by Medicaid?
By now, it is well known that while the U.S. Supreme Court generally upheld PPACA's constitutionality, the court invalidated the PPACA provision that would have required all states to expand current Medicaid coverage eligibility to all individuals under age 65 with incomes below 133% of the Federal poverty level (FPL). Because of this unexpected decision, PPACA fails to make clear whether those poverty-level individuals are eligible to purchase taxpayer-subsidized, individual coverage on the new HIXs. The relevant PPACA statute strongly indicates that those with household incomes between 100% and 133% of the FPL can do so. It is far from clear whether the same opportunity exists for those with household incomes below 100% of the FPL. Again, stay tuned.
- Will taxpayer-subsidized coverage be able to be purchased through a federally-established HIX?
As noted in an article that appeared in the firm's January 5, 2012 Health Law Update, a new, politically-charged legal controversy has arisen in the wake of the Supreme Court's decision to uphold most of PPACA: whether individuals who purchase coverage through a HIX that the federal government establishes (i.e., because a state has failed or refused to do so) can still qualify for taxpayer-subsidized coverage. Read literally, the relevant statute provides taxpayer-subsidized coverage only when an individual becomes "enrolled in [a qualified health plan] through an Exchange established by the State." While recently-published Treasury regulations gloss over this apparent gap in the statutory language, it is not clear whether the Treasury Department has the authority to construe the taxpayer-subsidized coverage this broadly. Because the presence -- or the absence -- of taxpayer-subsidized coverage is what triggers the $2,000/$3,000 employer penalties that PPACA prescribes for applicable large employers that do not comply in full with the new employer mandate rules, this controversy is unlikely to simply go away. Because the stakes are potentially huge, its outcome is incapable of being accurately predicted.
The new HIXs set to become effective in 2014 have the potential to transform the way all employers think, and act, when deciding whether to offer health care insurance coverage to their employees and their employees' dependents, and if so, what type of coverage(s) they will offer and what terms and conditions they will impose. Even for those employers not initially able to shop for group coverage on the new HIXs (or through the new SHOP program), the effect that the new HIX will have on everyone's employees, and on the health insurance markets generally, demand close attention and careful study.
Summer associate, Andrew Doggett, helped with this Executive Alert.