California Health Insurance Information and News

The Affordable Care Act (ACA) will change the rules for purchasing individual and small group health insurance. While many of the rules have not been finalized, a savvy business owner (or one with a knowledgeable agent/broker – like BenefitsCafe.com) will have new opportunities to lower the cost of care for employees.

Specifically, the ACA will allow business owners who purchase health insurance for their employees to engage in a type of “arbitrage.”  Wikipedia defines arbitrage as “the practice of taking advantage of a price difference between two or more markets.”

Health insurance plans with identical benefits, offered without regard to health status (i.e., no medical underwriting – the insurance companies must accept everyone) – will be available in both the small group market and the individual/family market.

Accordingly, in 2014, when the new market rules take effect, a business owner may be able to choose between the small group and individual market when purchasing coverage for employees.

The insurance companies will price the policies in each market based on separate populations with separate levels of usage.  Stated another way – small group rates will be based on the number of healthy and sick people in the “pool” of employer groups.  Individual and family rates will be based on the claims experience of individuals and families in a separate pool.

By law, the plans offered in both pools must include “essential benefits” (i.e., coverage for in and out of hospital care, prescription medicine, maternity coverage, etc.)  Same product in two separate markets offered at different prices.  A small business owner’s arbitrage opportunity would be to purchase health insurance for employees in the market with the lowest price.

So, how will an employer (or more likely his/her agent/broker) take advantage of this opportunity?

Step 1: Quote the employees and dependents of a small group in the small group market.

Step 2: Quote the employees and dependents in the individual market and organize the data to allow comparison with the small group quote.

Step 3: Determine if there is a significant price savings from converting from small group to individual plans.

Step 4: If the answer to step 3 is “Yes” then estimate the transactional costs of converting a small group to individual plans.

The “transaction costs” of enrolling the employees of a small business (2-50 employees) into individual plans would be the method of consolidating all of the individual policies into one bill which the employer can pay jointly with employees in a tax-favored way. In some cases this might involve the services of a Third Party Administrator (TPA) (see below.)

Insurance companies have not offered guidance on whether they would allow a group to offer employees individual plans. Business owners will need to ensure that the individual policy payment is set up so that it qualifies as a deductible business expense with the IRS.  We at BenefitsCafe.com do not give legal or tax advice and business owners should consult an accountant and/or attorney for tax advice.

Employers must make sure that the method they adopt: 1) is acceptable to the insurance company that offers coverage; and 2) complies with the IRS guidelines for the deductibility of health insurance premium.

I do not know if the IRS allows employers to deduct the premium of individual health insurance plans as a business expense. This is allowed on group health plan.  IRS 15-S “Employer’s Tax Guide to Fringe Benefits” provides some guidance for employers.

List Bill: One method to administer individual policies for a small business would be for an insurance company to “list bill” the employer for individual plans. In this arrangement an insurance company sends one bill to the employer.  That bill lists all of the individual policies held by the company’s employees. Employers would pay their portion of the premium and deduct the employee’s contribution from employee’s paychecks. The employer would remit one company check to the insurance company. Theoretically, employees could use pre-tax dollars under Section 125 to pay their individual premium.  This is a hypothetical situation and not intended as tax advice or guidance. Ask your accountant if this sort of arrangement would enable both the employer and employee to deduct the health insurance premium as a business expense.

Subsidies: Low wage employees who purchase individual medical insurance in “Covered California” (California’s Health Benefit Exchange) may qualify for tax subsidies that will lower the cost of their health insurance plan.  I do not know if the IRS or Covered California will allow an employer to pay a portion of an individual’s health insurance premium if that same person also obtains a tax subsidy for his/her coverage.  If employers are able to pay a portion of the health insurance premium along with a government tax subsidy; it would encourage many small businesses to sponsor medical insurance plans for their employees.  Policy makers should fully explore this option.

Health Reimbursement Arrangement (HRA) – Section 105 Plan: Another method for employers to use individual plans for group coverage may be through a Section 105, Health Reimbursement Arrangement.  Here a Third Party Administrator (TPA) receives payments from an employer and reimburses employees for qualified medical expenses.  Medical insurance premium is a qualified medical expense. This sort of arrangement has added costs (for the TPA) but it may be the only way an employer can truly offer benefits to employees using individual plans and receive full tax benefits.  Again, we at BenefitsCafe.com are neither accountants nor attorneys and do not offer legal or tax advice.

The ACA will change most of the rules that regulate small group and individual health insurance in California. With change comes opportunity. Arbitrage between the small group and individual market may be an opportunity for small business owners.

California state insurance regulators and the officials of Covered California, the new health benefit “exchange” created by the Affordable Care Act (ACA), must make some very difficult decisions about a seemingly minor aspect of small group health insurance: Employee Participation and Employer Contribution Rules

Currently, a small business must have a minimum of 75 percent of the eligible employees enrolled in a group health plan (i.e., “EE Participation”) AND the employer must pay at least 50 percent of the employee only premium (i.e., “ER Contribution”).  There are some slight variations to these two rules but generally all small businesses must comply with these two requirements.

The BIG, hugely impactful decision Covered California, DOI and DMHC must make is: must an insurance company consider an employee enrolled in an individual health insurance plan (either in the exchange or outside of the exchange) to have a valid “waiver” of the group plan; or, should the insurance company consider the individual coverage as a “declination” of group coverage.  Employees who “waive” coverage do not count against the “participation” requirement. Employees who “decline” coverage DO count against the participation requirement. This could make or break small group health insurance.  Let me explain.

Currently, if an employee has coverage through a spouse’s group health plan – say an employee’s husband works at the telephone company and the small group employee is covered as a dependent on the telephone company’s plan, then the small group employee can “waive” coverage.  Coverage with Medicare and or Medi-Cal is also a valid waiver.

Conversely, insurance companies consider an employee who has an individual medical insurance plan and chooses to keep the individual plan – rather than enrolling in the company’s group health plan – to be a “declination” of coverage. The semantical difference is critically important for a small business that wants to establish a group health plan.

Consider the hypothetical example of a small business with 10 employees (EEs.) If 2 EEs are covered as a dependent by a spouse (or parent if under age 27) then these would be valid waivers and we would need 75 percent (6 EEs) of the 8 remaining employees to enroll in the plan to meet the participation requirements.  If that same company also had 3 EEs who purchase individual coverage and declined the group plan, then the group would only have 5 out of 8 eligible employees enrolling, or 62.5% (5 divided by 8.)  The group would not meet the minimum participation requirements (75%) and could not offer group coverage.

Why this is a critical question: Beginning in 2014, individuals whose household income is between 133 – 400 percent of the Federal Poverty Level (roughly $15,400 and $46,000 per year for a single person)  will be eligible for a tax subsidy for their health insurance when they purchase coverage through the Exchange (Covered California.)  Low-wage employees who qualify for a subsidy have a financial incentive to purchase an individual policy through the exchange because the cost of their medical insurance will be lower than the full cost of the plan.

A small group employer with low wage employees would want employees to obtain coverage in the exchange because that would reduce the amount the small group employer would have to pay for his/her employee’s benefits .  If individual coverage is a valid waiver, EE’s enrolling in the Exchange and receiving a subsidy would not adversely impact a small group’s ability to obtain a group health plan.

Conversely, if insurance companies consider individual coverage (through the Exchange or outside of the Exchange) as a declination of group coverage (as they currently do); then low-wage EEs would have to forego the tax subsidies and receive their coverage through their employer’s group plan.

Many employers may want their employees to purchase an individual plan – especially if the employee could obtain a subsidy through the exchange – because it would save the employer the cost and the head-ache of offering a group plan.  If individual coverage is a valid waiver, then small group plans in 2014 may only cover direct family members. Employees would have individual coverage for which they may receive a subsidy from the government or, their employers may even pay a portion of the cost (premium) of the individual plan.

Let’s hope that the regulators at the California Department of Insurance and the Department of Managed Health Care and the decision makers at Covered California give a lot of thought to this issue. It could make or break the small group market.

Covered California, the new name for the California Health Benefit Exchange, has just released a report on its activities. Addressed to the Governor and Legislature, the report describes the reasons for creating the exchange and the progress in that effort.

The report states that the high cost of medical insurance is the most commonly reported reason for lack of coverage and this trend is continuing. “Between 1999 and 2011, average annual premiums for single and family coverage increased approximately 250 percent,” the report said (p.5).

Further, the high cost of coverage has led to reduced benefits. “From 2006 to 2011, there was more than a four-fold increase in the proportion of insured workers in small employer firms with deductibles of $2,000 or more, from six percent up to 28 percent,” according to the report (p.5).

Cost of Coverage: Covered California intends to address the problem of high-cost health insurance.  ”Lower income individuals and families will be able either to enroll in public programs like Medi‑Cal or access subsidies to offset the cost of premiums…Small business owners will find coverage options for employees that did not exist before, and in some cases, those businesses will qualify for tax credits that will help make it easier to provide insurance to their employees,” the report says (p.8).

Standardized Benefits: Covered California will also standardize the health plans available to include “essential benefits.”  “California… designates the Kaiser Foundation Health Plan Small Group HMO 30 plan, as it was offered during the first quarter of 2012, as the state’s benchmark plan for essential health benefits,” according to the report (p.13.)

“Every insurance policy offered inside and outside the Covered California marketplace will be given a “metal rating” — platinum, gold, silver or bronze — based on “actuarial value” calculations. This rating indicates the share of costs paid by the plan for health benefits and the share paid by the consumer. For example, a consumer with a bronze-level plan would pay on average 40 percent of the cost of healthcare expenses through features like deductibles and coinsurance, while a consumer with a higher-premium platinum plan would pay only 10 percent,” (p.14).

Enrollment Targets: Covered California will create an online enrollment process which they hope will make selecting and enrolling in a health insurance plan as easy as purchasing a ticket on Expedia or buying a book on Amazon.

“The California Healthcare Eligibility, Enrollment and Retention System (CalHEERS) aims to make the process of finding what is affordable and shopping for insurance easy… Accenture was hired for the design, development and deployment of CalHEERS. The contract includes approximately $183 million for the initial development and implementation of the system… After the CalHEERS system becomes operational, the contract provides $176 million for continued development and operating costs over a period of approximately three and a half years,” the report says (p.23).  Adding up the numbers, the Covered California web site will cost $359 million for 3 1/2 years.

According to the report, Covered California hopes to enroll a few million people through this effort.  ““The specific enrollment targets for the marketing, outreach and education effort are as follows:

• By 2015, 1.4 million Californians enrolled in subsidized coverage in Covered California or eligible to purchase in the individual market without subsidies;

• By 2016, 1.9 million Californians enrolled in subsidized coverage in Covered California or eligible to purchase in the individual market without subsidies; and

• By 2017, 2. 3 million Californian’s enrolled in subsidized coverage in Covered California or eligible to purchase in the individual market without subsidies.” (p.33)

Funding: “Covered California has received $236.5 million in federal planning grants from the Department of Health and Human Services … In November 2012, Covered California submitted a … request to the federal government for $706 million to provide funding for 2013 and 2014,” (pps.41 & 42) Stated another way, Covered California will have spent $942.5 million to meet its target enrollment of 1.4 million people by January 1, 2015 at an average cost of $673/per enrollee. Keep in mind that this cost does not include the Federal Tax Subsidies that will reduce the actual cost of care. This only covers the administrative cost of the Exchange.

Self-Sufficent by 2015: According to the report “From 2015 Covered California must be wholly self-sufficient with funding derived from participation fees on health plans in the Covered California marketplace.” (p.41)  Said another way, the health insurance companies must pay the cost of Covered California starting in 2015.

The only way the health companies can pay this extra cost is to increase their premiums – which will result in higher cost health insurance – the exact problem the exchange was intended to fix.