Health Reform: Impact of What Congress is Considering on the Employer-Based Delivery System

By:  Scott J. Macey, Senior Vice President and Director of Government Affairs

As Congress returns from its summer recess, it will again take up varying proposals that, if enacted, would substantially restructure the provision of health care in the country.  A number of key principles have emerged in the debate, and a number of key issues and concerns have arisen for employers.  The proposed bills in the House and Senate would impose a mandate for most individuals to purchase health coverage, establish a public plan alternative available for individuals and small businesses, create a system of federal subsidies for low-income individuals and families, require the creation of new health insurance exchanges, and realign the marketing and underwriting of health insurance in general.  In addition, and  most importantly for employers, the current bills would require them to provide their employees with specified qualifying health coverage (otherwise known as the “employer mandate”) or pay an excise tax for failure to do so.

We will summarize below background on the initiative, some of the key directions Congress is considering, and some of the critical issues that could affect employers and their plans.

Background
The health reform initiative is enormously complex and far-reaching, involving approximately 17% of the nation’s economy and touching all Americans.  The current bills are complex—with over 1,000 pages of inter-related provisions creating new rules and requirements for designing, administering, and financing health plans both for employers and the insurance industry.  Many of the provisions are ambiguous or controversial.  Health reform legislation, if enacted, will have a great impact on the access to, delivery of, and financing and costs of the American health care system.  Regardless of the form and specifics of any final legislation, if enacted, health reform will also have a substantial impact on employers.

At this juncture, the proponents and opponents of current health reform proposals are communicating with the public about their respective positions and concerns.  The debate is heating up, and the passions and arguments on both sides have heightened.  The biggest concerns of critics are the possible long-term costs, increases to the federal deficit, and intervention of the federal government in the provision of health care.  Proponents argue equally forcefully that the current system is unsustainable, that reform will reduce long-term costs, and that a fair society must provide health care access to all its citizens.

Depending on the details, health reform could increase general labor costs, impose new mandates on employer health plans, modify the regulatory system and rules (including certain ERISA provisions) applicable to health benefits, and affect the design, structure, and administration of employer-provided health benefits.  There is no predicting whether reform will be enacted this year or the specific final shape of such if it is. 

Key Reform Proposals and Issues
The President and Congressional leaders have indicated that health reform is critical to assure future economic growth, slow the ever-increasing health care cost spiral, expand access to millions of uninsured and underinsured individuals, and rectify the problems of those who already have coverage (e.g., potential loss of coverage, lack of portability, increasing costs, inconsistent quality of care, significant plan limitations, etc.).  Of course, enacting legislation does not assure actual achievement of these objectives.  Three committees in the House and two committees in the Senate have been working on bills.  There are currently three versions of House bills (all based on a common bill but with some different provisions arising from separate Committee markups), a Senate HELP (Health, Education, Labor, and Pensions) Committee bill, and continuing bipartisan discussions in the Senate Finance Committee with the objective of formulating a somewhat more modest bill.  The various House and Senate HELP bills are similar in basic structure and direction, but differ on some key details. 

The House bills would impose many new requirements and significant penalties on employers to achieve Congressional health reform objectives.  The House bills also impose a new tax surcharge on high-income individuals and families to pay for a portion of the costs of expanding the eligibility of Medicaid and providing subsidies for families with incomes up to $88,200 (four times the federal poverty level for a family of four).  The Senate HELP Committee bill does much the same as the House bills, but with a somewhat lighter touch and without any tax provisions.  Both House and HELP versions provide for the establishment of a public plan option that could compete with private insurance plans offered through new federal or state-based insurance exchanges.

There is a great deal of controversy over several key provisions in each of the published bills.  First, the bills generally require employers to provide health coverage to employees, but the minimum plan design requirements are not defined, and the definition of the excise tax penalty for not providing health coverage is unclear in some respects and controversial in others. Second, the bills contain a public plan alternative, but the existence, structure, eligibility for, and administration of such an option remain in conflict and have been the subject of heavy criticism.  Third, revenue or savings required to pay for the increased federal costs of expanding health coverage are both problematic and controversial.  Finally, the bills have been criticized for not adequately addressing the increasing costs of existing and expanded health coverage.  Each of these issues could have a significant effect on employers and their current plans depending on how these elements are resolved and the details of any final approach.  (Other provisions remain controversial or in dispute, but may not be as significant for employers.)  An overview of the basic House and HELP Committee approaches is available here. 

Employer Mandate
Perhaps the most significant provision affecting employers in the health reform bills is the employer mandate.  The critical issues regarding this include:  who and what would be mandated, how the mandate is determined, the penalties for noncompliance, and the likely impact on employers and their existing plans.  Under the House and Senate HELP Committee approaches, all but the smallest employers would be required to offer qualifying coverage or pay penalties for noncompliance.  The bills do not fully describe or define what benefits would be required, but they do indicate that an employer would have to provide certain basic benefits (e.g., preventive care, emergency room treatments, hospitalizations, etc.) at a specified support level, essentially in line with either typical broad-based employer plans or the Federal Employees Health Benefit Plan (FEHBP).

The detailed benefit requirements ultimately would be determined by a new Health Commissioner or the Department of Health and Human Services (HHS).  The bills generally provide for certain minimum levels of employer support, both regarding premiums for coverage and the cost-sharing for benefits usage.  The minimum required employer subsidy for premium contribution is 60% of premiums and 60% to 80% for benefit usage (with maximum out-of-pocket limits of $5,000 for individual and $10,000 for family coverage).  All this means that employers would be required to offer a plan with specified minimum benefits, pay a specified minimum level of the premium, and support the costs of usage at a specified level.  The bills do not address the details of how the plan usage support must be configured or determined, but it appears it could be calculated actuarially as a specified percentage of the value of the federal employees’ plan or of the total projected costs of coverage under the plan.

Penalties for noncompliance would be 8% of payroll or wages (definition of payroll costs is not addressed in the bill) under the existing House bills and $750 per full-time employee and $375 per part-time employee annually under the Senate HELP bill.  Small employers are exempt from the mandate and the penalties.  For such purposes, the Senate HELP bill exempts employers with 25 or fewer employees while the latest version of the House bills indicate employers with less than $500,000 payroll annually would be excluded.  Employers with up to some number of employees (e.g., 50) might be eligible for partial government subsidies for providing coverage.  The Senate Finance Committee is apparently considering not including an employer mandate, but requiring employers to pay for a portion (up to $400 per employee annually) of the federal subsidies available to employees who do not have employer coverage and obtain coverage through an insurance exchange or public plan.

è Potential Impact of Employer Mandate

The impact of an employer mandate could be significant on smaller and medium-sized employers that do not currently provide health care coverage or provide health coverage that does not meet the federally defined minimum levels. They would either incur the penalties or be required to adopt and support relatively costly coverage.  Presumably, this would affect their hiring and pay practices, which, over time, could have a macro-economic effect across a portion of the economy.  On the other hand, small and medium-sized employers that currently meet minimum plan design and contribution requirements could see a favorable impact on their plan costs with reduced cost-shifting due to reduced uncompensated care costs of the currently uninsured citizens who become covered due to market reforms and new insurance pricing paradigms. 

Large employers that currently provide comprehensive self-insured coverage and underwrite a significant portion of health care costs will be less affected, but some plan design changes may be required (although the bills generally provide some transition period, such as five years, during which employers can maintain their current plans).  For many large employers, the movement toward consumer-directed plans could potentially be negatively impacted, depending on the final details of any employer mandate and minimum plan design requirements in the final legislation.

Public Plan
The public plan option is perhaps the most controversial aspect of the various health reform proposals.  The various bills all provide for a public plan, generally sponsored by either the federal or state government, to be offered through the insurance exchanges through which individuals and small businesses could buy coverage (offered by competing private insurance companies and other health plan administrators).  Critics of the public plan proposal argue that it would undercut private insurance and employer plans because of its likely size and pricing advantages, and could ultimately lead to a single payer health care system, since private plans could not effectively compete with a government-sponsored public plan.  The President says that a public plan is necessary to provide effective competition to the private sector, reduce long-term costs, and assure cost-effective, comprehensive coverage to all Americans. 

The ultimate impact of a public plan is probably largely dependent on its structure, rules, and financing.  If a public plan is structured and operated like Medicare, with provider reimbursement based on Medicare payment levels and supported by federal financing (and guarantees), the critics are probably correct.  On the other hand, if a public plan would be operated subject to the same rules and requirements as private plans, with reserves, negotiated reimbursement rates, payment of state taxes, coverage of state-mandated benefits and no government guarantees, then the critics could be proven wrong.  So far, the various House and Senate HELP bills tend toward making the public plan option more like the Medicare rather than private plan model.  One concern is that the public plan provisions could be modified in the future to do exactly what the critics fear. Although eligibility for the public plan would be limited to the uninsured and small groups with 10 or fewer employees, Congress could require larger employers to offer the public plan to employees in future years as an elective alternative to employer coverage.

Opponents of the public plan option have suggested that it should only be implemented on a deferred basis if the private market does not satisfy the reform objectives (i.e., enhanced coverage and reduced costs) within a specified number of years.  Other critics of a strong public plan have suggested the establishment of a private, nonprofit health purchasing cooperative as an alternative to a government administered system.  That is the apparent direction of the Senate Finance Committee approach, and the President has recently indicated a willingness to consider that approach (although many Congressional Democrats have criticized the President’s apparent openness to compromise on this issue).   

èPotential Impact of Public Plan
The two biggest concerns for employers are that a public plan could shift costs to employer (and other private) plans, similarly to Medicare, and pull away younger, healthier individuals in employer plans (because of the lure of possible cheaper coverage), thereby changing the employer plan’s risk profile and average participant costs.  These are critical concerns and could undermine the employer-provided health system if not adequately addressed.  One suggestion is to preclude anyone offered qualifying employer coverage from opting out and joining either a public plan or health plan offered through an insurance exchange.

Cost/Financing
The estimated cost of the current HELP Committee and House bills to the federal budget is approximately $1 trillion over ten years.  This does not include any costs imposed on individuals, plan sponsors, or state governments from increased Medicaid costs.  The estimated costs are generally due to subsidies for low-income individuals and families to purchase coverage, enhanced Medicaid eligibility, the costs of any public plan option, and tax credits for some small businesses.  The President has said that health reform will not increase the federal deficit over the next ten years.  The costs can be paid for with either savings or revenue.  Savings can be achieved through reductions in expected/budgeted costs for current programs (primarily Medicare and Medicaid).  Some provisions in the reform proposals might achieve this over the long term.  For example, there are proposals for fostering greater prevention and wellness, implementation of electronic medical records, comparative medical effectiveness to identify and eliminate low value added drugs and medical services, and proposals for reforming system-wide provider payment programs.  The latter could come through modified provider reimbursement schemes that focus on comprehensive episodes of care rather than each item of service and arrangements that reward providers for quality and penalize them for poor care (e.g., hospital-borne infections, avoidable re-admissions, excessive and unnecessary tests, etc.). 

The savings proposals would be positive steps, but the measures included in the bills probably do not have enough teeth, and any savings would likely not emerge in the short run, if at all.  Thus, to avoid a real deficit from emerging, enhanced revenue or taxes will be necessary.  This is significant and controversial.  Proposed sources of this include the House bill surtax on higher income individuals and families and the penalties on employers who do not provide qualifying coverage. 

èPotential Impact of Costs/Financing
Opponents of new taxes argue they will impede economic recovery and likely fall most heavily on small business entrepreneurs.  Penalties on all but the very smallest employers who do not provide the required qualifying coverage could also hurt small and medium-sized businesses that are financially unable to provide coverage.  The Finance Committee is concerned about these issues and is reportedly looking at taxing the insurers or employer sponsors of excess “Cadillac” coverage.  If that approach is adopted, presumably the benefits under richer plans would be reduced and/or dental and vision care plans (which would reportedly be included in any maximum value test) would be curtailed or eliminated. 

Additional Employer Risks
What could adversely affect all employers is the possible contraction of ERISA preemption and the general cost impact of health reform.  The bills generally do not address ERISA or preemption, except for several provisions in the House Education and Labor bill.  One provision in that version indicates that state law remedies and litigation rights would apply to all plans, potentially including self-insured employer plans, and another would override preemption if a state enacted a single payer system, raising the specter of continued state reform measures.  If individuals are allowed to pursue expensive state law litigation rights and remedies (a right which they do not have now under self-insured programs and only in limited circumstances for insured programs), that would certainly increase the legal risks and costs of maintaining a plan.  Additionally, it is not clear what flexibility states would have to mandate certain benefits, require provisions greater than the federal mandates, or otherwise regulate employer-provided plans.  A third provision in the Education and Labor bill would prohibit changes to retiree health programs unless similar changes were made to active employee health benefits.  And, any federal mandate on employers to provide “qualifying” benefits would, by its very nature, undercut plan design flexibility currently permitted under ERISA, thus subjecting employer plans to new federal mandates. 

èOther Potential Employer Risks
Perhaps the biggest economic risk to employers (beyond the possible increased costs of an employer mandate) is if the public plan option is structured like Medicare and similarly shifts costs to the private sector because of inadequate provider reimbursement rates.  Another risk to small businesses is the possible increased taxes that could apply to higher-income individuals and families.  This could directly affect family-owned and other similar businesses, many of which closely align business and personal tax and financial status.  Additionally, the proposal emerging from the Finance Committee to tax insurers that offer rich plans or employers that sponsor such plans could adversely affect some plans.  Clearly, that provision, if adopted, could be expensive to some companies that continue to provide what would be considered “Cadillac” health plans after reform.  Alternatively, insurers or employers could pass the costs on to participants or eliminate or curtail benefits (unless they had bargained them with unions).

Insurance Market Reforms
The bills also contain a number of important insurance market reforms.  Key changes include requirements for guaranteed issue and non-cancellation for health status, prohibitions on pre-existing conditions, and limitations on premium rating variations due to family status, geography, tobacco use, and age (up to a ratio of 2 to 1 between the youngest and oldest ages).  These changes would have the most significant impact on the individual and small group insured market.  Additional changes in the HELP Committee bill include requirements to provide incentives in insured plans for coordinating care through case management and chronic disease management and promoting health and wellness initiatives.  Both House and Senate HELP Committee versions also require insurance company reporting of medical loss ratios (i.e., amounts spent on health care) and, under the House bills, actually require a certain medical loss ratio.  These various reforms are aimed at assuring maximum access, reducing costs, and enhancing the quality and outcomes of care. 

Conclusion
The issues regarding an employer mandate, a public plan option, and the financing of reform are only a few of the myriad of general and more detailed issues facing the country in the possible redesign of our health care system.  In the end, any reform effort must be judged on its ability to improve the current situation and more importantly improve the health of the American people in an efficient and cost-effective manner.  The bills have been criticized by many commentators, including the Congressional Budget Office (CBO), for failing to include adequate provisions for addressing costs and quality.

Employers are likely to remain at the core of the American health care system, with or without the enactment of reform.  Thus, it remains critical that companies are allowed to design and administer cost-effective, efficient and responsive plans for their employees.  Health care experts and economists have indicated that certain key provisions should be included in any reform measure (and in health plans, regardless of reform) to adequately address both the cost spiral and quality issues. 

Several of these provisions include:

• Strong incentives for prevention and wellness initiatives
• Efficient disease management programs that assist individuals in managing chronic diseases
• Imposition of greater responsibility of individuals to improve health related behaviors
• Plan designs, such as consumer-driven plans, that encourage healthy behaviors and responsible health care purchasing
• Provider payment reforms to reimburse doctors and hospitals on episodes of care, not items of service, including payment reforms related to quality of outcomes

Many employer plan sponsors are now pursuing these and other possible initiatives, and they should continue to encourage and foster effective cost control and quality measures regardless of health reform.  Under existing law, however, sponsors have to grapple with HIPAA, the new Genetic Information Nondiscrimination Act (GINA) and the Americans with Disabilities Act (ADA) in fashioning wellness and prevention programs.  These laws limit the rewards and penalties that employers can use for incenting improved health behaviors, and GINA may restrict the types of information (e.g., family medical histories) that plans or employers may request or utilize in assessing health risks.  Health reform, if enacted, may clarify or relax some of these restrictions, and it is hoped that such is the case. 

The enactment of comprehensive reform remains problematic. Public policy makers continue to work diligently and in good faith toward meaningful and comprehensive reform.  In any case, regardless of the ultimate outcome of reform or its scope and direction, if enacted, the employer system will continue as the bedrock of coverage for more than half of the American population.  The measures mentioned above are critical for employers in managing their programs, controlling costs, and enhancing employee health and productivity.  It is hoped that any reform enacted will include provisions that acknowledge and foster these strategies and work to strengthen employer sponsored health coverage.

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For more on this topic, contact Scott Macey at scott_macey@aon.com or +732-302-2112.

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