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H e a l t h C a r e R e f o r m " L o o k b a c k "

A Framework for the Discussion

Broadly speaking, health reform is unfolding in discrete stages, with the period 2010-2013 focusing on insurance reforms (eliminating lifetime maximums and many annual limits, preventive benefits, etc.) and expanded access to cov- erage (adult children to the age of 26 and full-time workers defined as 30 hours or more, as examples). The year 2014 marked the introduction of the individual coverage mandate as well as the launch of federal and state health insurance exchanges (marketplaces) and state-by-state expansion of Medicaid. These vehicles further expand access to coverage

and enhance affordability either through the expansion of Medicaid or through low-income subsidies available to qual- ified low-wage persons seeking coverage through the public exchanges. The employer mandate and the introduction of the full-time/part-time measurement requirements follow in 2015.

Next, 2018 marks the introduction of the so-called “Ca- dillac” or excise tax which (based on Towers Watson 2014 projections) will hit roughly 58% of large employers in that year, given current cost trajectories and definitions. Also un- folding in future years will be activities addressing improved care delivery, value-based contracting and the introduction

The Impact of the Affordable Care Act on Large Employers: A Retrospective The Patient Protection and Affordable Care Act (ACA) has created a new environment for employer health ben­

efit plan management that is influencing costs, benefit design, delivery, administration, financing and compli­

ance as well as the positioning of health care within the benefits portfolio and the broader total rewards strat­

egy. This article will examine the key pragmatic effects of health reform for larger employers to date, quantifying

its direct costs and discussing the new dimensions of management that reform has introduced. The discussion

will focus on nongrandfathered self­funded plans and will address only major influences. It is not intended to

be all­encompassing and is, of necessity, general in nature. Each employer will have somewhat differing experi­

ences and results but should find the discussion to be helpful both in understanding what has evolved as well

as what is to come.

by Randall K. Abbott | Towers Watson

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of new technologies as well as digitalization of more health information. While “future years” are not of immediate con- cern to most employers, these longer term ACA efforts will inevitably influence employers as they unfold.

While the above will serve as our backdrop, we will focus on the issues that human resources and benefits profession- als have experienced and must prospectively manage in the years immediately ahead. Those issues include the broader strategic context, costs, eligibility and subsidization of plan participants, benefit design, financing and risk transfer, ad- ministration, network optimization and the delivery of care in a new value-based marketplace. Each of these topics could be a tome in and of itself; as a result, we will focus on key pragmatic points, recognizing that deeper analysis is neces- sary for each employer based on its own unique business, workforce and strategic circumstances.

The Broader Context Although employers have never been required to offer health

care benefits to their workforces, virtually all larger employers have done so since World War II. ACA’s passage began a new conversation about the employer’s role in providing health care benefits. Shortly after the law passed, numerous employers ex- plored the possibility of exiting direct sponsorship of health benefits with an eye toward eliminating coverage and sending all employees and their families to the public exchanges when they became operational. That assessment quickly highlighted several key points that have now caused 98% of large employ- ers to say they intend to continue providing employer health coverage (Towers Watson/NBGH 2013/2014 Employer Survey on Purchasing Value in Health Care).

The decision to continue offering health benefits is grounded in the recognition that eliminating coverage re- sults in a pay cut for every participating employee since health benefits are a tax-free benefit. While all employees could go to the public exchanges as individuals to obtain guaranteed issue coverage, only a portion of them would be eligible to receive federal low-income subsidies equal to, or greater than, the employer’s typical subsidy. In addition, em- ployers would lose the availability of the deduction for health benefits. They would face the need to replace some or all of the lost compensation with pay, which would be taxable to

the employee and would incur all applicable employer pay- roll taxes. Failing to provide minimum essential coverage to at least 95% of employees (70% in 2015) triggers a penalty of $2,000 a year per full-time employee (minus the first 80 in 2015 and minus the first 30 thereafter). These elements compound to make “exit” a relatively unattractive option for most employers.

While the vast majority of employers continue to provide health coverage, the 2014 Towers Watson/NBGH survey found that only 25% of large employer respondents are con- fident they will provide coverage ten years from now.

The decision by employers to stay in the health benefits game has fueled a robust conversation about the position- ing of health benefits within the total rewards package, who should be covered and how employers should subsidize cov- erage. Only 4% of Towers Watson/NBGH survey respondents indicate they have no plans to recalibrate their health care strategy, with 18% already having done so and the remain- ing 78% having plans underway. (And nearly half are doing so within a broader total rewards context.) Employer actions include marked increases in dependent premium rates, rapid growth in spousal surcharges and innumerable discussions reprising the idea of employers establishing a “defined con- tribution” for their share of health coverage costs.

ACA is not the only dynamic fueling these conversations, but it certainly has been a catalyst and will continue to be a springboard for discussion as 2018 approaches and employ- ers face the business risk of the excise tax. The continuing rise in annual health plan costs (projected at 5.2% for 2015 before plan changes and 4.0% after plan changes), plus the onerous implications of the excise tax, are causing employ- ers to focus on optimizing health plan performance. As one consultant put it, “The new gold standard for health plan cost trend is managing to the CPI.” A 5% or greater trend rate will be virtually unsustainable for many employers as the excise tax emerges, since the tax is indexed at a variation of the con- sumer price index (CPI) rather than medical cost trend.

The Cost of ACA for Large Employers ACA’s cost impact varies by employer, depending upon

its historical benefit design, eligibility requirements and other plan provisions. Broadly speaking, ACA has been a

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significant added cost to employers. Some argue the law will offer longer term relief as value-based contracting and reimbursements are introduced in the marketplace, providers focus more on efficiency, quality of care and out- comes, and technology is enhanced. But, to date, the law has unquestionably increased employer costs.

As noted, each employer will see different cost effects depending upon its circumstances. For example, if a plan had a robust range of preventive benefits and covered children to the age of 25, the expansion of preventive ser- vices for the adult child to the age of 26 would have only a minimal cost effect. The cost would be greater for those with more restrictive benefits and eligibility

provisions. It is possible to quantify a range of impacts for large employers. The table depicts an annual percentage increase due to various health reform mandates expressed as a range based on Towers Watson experience and pro- jections for large employers.

The expansion of Medicaid in some states can help offset some of these add- ed costs for employers with low-wage workforces. The yet-to-be implemented automatic enrollment provision will likely be an incremental cost to many employers. With the exception of those with a very high percentage of workers eligible for Medicaid, this writer has seen no large employer that experienced either a cost reduction or a moderation in costs because of ACA to date.

Eligibility and Subsidization ACA has created a new focus on

who is covered and how employers subsidize employee and dependent participation. Employers face poten- tial increases in participation because of the individual mandate and the au- tomatic enrollment provision resulting in some prior opt-outs joining the plan. Other increases in participation could come from newly eligible employees to the 30-hour rule, the expansion of cov- erage to the age of 26 for adult children and the possible influx of spouses due to either the individual mandate or ac- tions taken by the spouse’s health plan in response to health reform. An op- portunity to reduce plan participation has also emerged with Medicaid ex- pansion and the availability of guaran- teed issue coverage through the public exchanges for Consolidated Omnibus Budget Reconciliation Act  (COBRA) continuees and pre-Medicare retirees. These individuals may also be eligible for federal subsidies. (Given the rocky rollout of the public exchanges in 2014, employers have been cautious in their migration efforts.)

As a result of these new circum- stances, employers now have the op- portunity to assess their populations to determine the most appropriate ways to deliver benefits to each segment. The newly available benefit delivery chan- nels (public and private exchanges for actives and retirees), as well as the tra- ditional self-managed employer plan, are all opportunities to revisit how health benefits can be most effectively delivered for unique segments of the employer group. This concept, referred

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T A B L E

Annual Percentage Increase due to Various Health Reform Mandates, Expressed as a Range

Preventive services covered and expanded at 100% 0.0­1.5%

Removal of annual and lifetime limits 0.0­1%

Coverage of adult children to age of 26 0.0­1.5%

Patient­Centered Outcomes Research Institute (PCORI) fee: ,0.1%

Total incremental cost 2010­2014 , 0.1­4.1%

Transitional reinsurance fee, 2014 1/21.3%

Transitional reinsurance fee, 2015 1/20.9%

Transitional reinsurance fee, 2016 1/20.5%

Health insurer fee (applies only to insured plans beginning in 2014) 1.5­3.0%

Reduction in opt­outs due to individual mandate 0.0­5.0%

Integrated out­of­pocket maximum for medical and drug 0.0­1.0%

2018 excise tax varies based on plan costs, rate of cost trend and year but triggers at $10,200 for individuals and $27,500 for a family with a 40% nondeductible tax on amounts over those thresholds. Computed by employee.

Source: Based on Towers Watson experience and projections for large employers.

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to as cohort value optimization (CVO), seeks to connect peo- ple with the greatest value in terms of benefits, choice and cost.

Increasingly, employers are no longer relying on just the self-managed group plan for all benefit participants. The co- hort-based segmentation process began with the availability of private Medicare exchanges nearly a decade ago and has expanded with the introduction of the public exchanges as well as the availability of private exchanges for actives and early retirees. The private Medicare exchanges have bur- geoned in recent years. With the emergence of the public exchanges, we are seeing nascent activity channeling pre- Medicare retirees, COBRA continuees and part-time work- ers to them. As employers become more comfortable with these new channels, we will increasingly see use of hybrid de- livery channels for leveraging each arrangement to optimal advantage. As examples, COBRA continuees can often enjoy more choice, lower costs and possible federal subsidies in the public exchanges, as can early retirees—especially those pre- Medicare retirees with “access only” employer plan arrange- ments or low employer subsidies toward coverage. CVO of- fers advantages to the employer and the employee, former employee or retiree and is possible, in part, because of ACA.

Employers are broadly affected by ACA as they consider how they will subsidize coverage and how employees will share in plan costs. Under the law, the affordability of an employer-sponsored plan to the employee is defined as the share that is paid by the employee via premium contribu- tions. The employee share of premiums cannot exceed 9.5% of household income for the cost of the lowest option em- ployee-only plan. This has required employers to a) do the requisite calculations and b) emphasize point-of-care cost sharing in lieu of premium-based cost sharing. In addition, the value of incentives must now be incorporated into the determination of whether the plan is, in fact, affordable, with a suite of guidelines prescribing how to assess the premium value—including incentives—and its affordability.

The 30-hour threshold for full-time determination, the af- fordability test and the actuarial value of the plan are all key factors in determining whether an employer meets the re- quirements to “play” and avoid the $2,000 penalty mentioned earlier. If the cost of the lowest value employee plan exceeds

9.5% of household income and the employee is awarded a subsidy through the public exchanges, the employer is now levied a penalty of $3,000 per year per affected employee.

The discussion on who to cover and how to cover them includes all of the elements described above but also includes a focus on spousal coverage. As noted earlier, the availability of coverage through the public exchanges, the need to im- prove health plan performance through optimal cost man- agement and the actions of other employers have all com- bined to cause many employers to revisit the commitment to spousal coverage. Of late, employers have often increased dependent rate tiers, and 37% have introduced spousal sur- charges, with an additional 10% planning to do so in 2015. The spousal surcharge trend has increased across all indus- tries and is now averaging $100 per month, with a low of $50 to a high of $125 (Towers Watson/NBGH 2014). The ACA influence is clear: The public exchanges offer an alternative for guaranteed issue coverage and, where the need to man- age cost is acute, eliminating or surcharging spousal cover- age is an option, but it must be considered within the broader “deal” or employee value proposition.

These ACA requirements have combined to require new administrative functions and parameters surrounding how costs are shared with employees; they also introduce the risk of new penalties for noncompliance.

Benefit Design Beyond defining eligibility for full-time employees and

adult children, ACA has materially affected benefit plan design for employer-sponsored plans. While the federal in- fluence on retirement plans has long been a fact of life for employers, health benefit plans faced considerably fewer pure design requirements, except for those needed to com- ply with the various Section 105 nondiscrimination rules or, in the case of insured plans, to comply with applicable state mandates. Employers could design plans with very minimal benefits (such as the so-called mini med plans), apply limita- tions on lifetime benefits and not be required to cover certain benefits now deemed “essential” under insured plans.

Employers now face both a floor and a ceiling under ACA. First, the plan must meet a minimum actuarial value of 60%, which means that, of total eligible charges, the plan

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must reimburse at least 60% of those charges. Second, be- ginning in 2018, the value of the plan (when combined with other health benefits included in the definition) cannot ex- ceed a dollar value of $10,200 for an individual or $27,500 for a family under the excise tax provision.

These two requirements have had a profound effect on benefit design already. Minimum benefit plans have been phased out. Employers have had to validate that their benefit plan is above the minimum and are focusing on examining the level of benefits provided prospectively as they anticipate the effects of the excise tax thresholds on projected 2018 costs.

Pragmatically, the minimum benefit requirement has produced at least three results:

1. Employers have upgraded benefits on plans that failed to meet the minimum.

2. Benefits have been eliminated as prospectively unaf- fordable.

3. The employer has directed affected employees to the public health exchanges to purchase coverage (with or without the support of an employer-sponsored transitional concierge or navigator to assist in evalu- ating exchange-based options and determining the potential for subsidies).

The 60% minimum is largely a nonissue for large em- ployer plans since most employer-provided health plans cur- rently have an actuarial value in the range of 80-85%. How- ever, as the excise tax looms, plan sponsors are assessing plan values within the context of their larger excise tax risk, with the expectation that benefit values will erode in the future as employers adversely affected by the excise tax work to reduce their exposure through redesign, cost-mitigation strategies and improving care and condition management as well as workforce health status.

The inclusion of ACA-required benefits ranging from in- full preventive services to elimination of lifetime maximums (as noted previously) has contributed to the need for design changes and a close eye toward monitoring compliance with the law and new regulatory guidelines, which often require updating or refining plan provisions or rules.

Financing and Risk Transfer The law has delineated from inception the difference be-

tween insured and self-funded employer health plans in its application and has imposed added levies on insured plans. The health insurer fee noted earlier has caused some smaller employers to reconsider insured status and explore the vi- ability of self-funding both to avoid the incremental ACA in- surer tax as well as to avoid the added cost of insurance ver- sus a self-funded arrangement (which can add from 5-11%). But the trade-off is cash flow volatility and the added risk corridor that a self-funded plan with reinsurance typically requires.

Self-funded plan sponsors have revisited excess reinsur- ance (stop-loss) levels to determine whether the elimination of annual and lifetime benefit limits requires an adjustment to the stop-loss attachment point in place. Interestingly, health reinsurers informally surveyed for this article have not yet cited a trend toward higher stop-loss rates due to ACA, although they have noted that aggregate premiums have increased in some cases as employers elected to adjust stop-loss levels to reflect the loss of lifetime limits and the added risk potential.

A further risk transfer consideration may emerge as the excise tax is triggered in 2018. Under the law as currently written, insured dental and vision plans are excluded from the excise tax calculation; self-funded dental or vision plans are included. If this oddity is sustained through final regu- lations, it is inevitable that employers facing the excise tax will actively explore adopting insured arrangements for these benefits. Many observers, however, question whether this anomaly will survive as final regulations are drafted, as- suming the excise tax itself is made effective as currently de- signed.

Administration Unquestionably, ACA has increased the administrative

burden on employers because of the continual need to moni- tor compliance, meet new communication requirements, im- plement new measurement standards and increase reporting.

The fundamental task of monitoring, reviewing and inter- preting a steady stream of guidance has added to legal and benefit staff burdens, as has the need to modify contracts and plan administration provisions to achieve and maintain compliance. It is easy to forget the myriad of administrative

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changes necessitated—and the com- munication efforts required—due to ACA. Examples include the notice on maintenance of grandfathered status (where applicable), expansion of pre- ventive services, extension of coverage to adult children to the age of 26, elimi- nation of maximums, introduction of women’s health benefits, the health flex- ible spending account cap at $2,500, the change in health savings account with- drawal penalties, new rules on wellness programs and any associated incentives, new claim appeal and external review provisions, communications on the availability of public health exchanges and, of course, the summary of ben- efits and coverage, to name a partial list. And, in the years ahead, more will be required.

Perhaps one of the greatest chal- lenges faced by many employers has been the requirement (expected to be implemented in 2015) related to the ini- tial and ongoing measurement of full- time and part-time status. This complex provision requires employers to estab- lish measurement periods for tracking hours worked to prove that full-time workers are, in fact, appropriately cov- ered. The focus on defining full-time status for health coverage at 30 hours a week (130 hours a month) has given rise to a careful scrutiny of workforce planning needs within many organiza- tions—especially those with workforces that are heavily part-time, temporary or seasonal.

The reporting requirements under Section 6055 (individual mandate re- porting) and Section 6056 (employer mandate reporting) to support Inter-

nal Revenue Service enforcement are significant and will require a continu- ing employer effort to track, report and submit this data. Overall, the admin- istrative effort under ACA has added dramatically to the employer’s health benefit management activities while also necessitating the use of actuaries, consultants and attorneys to aid in in- terpretation and implementation of the requisite provisions both within the employer organization and with exter- nal vendors or service providers.

Network Optimization and Care Delivery

ACA has both fueled and acceler- ated an employer focus on optimiz- ing the network delivery of care and the manner in which care and condi- tion management are applied to their populations. Prior to reform, numer- ous employers were seeking to adopt or expand value-based arrangements, which focus on not just the discounted unit cost of care but rather the total cost, encompassing price, efficiency, quality of care and the outcome of the care delivered. ACA includes numer- ous requirements that will migrate the reimbursement of health care to value- based arrangements in the years ahead. This accelerant is affecting employ- ers—and ultimately plan members— as hospitals, health systems and physi- cians respond to the law by changing practices, consolidating and entering into risk-bearing or risk-sharing ar- rangements. Employers are seeing the effects of this as entities like account- able care organizations arise and as health plans begin to move from pure

discounted fee-for-service contracting to a variety of value-based arrange- ments. Even today, employers with na- tional networks are experiencing the effects of value-based approaches as health plans adopt various efficiency and quality measures in their network contracting with primary care physi- cians and hospitals.

Other employers are moving the market themselves through direct con- tracting arrangements or are pressing to develop high-performance networks and the expansion of procedures di- rected to centers of excellence. In the years ahead, employers will increasing- ly utilize hybrid network arrangements drawing on national vendors, directly contracted configurations and, often, narrower networks defined by the pro- vider’s demonstrated willingness to deliver based on both cost and quality of care. This aspect of ACA is only now being better understood by employer plans but is both real and an opportu- nity for positive change.

Another aspect of care accelerated by ACA is the focus on primary care and the need to place more wellness and condition management within the provider community rather than with health plan administrators or specialty third-party vendors. There is a renewed emphasis on primary care and increased emphasis on the patient- centered medical home. While neither are new topics (the medical home con- cept is more than two decades old), it has renewed recognition of the need for patients to have both primary care and a medical home.

The emphasis on population health

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management and the move to providers assuming risk for the outcome of care is also creating a foundation for tran- sitioning more of the wellness efforts and condition man- agement activities from third parties into the provider en- vironment. Based on conversations with both health plans and providers, this shift will be gradual and will likely stretch out five to seven years, and a greater provider role in these areas is emerging.

Finally, the expansion of health care coverage under ACA to those previously uninsured has added to concerns about a physician shortage and increased difficulty access- ing care. The shortage of physicians is real and is spurred not just by health reform but, in larger part, by an expand- ing, aging population with mounting health risks. There also is a generational shift as baby boomer physicians rap- idly retire. Employers in many areas will be faced with ac- cess concerns and, depending upon locale, may need to consider bringing services on site through an employer- sponsored clinic or health center. In addition, telemedi- cine will be a key component of care delivery utilizing the technology now available via smartphones and tablets. Some observers believe technologies like telemedicine and remote monitoring will be the key to managing the short- age. These phenomena will challenge employers to rethink many aspects of traditional network structure and care de- livery in the months and years ahead.

Putting It All Together This brief retrospective highlights the significant impact

of ACA already affecting employers and foreshadows the challenges and opportunities to come. Without a doubt, ACA has affected more than health benefit plans—It has be- come a total business issue with employers facing not only its health benefit management implications but also the broader administrative, systems and reporting challenges. It also raises the strategic implications of how ACA, the emer- gence of public exchanges and federal subsidies (as well as private exchanges) will change the employer role in health care benefit delivery, the positioning of health care within the organization’s total rewards strategy, workforce planning and ultimately the employee value proposition.

The financial effects have been real, and the 2018 excise tax will create further costs for roughly 60% of employers based on their current trajectories. This risk requires thoughtful scenario planning now to anticipate the change needed, the delivery options available and the glide path required to get there in the months remaining.

While the challenges for employers are great, the Tow- ers Watson Health Care Changes Ahead Survey conducted in the summer of 2014 shows that 83% of the large employer respondents fully expect employer-sponsored health care to be a core part of their total rewards package and employee value proposition in 2016 and beyond. As the later phases of health reform unfold, giving rise to more value-based care, more technology and innovation, one can hope that reform will bring with it new opportunities and an improved health care system.

In the meantime, employers must focus on optimizing health plan performance, improving workforce health and determining the most appropriate benefit delivery channels to achieve the greatest value for the company and employees alike.

Reference Towers Watson/National Business Group on Health (May 2014) Full Re-

port: Towers Watson/NBGH 2013/2014 Employer Survey on Purchasing Value in Health Care, The New Health Care Imperative: Driving Performance, Con- necting to Value. Available at www.towerswatson.com/en-US/Insights/IC- Types/Survey-Research-Results/2014/05/full-report-towers-watson-nbgh- 2013-2014-employer-survey-on-purchasing-value-in-health-care.

A U T H O R

Randall K. Abbott is a senior consultant and North American practice leader at

Towers Watson, based in Boston, Massachu­ setts. His work encompasses health benefit

strategy, workforce health improvement, total benefits strategy and positioning benefits within the

broader total rewards context. He has been deeply involved in the evaluation of exchange­based delivery of health

care, including both public and private exchanges.

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