an employer's guide to the affordable care act

Bringing Clarity to The Affordable Care Act

A Complex Ecosystem 01

An Evolving Regulatory Process 02

Access 03

Tax Policy 04

Regulatory Compliance 05

Underwriting Health Care Benefits 06

Your Situational Assessment 07

Making Wellness Work 08

Self Funding 09

Consumerism and Decision Support 10

Health Care Strategies 11

Andre J. Lukez, CEBS

Chief Consulting Officer

The Fedeli Group

The Affordable Care Act (ACA) was signed into law on March 23, 2010. Since its passage the law has evolved, been challenged on

numerous occasions, and is serving as a catalyst for change.

This guidebook is meant to provide broad regulatory guidance while providing perspectives and insight as to what employers should

do next in the management of their health plans. For employers, complying with the Affordable Care Act is not optional!

Despite the law’s many imperfections and unintended consequences, surprisingly, the law has ushered in a new era of health care as

start-up firms attempt to build niches and established players are forced to reinvent themselves. With new options and the realiza-

tion by everyone, including employees, that change is inevitable means that now is the time for employers to be creative, bold, and

focused.

Obesity rate * 15 %

Over age 65 12.6%

Median age 32.9

Obesity rate * 35.7%

Over age 65 13.1%

Median age 37.2

* Based on data from Centers for Disease Control and U.S. Census Bureau

Health Care Spending

(As a Percent of GDP)

CMS Office of the Actuary Projection: 11/2013

18.0%

17.59%

13.60%

Mary Gonsowski

Senior Consultant

The Fedeli Group

1993 2010 2018

The Fedeli Group 2014

The Affordable Care Act is not just an employer law. Participants throughout the health care system are impacted.

The law attempts rather ambitiously and naively to reshape and correct problems that developed over the past

fifty years. Somewhat ironically, new ideas spawned by the law are generally incremental and niche-oriented.

Employers need to realize that there is no grand solution to their health care situation. Employers who think long-

term, make incremental change, and “experiment” with new ideas will find themselves well-positioned. Those

who do nothing will find themselves paying significantly more for health care in the long-run.

Provider payment methods change

Independent Payment Advisory Board (IPAB)

Payments based on quality and patient experience

Penalties for readmission / acquired illnesses

Reduction in Disproportionate Share Hospital (DSH)

32 million patients become insured

Community Health Center Expansion

Patient Centered Medical Homes (Medicaid)

Reallocation of unused residency programs

Graduate nurse education demonstration projects

“Donut Hole” reduced

Annual wellness benefit

0.9% Medicare tax on wages above $200,000 (single)

Mandated loss ratios - 80% small group; 85% large group

Medicare Advantage loss ratio requirement - 85%

Traditional underwriting model disrupted

Reinsurance provided to compensate for adverse selection

Federal oversight on premium rate setting (HHS)

Health Care Providers

Hospitals

Insurers

Medicare

Medicaid - Federally funded expansion

Medical Device Companies - New taxes Pharmaceutical Companies

New taxes

Better pricing for Medicare

Employer - Participate or be taxed

Employee - New access options

Please note that this guidebook offers general information regarding the Affordable Care Act and other employee

benefit regulations. This guidebook in no way should be considered to offer legal or tax advice.

A Complex Ecosystem 01

2014 The Fedeli Group

Employer Mandate Delays

March 23, 2010 June 28, 2012 July 2, 2013 February 10, 2014

Law Signed

Supreme Court Ruling

(Individual Mandate

and Medicaid Expansion)

Treasury Announcement

(Employer Mandate Delay)

Treasury Announcement

(Employer Mandate and Coverage Delays)

Coverage until age 26

Pre-existing conditions eliminated—under age 19

No lifetime limits

Preventive care covered in full

W-2 reporting

Summary of Benefits and Coverage

Plan fees begin—PCORI

2011

2013

90 day waiting period

All pre-existing conditions eliminated

Public health exchanges

Individual mandate

Underwriting rules

Deductible cap limits amended - small

group and individual coverage

Medicaid expansion begins

Plan fees begin—Reinsurance Assess-

ment Fee and Health Insurer Tax

2014

June 30, 2014

Supreme Court Ruling

(Religious Exemption)

The Affordable Care Act has created a flurry of legal activity with numerous lawsuits

being filed. The United States Supreme Court has ruled twice. A ruling issued on

June 28, 2012 confirmed the constitutionality of the individual mandate while

providing each state with the option of expanding Medicaid. A second ruling issued

on June 30, 2014 exempts certain privately held businesses from having to provide

forms of contraceptive coverage in their health plans that violate the religious beliefs

of the owner(s).

Conflicting lower court rulings issued on July 22, 2014 that challenge the legality of

public exchange subsidies in the federally operated exchange will likely make their

way to the Supreme Court. A decision by the Supreme Court could have a signifi-

cantly impact on the implementation of the ACA, particularly in the 34 states that

have opted into the federal exchange directly or through a federal-state partnership.

Delays, Changes, and Continued Legal Challenges

July 22, 2014

U.S. Court of Appeals

(Conflicting Opinions on

Federal Exchange Subsidies)

An Evolving Regulatory Process


Small Employer Mandate Begins (50 to 99 employees)

January 1, 2015 January 1, 2016 January 1, 2017 January 1, 2018

Era of “Shared Responsibility” Begins

IRC 4980H

Option A

Offer a health plan with Minimum Value and

Affordable coverage to 95% of full time

employees 1 & 2

OR

Pay an Annual Tax of $3,000 per full time

employee that receives a subsidy in a public

exchange

Option B

Offer a health plan to 95% of full-time

employees and dependents

OR

Pay an Annual Tax of $2,000 per full time

employee (less the first 30) if only one em-

ployee receives a subsidy in a public ex-

change 3

Offer of Coverage Phased-in 1

70% 95%

1 Regulatory guidance defers 95% rule until January 1, 2016. 2 Spousal coverage offer is not required. Dependents include son, daughter, adopted children. 3 Penalty applies to all employees, including those with coverage.

“Cadillac” Tax

(Surcharge on expensive health plans)

Large Employer Mandate Begins (>100 employees)

Employer Mandate Requirements

02


Projected Medicare Enrollment

(millions of enrollees)

2000

39.7

2050

92.4

Employer

Public Exchange Individual Medicaid Medicare Other*

*Military, Indian Services, Spouse Plan, etc...

2040

88.9

2030

81.5

2020

64.3

2010

47.7

Access to Health Insurance - Pre ACA (2010) Access to Health Insurance - Projected (2018)

Fedeli Estimates

Uninsured Population 7.0%

Public Exchange 4.0%

Medicaid 18.0%

Medicare 19.0%

Individual (non-exchange) 7.0%

Employer Based 45.0%

Employer Based

48% Medicare

14%

Medicaid

16%

Uninsured

16%

5%

Individual

Other Public - 1%

The Affordable Care Act expands access to health care insurance. While predominately an employer based system, fewer than 50%

of Americans receive their health care insurance through an employer. Going forward a greater percentage of Americans will re-

ceive health care benefits outside of the traditional employer based model.

Access


Source: U.S. Bureau of Labor Statistics: Tracking Employment

Based Health Benefits in Changing Times (2010).

Source: 2013 Annual Report to the Board of Trustees of the Federal Hospital Insurance Trust Fund.

Federal

Poverty

Level (FPL)

Family Income

(4 person) 2014

Maximum Family

Premium

Maximum

Family Out of

Pocket

>= 400% $95,400 n/a $12,700

300% $71,550 $6,797 $8,382

250% $59,625 $5,068 $6,350

200% $47,700 $3,005 $6,350

150% $35,775 $1,431 $4,229

133% $31,721 $951* $4,229

100% $23,850 No premium $0

Public Exchange Premium Credits

Government funded subsidies (premium credits)

for the purchase of health insurance coverage

are some of the most controversial and costly

aspects of the ACA. A Congressional Budget

Office report issued in May 2014 estimates that

over a ten year period exchange subsidies will

cost $1.032 trillion. The cost of Medicaid expan-

sion will have an additional ten year cost of $792

billion.

Public exchange premium credits not only pro-

vide subsidized premiums but reduce maximum

out of pocket costs based on income thresholds.

Subsidies are available to individuals and families

earning up to 400% of the federal poverty level.

State Type of Exchange Public Exchange

Enrollment

% of

Population

Increased

Medicaid

Enrollment

% of

Population

Ohio Federal 154,668 1.3% 208,280 1.8%

Indiana Federal 132,423 2.0% 45,044 0.7%

Michigan Federal 272,539 2.7% 30,248 0.3%

Pennsylvania Federal 318,077 2.5% 40,988 0.3%

Texas Federal 733,757 2.8% 3,214 0.0%

New York State 370,451 1.9% 343,835 1.8%

California State 1,405,102 4.4% 1,177,000 3.0%

Kentucky State 82,747 1.9% 300,615 6.8%

U.S. - Total 17 State / 34 Federal 8,019,763 2.52% 4,800,000 1.51%

Medicaid Expansion and Public Exchange Enrollment

Source: Department of Health and Human Services ASPE Brief May 1, 2014.

Note: Medicaid is 100% government paid while approximately 85% of public exchange enrollment is sub-

sidized.

Source: Internal Revenue Service and Health and Human Services (HHS)

*Subsidy begins at 100.1% of FPL but is not relevant if Medicaid cover-

age is expanded.

Subsidy

Medicaid

No Subsidy

03


The Affordable Care Act introduces new taxes and fees. In total, policymakers expect revenues of more than $1.1 trillion over a ten

year period. The taxes and fees do not offset the additional costs associated with premium exchange subsidies or Medicaid expan-

sion (Section 3). Whether presumed “savings” from certain provisions of the law can close the gap between revenue and cost is un-

certain.

Medicare unearned income Applies to couples with joint incomes greater than $250k. Tax

of 3.8% on certain “net investment income”

Medicare payroll tax Additional 0.9% tax from employees who earn more than

$200,000 per year (only employee, no employer match)

Individual Mandate penalties $55.0 Applies to individuals who do not obtain “minimum essential

coverage”

“Cadillac” Tax $111.0

40% marginal tax on premiums above $10,200 single coverage

and $27,500 family coverage (adjusted annually). Tax will be

built into premiums

Individuals

Sources: Center for Health Care Research and Transformation (Issue Brief August 2013) with information sourced from

the Joint Committee on Taxation (June 2012) and Congressional Budget Office (July 2013)

Health Plans PCORI Fee $3.8

$2 per member per year. Adjusted for health care spending

from 2015 to 2019. Funding for Patient Centered Outcomes

Reinsurance Assessment Fee $25.0

2014, 2015, 2016; $63 per member per year in 2014, $44 in

2015; undetermined for 2016. Used to stabilize premiums in

the individual market

Health Insurer Fee $101.7 General fee to offset costs associated with ACA

Permanent Risk Adjustment $0.2

Fee to operate the Federal Risk Adjustment program. Insurers

will pay $0.96 per member per year (2014). Adjustments

thereafter

Corporations and Employers

Tanning Excise Tax $1.5 10% of the amount paid for tanning services

Branded Prescription Drug

Tax $34.2 Percentage of sales to government programs

Medical Device Tax $29.1 2.3% of sales price of certain medical devices

Shared Responsibility $96.0 Paid by employers who do not offer health coverage

Projected Ten Year Tax Revenue - Billions

$377.7

Tax Policy


In general, employer sponsored health care coverage is a tax deductible expense to the employer. Meanwhile, employees are not

taxed on the value of benefits received. To the employee, a $1 of health care benefits can be the equivalent of $1.20 or more of

cash compensation.

The tax preferred status of employer sponsored health insurance has not gone unnoticed. The Congressional Budget Office esti-

mates that $248 billion of tax revenue was lost in 2013 as a result of the non-taxation of health care benefits received through em-

ployer sponsored health plans.1

The Affordable Care Act requires employers to report the value of health care benefits on W-2 statements when more than 250 W-2

statements are issued annually. Could taxation of benefits be far behind?

The employer based health care system will eventually be affected by tax policies that have yet to be formally debated in Congress.

The table below illustrates the tax advantages realized under the current employer based health care system.

If an employer were to no longer offer health care benefits, a $100,000 per year employee would presumably

negotiate additional wages to offset the need to purchase health care as an individual.

The Tax Advantages of Offering Health Care Coverage Continue

($4,031)

($8,204)

Additional FICA: Employer $956

Penalty (not deductible; $2,000 grossed up by 35%) $3,075

Combined Tax Burden - Employee and Employer =

1 May 2013; The Distribution of Major Tax Expenditures in the Individual Income Tax System

Continue Health Care Exit Health Care Tax Impact

Health care premium - employer $7,500 $0

Employee annual salary $100,000 $107,500

Health care premium - employee (pre-tax) ($2,500) n/a

Taxable wages before deductions $97,500 $107,500

Federal Income Tax (16.5%; 17.5%) ($16,056) ($18,856)

FICA: Employee (7.65%) ($7,458) ($8,414)

State Income Tax - Ohio (2.98%; 3.2%) ($2,975) ($3,392)

Employee purchases health insurance (after tax) n/a ($10,000)

Net wages (after taxes and health care premium) $71,011 $66,838 ($4,173)

Wage offset to

retain employee

04


EXAMPLE: Tax Impact - One Employee2

Assumptions:

The employer substitutes health care coverage for increased wages under the “Exit Health Care” scenario.

Employee needs coverage for himself and two child dependents. Spouse is covered elsewhere. Premiums are $10,000 per year.

Employee contributes 25% towards heath care coverage under the “Continue with Health Care” scenario.

Employee files taxes as “married, filing separate” and realizes deductions of $17,800 for exemptions and standard deduction.

Affordability and Minimum Value. Most employer health plans meet the Minimum Value criteria by offer-

ing a medical plan that covers at least 60% participant medical expenses. However, some still struggle with the

Affordability standard.

Employee contributions for self-only coverage cannot be more than 9.5% of an employee’s W-2 pay. An employ-

ee working 30 hours per week at the Ohio minimum wage ($7.95 per hour) can pay no more than $98.18 per

month towards health care premiums.

Variable Hour Employees. Prior to ACA, employers had substantial flexibility with regards to the type of

employees that were offered health care benefits. The law formalized the definition of a “full-time” employee to

a person working on average at least 30 hours per week. Safe Harbor regulations were written (IRS Notice 2012-

58) that allow up to a 12 month measurement period, meaning that hours for part-time employees can fluctuate

above and below 30 hours per week (Section 7).

Variable hour employees such as interns, commissioned sales people, and seasonal workers may become eligible

for benefits even if the employer did not consider these employees eligible in the past. Additional regulatory

guidance is still needed with regards to certain types of employment relationships.

The “common law” definition of an employee is used under ACA. Independent contractors (properly defined) do

not fall under the “shared responsibility” requirements of the law.

Filings and Forms. New taxes and fees create additional filing requirements including:

1. PCORI Fee: IRS Form 720, the Quarterly Federal Excise Tax Return

2. Reinsurance Assessment Fee: Health and Human Services ACA Transitional Reinsurance Program Annual En-

rollment and Contributions Submission Form with Supporting Documentation File, and payment submission on

Pay.gov.

3. Additional W-2 reporting: The value of health care benefits must be included on an employee’s W-2. For em-

ployers that issue more than 250 W-2 statements per year.

4. Forms 1094 and 1095:

For tax year 2015, employers will need to file documentation to assist the government in enforcing the Individual

and Employer Mandates. Employers will need to provide data on their medical plans and employee population.

It will be essential for employers to document which employees were offered medical coverage, who accepted,

and who declined. With penalties on the line for both employers and employees, tracking plan enrollment and

plan waivers is crucial. Regulatory guidance is in development but employers need to be prepared to meet the

extensive data requirements.

Employee Notices Required per the Affordable Care Act. In addition to numerous notices already re-

quired (see next page), employers must provide employees with the following:

The Summary of Benefits and Coverage needs to be provided at open enrollment and to new hires.

The Notice of Employees of Coverage Options (Exchange Notice) needed to be provided no later than October 1

of 2013. This notice applies to new hires on an ongoing basis.

If an employer plan is considered “grandfathered,” a notice stating this fact needs to be delivered each year and

to new hires. As of 2015 only a small percentage of plans will maintain “grandfathered” status.

Regulatory Compliance


The Employee Retirement Income Security Act (ERISA) of 1974 sets minimum standards for both em-

ployer pension and health plans. For self funded health plans, ERISA preempted a patchwork of state regula-

tions, enabling multi-state employers to offer consistent and more easily administered self funded health plans.

But ERISA did not alter the regulation of insurance. That remained in the purview of the states.

ERISA applies to private firms but not governmental or church entities. ERISA applies to both self funded and

fully insured employee benefit plans. Plan sponsors are fiduciaries and are prohibited from self dealing. Self fund-

ed plans are prohibited from favoring highly compensated employees (IRC Section 105(h)).

ERISA plans require a plan document and the filing of Form 5500 (more than 100 eligible employees). Many in-

sured employers assume that a booklet delivered by an insurer is a plan document. This is usually not the case.

A “wrap” document can be paired with the insurers’ certificates to create an ERISA compliant plan document.

The Health Insurance Portability and Accountability Act (HIPAA) of 1996 had three major goals:

First, that individuals can freely move between jobs without loss of coverage.

Second, that the exchange of health care financial and administrative information is standardized.

Third, that the privacy of patient information is protected.

HIPAA continues to evolve through the regulatory process. With HIPAA, the federal government entered into

areas historically reserved for states, namely the regulation of insurance by mandating rules regarding pre-

existing conditions. Prior to HIPAA, it was possible to be denied health coverage when switching jobs even

though a person had continuous coverage. HIPAA prohibits discrimination based on health status.

HIPAA legislated the standardization of claims administration formats, accelerating electronic claims submission.

The handling of Protected Health Information (PHI) directly effects sponsors of employer health plans. Data se-

curity requirements were bolstered with the addition of HITECH in 2009. Penalties for HIPAA violations can be

significant and employers need to put serious thought into how they handle PHI.

Plan sponsors need to ensure that business associate agreements are in place for required parties, including

claims administrators, wellness providers, consultants, and other vendors that review or analyze health infor-

mation. Employers need to designate a “Privacy Officer” with responsibility for privacy policies and procedures.

COBRA and Leave Management. COBRA was passed in 1985 to provide insurance security for those losing

their jobs, voluntarily or involuntarily. The relevance of COBRA is under question now that access to coverage is

essentially unrestricted. COBRA applies to companies with 20 or more full time employees. The Family Medical

Leave Act (FMLA) was passed in 1993. The law makes available up to 12 weeks of unpaid leave for families with

illness, pregnancy or care of a newborn child, adoption, or foster care needs. The law applies to employers with

50 or more full time employees. ACA does not effect FMLA.

Employee Notices and Disclosures. Notices required from years of legislation and regulation can be over-

whelming. Most notices can be incorporated into the ERISA plan document, adding to the importance of a peri-

odic review.

Distribution with the plan document: Children’s Health Insurance (CHIP) Notice, HIPAA Notice of Privacy Practic-

es, Initial COBRA Notice, Women’s Health and Cancer Rights Act Notice, PPACA Grandfathered Status Disclosure

Notice, Qualified Medical Child Support Order Notice, Wellness Incentive Disclosure, USERRA Rights Notice

(military service). Furnished separately: Medicare Part D Notice.

05


Health Statements Gender Age Geography Smoking Wide Range of

Premium Rate Tiers

Pre Affordable Care Act

Affordable Care Act

Small Group and Individual Underwriting

The way in which insurers can underwrite health care coverage for individuals and small employers (2-100 full time employees) is

fundamentally changed under the Affordable Care Act. Common underwriting practices that helped insurers “cherry pick” risk are

no longer allowed. Under these new rules, health plans with a younger workforce will likely pay greater premiums than in the past.

Employers with older workforces will benefit from the elimination of health statements and compressed premium tiers.

The law provides insurers with subsidies in the form of risk adjustments and market stabilization premiums to encourage continued

marketplace participation.

For larger employers (100 plus) the changes are less significant as “experience rated” underwriting methods remain substantially

unchanged.

Insurers - Risk Sharing with the Taxpayers

Included in the Affordable Care Act are risk adjustment and

market stabilization provisions designed to encourage insur-

ance company participation in the individual and small group

market. Funding comes from the Reinsurance Assessment Fee

(applied to all medical plans) and from insurers who experi-

ence lower than expected medical claims loss ratios.

The Reinsurance Assessment fee is $63 per member per year

in 2014, $44 in 2015, and undetermined for 2016. The law

anticipates that the “market” will be stabilized after three

years, at which point the assessment fee will no longer be

needed. Most industry experts view this outcome as unlikely.

HHS pays insurer 80% of loss*

HHS pays insurer 50% of loss

No Payments

Insurer pays HHS 50% of gain

Insurer pays HHS 80% of gain*

Limited

* 3:1 range; actuaries generally believe that a 5:1 range provides an accurate reflection of claims

Not Permitted Not Permitted

108%

103%

97%

92%

Risk Adjustment - Mitigates Insurer Risk

HHS = Health and Human Services

Loss Ratio Financial Payment

Underwriting Health Care Benefits 06

*


To remain compliant with the ACA, a Situational Assessment should be performed

on a regular basis. A proper assessment requires a comprehensive payroll feed

and plan design details. Geography, demographics, employer premium funding,

work force strategies, and corporate structures impact findings and recommenda-

tions.

Under the “participate or be taxed” requirements, an employer that offers em-

ployees a plan that is Affordable and provides Minimum Value will not be taxed.

Failure to do so will result in an annual tax of $3,000 for each employee that ac-

cesses coverage through a public health exchange and receives a subsidy.

Alternatively, an employer can offer a health plan that covers 95% of full time em-

ployees that may not be Affordable or provide Minimum Value. In this scenario, if

just one employee receives a subsidy through a public exchange the employer will

be assessed annually $2,000 per all full-time employees regardless of how many

employees have coverage. In reality, few employers will take this risk.

Tax penalties are not tax-deductible, thereby increasing their effective cost.

The Employer Mandate requires that all employees working an average of 30 hours per week or more must be offered medical cov-

erage or be subject to a tax. This seemingly simple requirement has led to a great deal of confusion and subsequent clarifying regu-

lations from the IRS. Authors of the law failed to appreciate the number of unique employment arrangements. In general terms,

employers are allowed to track average hours using several “standard measurement periods” matched with a corresponding

“stability period” under which benefits have to be offered whether the employee maintains the 30 hour week minimum or not. All

of the employee’s compensated hours must be considered in the calculation, including vacation time, holidays, and paid medical

leave.

Confusion has led some employers to cap weekly hours to just under 30 hours even though the law provides a high degree of flexi-

bility in the calculation of average hours. Employers who intentionally cut hours to avoid providing benefits may violate ERISA Sec-

tion 510.

Part Time Employee Calculations

Your Situational Assessment 07


Employers have been implementing and managing wellness programs for more than a decade. A major study of employer-based

wellness programs from the Rand Corporation, “Workplace Wellness Programs”, offered a tepid view as to the effectiveness of most

programs. Today, many employers are realizing that old approaches to wellness rarely work well and that new approaches need to

be explored. Based on Fedeli Group research and experience a wellness program should have the following:

1. Cultural alignment and senior management support

Employers that live and breathe wellness will have employees who do the same. Wellness needs to be a natural exten-

sion of an organization’s identity.

2. Proactive and ongoing education

Improving health is a long-term process that requires reinforcement, commitment, and the changing of habits.

3. Financial reward for measurable goal attainment

A well designed wellness program provides tools, the encouragement, and the culture to drive change across the enter-

prise. But ultimately, individuals must take responsibility for their own actions.

Wellness programs are not for everyone. From the exclusive standpoint of potential premium savings smaller employers (fewer

than 100 employees) will not benefit based on the ACA’s fully insured underwriting rules. Also, employers with high turnover may

not directly benefit. But larger employers, employers with stable workforces, and self funded plans can benefit not only from po-

tential long-term premium savings but from improved productivity.

The Affordable Care Act, along with clarifying regulations, provides comprehensive wellness program guidance. Wellness regula-

tions are for the most part well-vetted.

Reward based on attaining

a health standard

HIPAA wellness rules apply

30% premium differentials allowed; up to 50% if tobacco use considered

Health Standard: BMI, Blood Pressure, Glucose, Cholesterol, Tobacco

Reward not based on attaining

a health standard

ACA Compliant Approaches

Health Contingent

A health contingent program requires that a health plan member meet

a certain health standard to qualify for a lower premium. Plan mem-

bers unable to meet the standard must be offered the opportunity to

participate in a “reasonable alternative” in order to be eligible for the

lower premium.

Participatory

Making Wellness Work


The table to the right illustrates the significant direct medical plan

costs associated with chronic conditions. In addition to hard dollar

costs, the loss of productivity is also significant. A Productivity In-

sight report from The Standard Insurance Company noted that em-

ployees with two or more chronic conditions lose an additional 12 to

14 work days per year compared to those without multiple chronic

conditions.

Claimants: Unique individuals with claims for a given condition

Comorbidities: Total number of chronic conditions per claimant

Risk Index: Score based on 12 months of data ranked on a scale of 0-25;

the higher the value the greater the risk (using algorithms from Op-

tumInsight)

The Cost Impact of Chronic Disease

Employee Well-being

The Gallup organization and Healthways researched the impact of

employee well-being on workforce productivity and direct financial

costs to employer health and disability plans. Based on five statistical

dimensions that included measuring employee sense of purpose,

social relationships, sense of financial security, community linkage

(including safety), and physical health the study found that so-called

“suffering” employees incurred direct health related costs that were

2.5 times as great as those who were considered to be “thriving”.

The study found that 28% of participants were not thriving in any of

the well-being categories. Only 7% of participants were thriving in all

five categories.

The connection between employer based wellness programs and

overall employee well-being is often overlooked. Employers should

consider a thorough review of existing employee assistance pro-

grams (EAPs) and their linkage to wellness plan programming.

Claimants Risk Index Paid (Annually)

per Claimant Comorbidities

0 61.2% 8.3 $2,200

1 20.4% 12.85 $4,170

10.5% 15.27 $7,450 2

5.0% 17.02 $10,900 3

2.9% 18.99 $20,900 4

Motivation to Change Lifestyle

Source: Fedeli Research

“Suffering” employees cost their em-

ployers 2.5 times as much in health

related costs compared to “thriving”

employees.

Gallup and Healthways Research

A comprehensive study by the National Institute of Health (NIH),

“Smoking and Weight Change After New Health Diagnosis in Older

Adults,” measured the motivation to change lifestyle upon learning

of a new, serious health diagnosis. The motivation to change under

these circumstances is dramatic. But when not faced with a crisis

situation many Americans continue with a lifestyle that includes con-

sistent and ongoing poor health choices that gradually lead to ongo-

ing and costly chronic conditions. Human psychology can challenge

the very essence of employer-based wellness programs. Likelihood of Quitting Smoking Relative Weight Loss

No diagnosis New diagnosis New diabetes

Multiple diagnosis

1

3.2

6 times as likely

1 1.5

2.5

08


A Fresh Look at an Established Funding Method

The passage of ERISA in 1974 provided employers with the ability to

offer a consistent benefit plan to employees across states without con-

cern for the various state specific laws and mandates. Today, most

large employers and over 50% of employers with 200 employees or

more self fund their health care benefits.

With underwriting uncertainty in the insured market combined with

the additional frictional costs associated with the ACA health insurer

tax (2-3% of premium) and existing insurance premium tax (1.4% in

Ohio), self funding is becoming increasingly popular for firms with few-

er than 200 employees.

Captives and Health Care Plans

Captives are often associated with the property and casualty business. But

health care captives operate as well, enabling smaller health plans to fund

stop loss insurance on a pooled basis, thereby reducing risk and providing

the potential to share in underwriting profits. A health care captive provides

no unique tax advantages but can be an attractive strategy in managing risk.

Self Funding Analysis

Finding the right balance between risk transfer (stop loss protection) and risk acceptance (employer paid claims) is key to a success-

ful self funded plan. Applying statistical calculations to assess volatility (standard deviation of claims), demographics (age/gender

factors), chronic condition assessment (managed well or poorly managed) will provide a high degree of confidence in setting health

care budgets.

Increasingly, “new” self funded products are being introduced to serve the small employer market. Plan sponsors should carefully

evaluate contract terms, including the price and degree to which risk is transferred to an insurer.

Fiduciary Obligations for Plan Sponsors

A self funded health plan can offer significant finan-

cial and administrative advantages. Plan sponsors

should be aware that a self funded plan adds fiduci-

ary obligations under ERISA. A fiduciary must act

solely in the interest of plan participants, carry out

duties prudently, investment plan assets in a diversi-

fied manner, and follow plan documents. Fiduciaries

who breach their ERISA duty are personally liable for

loss of plan assets, errors and omissions, penalties,

and attorney fees.

A proper risk management strategy includes:

Plan documents are current, Form 5500’s are filed,

and plan participants are informed of any “material

modifications.”

Adequate insurance coverage is in place including:

a. Employee benefits liability (administrative errors)

b. Fiduciary liability

c. ERISA Bond

Feature Paper

Enrollment

Online

Enrollment

Private

Exchange

Defined contribution funding Sometimes Yes Yes

Regulatory compliance support No Yes Yes

Decision support tools No Sometimes Yes

Multiple plans Limited Yes Yes

Multiple medical insurers No No Sometimes

Administrative efficiency No Yes Yes

Enrollment Approaches

Self Funding 09


2013 Account balances estimated to

be in excess of $20 billion

The fact that most health care services are paid for by third-party payors (insurers and government)

creates an imperfect marketplace. Users of health care (with insurance) are insulated from the true

cost and in general do not have an incentive to “shop” for the best quality and price. Health care

purchasing decisions will never be as simple as buying a “normal” consumer good. But compared

to just several years ago, consumerism is taking root. Most insurers websites now offer pricing

models, provider quality measures, and other “shopping” tools.

Health Savings Accounts Continue to Grow

7.2

1.6 Million

2.8

Source: EBRI / Greenwald & Associates Consumer in Health Care Engagement Survey—2013

Number of HSA Accounts

2015 HDHP Maximum

Out of Pocket

ACA Maximum

Out of Pocket

Minimum

Deductible

Maximum HSA

Contribution

Single $6,450 $6,600 $1,300 $3,350

Family $12,900 $13,200 $2,600 $6.650

Health Savings Accounts (HSAs) are tax exempt accounts established for the purpose of paying qualified medical expenses. Contri-

butions are tax deductible and distributions to pay for qualified medical expenses are tax-free. Contributions into an HSA can only

be made if a person participates in a qualified High Deducible Health Plan (HDHP). In a regulatory quirk, 2015 ACA maximum out of

pocket limits are slightly higher than the limits for HSA qualifying high deductible plans.

2006 2010 2013

Private Exchanges Redefined

The term health insurance exchange has become part of the general dialogue about health care. The federal and state health ex-

changes provide a government subsidized market for Americans not eligible for Medicaid and not able to participate in an employer

-based plan that is both Affordable and provides Minimum Value.

Private exchanges entered the mix after several large, national employers announced plans to provide employees with a fixed dollar

contribution towards health care with which they could pick from an array of health plans from multiple insurance companies. De-

spite the widespread promotion by various media channels, private exchanges based on this definition have had limited success.

Challenges with risk sharing between participating insurers and the general challenge with self funding these types of arrangements

will prevent private exchange growth in the near future.

The definition of a private exchange has now evolved to include any online platform that combines decision support tools for em-

ployees in the selection of benefits. Private exchanges under this broader definition are essentially next generation online enroll-

ment systems. These software tools are evolving rapidly as employers must grapple with the added complexity of managing a

health care plan under the ACA, including the tracking of hours, employee notices, and government reporting requirements.

Consumerism and Decision Support 10


Communication of your employee benefit package is often more important than the package

itself. A comprehensive employee communication strategy linked to employer paid benefits,

buy-up benefits, and voluntary benefits will enhance employee loyalty and attract top talent.

From our experience, most employers underinvest in communication.

The Affordable Care Act is encouraging and sometimes forcing a reevaluation of current and long-term strategies for all connected

to the complex industry of health care. The status quo is being questioned from all angles. But many employers have been slow to

adopt innovation in their own health care plans. A combination of tradition, fear of change, and misunderstanding of what can be

done makes the adoption of new ideas slower than might be expected given the expense of providing health care coverage.

Options employers should learn more about include: Chronic disease management (including value based programs), convenience

clinics, integrated pharmacy with medical care management, narrow provider networks, centers of excellence for certain medical

conditions, and using administrative technology to reduce internal costs while enhancing employee communication.

Health Care Plan Strategies 11

Strategy Short-Term

Impact

Long-Term

Potential ACA and Industry Trend Impact

Increase medical plan deductibles,

copays, and coinsurance Minor Limited

ACA mandates out of pocket maximums; large claims

are the major driver of cost.

Increase pharmacy plan cost share Insignificant None Traditional drugs are coming “off-patent.”

Integrate specialty pharmacy with

medical plan and case management Good Necessary Specialty drugs are growing in use and price.

Self fund health care benefits Promising Good Flexibility, frictional cost savings, creative plan feature

potential. Need to carefully assess volatility.

Dependent “management” Good Necessary

Tighter controls of health plan enrollment through

spousal surcharges, spousal coverage verification, and

eligibility audits provide defensive protection as the

mix of health care access changes under ACA.

Chronic disease management Limited Significant An investment in adherence will pay off in fewer large

claims; early stage business models.

Consumer oriented plans Good Significant

HSA plans are growing for a reason. These plans have

lower trends in cost. Couple HSAs with innovative

ideas such as telemedicine and transparency tools.

Wellness programs Limited Promising ACA encourages wellness. A serious commitment from

employer is required.

Decision support tools / electronic

administration Cost item Necessary

ACA reporting requirements necessitate more robust

administrative systems for mid-sized employers.


The Affordable Care Act has not made health care more affordable. But the law has forced employers with 50 or more full time

employees to participate on terms set by the federal government. For the moment, the vast majority of employers are maintaining

their health care plans in lieu of paying a tax. The need to attract and retain employees requires them to do so. Unless the pre-

ferred taxation of health care benefits (Section 4) is changed, larger employers will continue to offer these plans well into the future.

But over time the way in which health care is accessed will change. An aging population is swelling the Medicare rolls and broader

income inequality issues in this country mean that Medicaid participation will continue to grow. The public exchange will grow, but

not as much as some expect, mainly due to the fact that so many employers will continue to offer a plan that is both Affordable and

provides Minimum Value, thus voiding the possibility of exchange subsidies for those who apply. The option to exit health care

which five years ago seemed to be the natural course is not happening.

The added layers of regulation (in addition to ERISA, HIPAA, and other laws) are burdensome but not insurmountable. Smaller firms

will need to employ human resources administrative technology that up until now may have been considered unnecessary.

Can health care be more affordable in the future? While demographic trends such as an aging population and the obesity epidemic

are difficult to overcome, a surprising number of initiatives are taking place throughout the health care delivery system. Some of

these initiatives have been spurred on because of the ACA. Compared to five years ago, employers have more choices in how they

go about designing their health plans. Our advice to is to dig deep, think creatively, and take action. We look forward to being of

assistance.

The Fedeli Group is a Cleveland based firm specializing in employee benefits consulting and property and

casualty risk management solutions.

The services and products offered by The Fedeli Group are integral to helping organizations and individuals

protect assets, manage risks, and maximize human resources.

At The Fedeli Group, nothing is more important than building relationships with clients, associates, strate-

gic partners, and the communities we serve. Our associates are committed to bringing forth the latest,

most creative, and thought provoking ideas and solutions.

The Fedeli Group strives to become an extended part of your organization so that the exchange of infor-

mation, ideas, and resources can be maximized for your benefit. A digital copy of this guide can be found

at: thefedeligroup.com/ACAguide

About The Fedeli Group

Concluding Thoughts


an employer's guide to the affordable care act

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