01.10.10

Why Employers are Unlikely to Use the Exchanges to Purchase Insurance for their Employees

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Under both the House and Senate bills, employers are permitted to purchase health insurance for their employees through the exchange. The exchange has been seen as having real potential for helping small employers. The CBO estimated that 9 million employees of small employers would get coverage through the exchange under the House bill and five million under the Senate bill. Although the bills set out in some detail the size of the employers that may participate in the exchange, they are much less clear as to how exactly employer participation would work. This post is an attempt to sort out this mystery (or perhaps to make it more mysterious).

First, the House bill. Under section 411 of the House bill, an employer must offer a qualified health benefits plan to its employees or pay a penalty. Under section 412(a)(2), an exchange-eligible employer can provide health insurance through the exchange. If the employer purchases through the exchange, the employer must, under section 412(b), pay at least 72.5% of the cost of the average of the premiums of the three lowest cost basic plans in the rating area. For individual coverage or 65% for family coverage. Employers whose payrolls are lower than $500,000 a year are not penalized for failure to comply with the mandate, and thus are presumably free to contribute anything they want to if their employees purchase insurance through the exchange.

Under section 302(c)(6), an employer can meet the requirements of section 412 by contributing to the cost of its employees enrolling in an insurance plan through the exchange. The employee can choose any plan within the exchange, but the employer need not pay more because the employee chooses a more expensive plan. Under section 305(b)(4), premiums are paid directly to insurers rather than through the exchange. This provision was necessitated by the CBO’s issue brief of May 27, 2009, on The Budgetary Treatment of Proposals to Change the Nation’s Health Insurance System which concluded that premiums paid through a national exchange would be considered revenues of the federal government.

Individuals who purchase insurance through an exchange will pay a premium for the plan they choose based on the actuarial value of the plan (basic, enhanced, premium, and premium plus) and on the permissible rating factors recognized by the bill (an up to 2:1 age ratio, geographic variance, and family composition). If an employer has 20 employees, therefore, it may pay a different premium for each based on the employee’s age, family composition, and plan chosen. The employer under the statute, of course, only has to pay 65% of the reference premium cost for family coverage and 72.5% for individual coverage for each employee, but the cost of the family and individual coverage will vary based on age, so the amount the employer will have to pay will vary. Moreover, even if the employer is small enough that the contribution requirements don’t apply, under the Age Discrimination in Employment Act, the employer cannot require an employee to pay a higher percentage of the premium of employment-related coverage based on age alone (29 C.F.R. 1625.10(d)(4)(ii)). This means again that if an employer voluntarily contributes toward the purchase of insurance by employees through the exchange, the employer’s cost per employee will vary, even though the percentage of the premium the employer pays will stay the same. Employers will also need to pay the premium separately to each insurer that insures one of their employees through the exchange.

Under the Senate bill, the role of the employer in purchasing through the exchange is muddier. Section 1311 of the Senate bill requests the states to establish individual exchanges and a Small Business Health Options Program (SHOP) exchange program for employees of small businesses to purchase insurance. States may combine both exchanges if they choose to do so.

The SHOP exchange is not described in the legislation. It is possible that it could be intended to be an exchange in which small businesses purchase group plans for their employees. This would seem to be consistent with section 1312(f)(2), which defines a qualified employer as an employer “that elects to make all full time employees of such employer eligible for 1 or more qualified health plans offered in the small group market through an Exchange.” Moreover, section 1312(c) provides that insurers shall treat all of their nongrandfathered, nongroup enrollees (in and outside of the exchange) as being in a single risk pool, and that small group insurers shall treat all of their nongrandfathered small group enrollees, in and outside of the exchange, as being in a single risk pool, and that a state may combine the risk pools, suggesting that perhaps a separate exchange will exist to sell small group rather than individual coverage. .

Elsewhere, however, the bill seems to contemplate an arrangement like the House exchange, under which small employers contribute to the premiums used by their employees to purchase insurance as individuals. Under section 1312(a)(2)(A), Am “qualified employer may provide support for coverage of employees under a qualified health plan by selecting any level of coverage 1302(d) [bronze, silver, gold, or platinum] to be made available to employees through an Exchange.” The subsection goes on to provide that an employee of such an employer may choose any plan within that level of coverage.

Section 1312(b) provides that individuals “may” pay their premium directly to the insurer. It is not clear whether an individual may instead pay the premium to the exchange, or whether if an employer pays part of the premium, it pays the part of the premium to the exchange or the insurer. Because the exchanges are run by the states under the Senate bill, it is also not clear whether the CBO would consider premiums paid to the exchange as being federal revenues, but the CBO memorandum provides that if states are acting as agents of the federal government in operating the exchanges, premiums paid to them may be federal revenues, so there is a considerable risk that the CBO would consider the premiums federal revenues.

Under the Senate bill health status underwriting is prohibited, but in the nongroup and small group market age rating is permitted at a 3 to 1 ratio, rating based on tobacco use is permitted up to 1.5 to 1 ratios, and “wellness” rewards are permitted that could reduce premiums by up to 30%, and, if the Secretary permits, up to 50%. Premiums for individuals who purchase through the exchange will, therefore, vary even more than in the House bill.

There is no employer mandate as such under the Senate bill. Employers can be penalized if their employees receive premium or cost-sharing subsidies, however. Employees offered health benefits by their employers can obtain subsidies if they are required by their employer to pay more than 9.8% of the taxpayer’s household income. To avoid a penalty, therefore, employers who cover their employees through an exchange, would have to pay at least the cost of each individual’s policy in excess of 9.8% of the taxpayer’s household income, which would inescapably vary from individual to individual. Again, moreover, the ADEA requires employers to pay at least the same proportion of the premium of every employee regardless of age, and the variance in the amount employers will pay for each employee will be greater under the Senate bill than under the House bill because it allows greater premium variation based on age.

One final issue is the application of the “Cadillac tax” under section 9001 the Senate bill. The 40% tax applies to individual employees who receive “excess benefits” from employer-sponsored coverage. The tax applies to both the employer and employee share of the premium. If an individual employee purchases health insurance through an exchange with the employer paying part of the premium, and the premium exceeds the premium levels permitted under the excise tax provision, the insurer would be liable for 40% of the excess premium. It is thus very possible that some employees of an employer who purchase a policy through an exchange (older smokers, for example) may end up with taxed benefits, while younger employees would not. How this would affect premiums or employer contributions for these employees, I will not hazard a guess.

All of this means, however, that employers may well simply ignore the exchanges, and hope that with the other reforms they will get a better deal than they do now in the small group market. Working through the exchanges will just be too complicated and create too much friction with employees. The employer,s life could be simplified if the statute simply allowed an employer to make a uniform per-employee contribution (and if the ADEA were amended to make this possible), but this would mean that individual employees of the same employer would still face radically different premiums based simply on their age and other personal characteristics, which would still be likely to lead to employee dissatisfaction. If the CBO were willing to back off of its judgment that channeling premiums through the exchange creates federal revenues and expenditures, or if Congress were willing to bite the bullet on this one and simply call this an increased cost of the reform, the exchange could aggregate premiums of employees and offer employers a composite rate and employees of an employer a uniform premium or uniform percentage or premium cost (at least per level of actuarial value), which would be much simpler. If this does not happen, it seems unlikely that employers will find the exchange an attractive alternative.

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The views reflected in this blog are those of the individual authors and do not necessarily represent those of the O’Neill Institute for National and Global Health Law or Georgetown University. This blog is solely informational in nature, and not intended as a substitute for competent legal advice from a licensed and retained attorney in your state or country.

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