The past few weeks have been a wild ride in the U.S. health insurance marketplace, with new regulations, executive orders, and administrative pronouncements coming at a furious pace. In effect, in lieu of passing health care legislation, the Trump Administration seems to be doing everything possible to unravel the Affordable Care Act and, for the time being, is assuming that a legislative replacement may emerge at some point in the future.
We’ll focus on the two recent actions that are most likely to affect employers: the executive order issued on October 13 to facilitate the use of coverages outside of the ACA exchanges and the decision to cease cost-sharing reduction payments to insurance carriers announced on October 12.
October 13 Executive Order
This Executive Order (“EO”) order has three parts. Specifically, the EO directs the Departments of Treasury, Labor and Health and Human Services to consider:
- Expanding access to association health plans (“AHPs”);
- Expanding coverage through the use of short-term limited duration insurance (“STLDI”); and
- Changes to the rules governing health reimbursement arrangements (“HRAs”) so “employers can make better use of them for their employees.”
Association Health Plans:
Expanding the use of AHPs could potentially allow unrelated employers to join an entity formed solely for the purpose of offering group coverage to employees. Of the three directives in the EO, the AHP directive would take the longest time to generate any changes—but the changes created by this directive could be the most far-reaching for employers.
The AHP directive would, in effect, require government agencies to reinterpret the definition of “employer” under ERISA. Under current law, the term “employer” includes “any person acting directly as an employer or indirectly in the interests of an employer in relation to an employee benefit plan; . . . includ[ing] a group or association of employers acting for an employer in such a capacity.” The courts, the legislative history of ERISA and the Department of Labor have, over the years, concluded that plans marketed to unrelated employers are not “employer” plans under ERISA. So, anybody challenging new initiatives on AHPs would have plenty of legal ammunition and, in light of the precedent established since ERISA, courts would not be as likely to show deference to any new interpretations of the law.
However, if this directive is ultimately implemented unrelated employers with some connection (based on factors such as geography or industry) could form a large group and create a self-insured plan. Such plans would not be subject to many of the benefit mandates imposed on an individual or small group coverages under ACA (such as the requirements that plans cover essential health benefits and the prohibition on charging higher premiums to people with pre-existing conditions) or state oversight in areas such as licensing, financing and consumer protections. This lightened regulatory burden (along with the ability to selectively recruit employers) would enable AHPs to offer attractive “teaser” premiums and could draw small employers (especially those with lower anticipated costs) away from the insurance markets.
These lower premiums come at a cost. In the past AHPs have been linked to questionable business practices and an increase in AHPs could create the risk that AHP-related scams would grow. Additionally, under AHPs employers share the claims experience of the other employers in the same AHP. Legal issues aside, the risk of sharing catastrophic claims with an unrelated employer would cause employers to be wary of AHPs. The AHP initiative may be slow to take hold but, if it does, it could change the health insurance markets.
Short-Term Limited Duration Insurance
Short-term limited duration insurance (“STLDI”) is not subject to ACA rules regarding minimum, essential benefits that must (otherwise) be provided under regular health insurance. So, STLDI carriers can deny coverage for preexisting conditions, can deny renewals because of health claims, and place significant limitations on the benefits covered.
Any expansion of STLDI could occur more quickly than AHP expansion – the rules to facilitate the expansion of STLDI are more squarely within the authority of regulators. Under current regulations, STLDI coverage cannot be for a period longer than 3 months (including extensions). Regulatory guidance could ease restrictions on the duration and use of STLDI. Additionally, regulators could try to stretch the law to allow individuals to use STLDI to meet the individual mandate.
The STLDI component of the executive order will have the smallest direct impact on employers but could have the greatest overall impact on health insurance markets. STLDI is very profitable for carriers – according to data from the National Association of Insurance Commissioners, the average medical loss ratio (MLR) for STLDI coverage in 2016 was 67.4 percent, and the largest insurer had an MLR of only 47.5 percent. So, we can expect heavy marketing geared toward the most attractive (underwriting) risks.
Drawing these individuals away from the individual insurance markets will cause costs in those individual and employer markets to increase. The only question is how much?
HRAs are employer-funded vehicles for covering employees’ health care costs including out of pocket expenses and premiums. In the current environment, it is not clear that employers will look to put additional money into these vehicles or as individual markets deteriorate, the attractiveness of using an HRA to purchase individual coverage may diminish.
Of the three parts in the executive order, the HRA directive may be the least significant in the near term. There are, however, several places where changes to HRA rules may have an impact:
- Under the current regulatory guidance, employer HRA contributions can be used to determine if employers’ plans meet the ACA affordability standards in only limited situations (if the HRA cannot be used for out-of-pocket costs). This rule could be relaxed by administrative action and employers could use HRAs, including existing HRA plans, to more easily meet the ACA’s affordability standards.
- Under current rules, employers are (effectively) preventing from using HRAs to pay for employees’ individual coverage. This rule could be changed administratively and employers could use HRAs to incent employees to purchase individual coverage. However, due to the elimination of the ACA cost-sharing reductions, expected premium hikes will cause the individual markets to look increasingly inhospitable.
ACA imposes very few limits on HRAs, so it is not clear that regulatory actions to expand them will have as much impact on the markets as the other portions of this EO.
The other major Administration action is the cessation of cost-sharing reduction payments to insurance companies. Under the ACA insurance companies are required to reduce cost-sharing for individuals with income under 250 percent of the federal poverty level ($60,000 for a family of 4) who purchase Silver level coverage. These cost-sharing reductions accompany the tax credits for insurance premiums provided by the federal government to these individuals.
The problem is that, while carriers are legally required to continue providing cost-sharing reductions to these individuals, the federal government will now stop reimbursing carriers for the cost of these reductions.
It is widely expected that the termination of these payments from the federal government to carriers will have two consequences. First, carriers will charge higher premiums to offset the loss of these federal payments – the Congressional Budget Office has estimated that elimination of the CSRs will cause premiums for Silver plans to increase by an average of 20 percent. Second, this could lead to more carriers withdrawing from exchanges, although the CBO estimates that this effect would be more modest (projecting that, in the short term, 5 percent of people would live in areas without a carrier as a result of this action).
The bottom line is that the elimination of the CSRs will create some disruption in the individual markets. However, the full extent of that disruption – and the consequences for employers – are more difficult to predict.
The Big Picture
These latest Administration actions will take some time to have an effect and so, in the meantime, the impact on employers will be more indirect:
- The Administration’s actions will not do anything to change the portions of the ACA that create the greatest burdens on employers (such as the employer mandate and the Cadillac tax on higher cost health plans). Also, ACA reporting requirements remain in place. These provisions are in the law until Congress can reach agreement on a replacement for ACA and although the Administration can issue regulatory guidance to soften some of the harsher edges of these provisions, they cannot be eliminated through administrative action.
- As individual coverage becomes harder to purchase – or is replaced by STLDI or AHPs, individuals with coverage gaps may be more likely to defer or forego medical treatment. Employers can, therefore, expect that new hires may start employment with untreated or undertreated medical conditions. And, guess what—once hired, these conditions are part of employers’ healthcare costs.
- The percentage of (nonelderly) Americans not covered by health insurance has under the ACA from 16 percent to 10%. The benefits of this expansion of coverage ripples through the entire U.S. healthcare system. For example, in the past few years, hospitals’ uncompensated care costs have dropped from 6 percent of total expenses to 4 percent. If the political stalemate begins to impact the number of uninsured, these costs could transfer back into the private system and (ultimately) into employer costs.
The Administration’s latest actions will cause disruption and uncertainty in the markets. During this period of uncertainty, it is increasingly