To Play or Not to Play?

Sometime in late June, the United States Supreme Court is expected to announce a landmark decision on the constitutionality of all or part of the Patient Protection and Affordable Care Act, also known as ObamaCare. The ruling is likely to make the earth move in a number of realms – legal, political, and business – and could well force employers to walk back any plans made in anticipation of the law's full implementation in 2014.

After conducting more than six hours of oral arguments over three days, the nation's high court reportedly has voted on whether to strike down the law's individual mandate that anyone not covered by Medicaid or Medicare must purchase health care coverage or pay a fine. Many observers believe the justices will rule that the mandate is unconstitutional, but the rest of the law will remain intact – despite the unfathomable lack of a severability clause.

Others believe the entire law is in serious jeopardy, which will make the law's provisions moot. That includes the so-called "pay-or-play" question, where employers must decide whether to provide at least a minimum level of coverage, or pay a penalty that will help finance the health coverage.

In this look at the pay-or-play decision, we will assume the entire law remains intact – a possibility if you hold to the theory that Supreme Court justices always rough up attorneys during oral arguments, but that such treatment isn't always an indicator of how they rule.

We also look at steps that employers might have to take if the entire law is thrown out, and in the accompanying sidebar we will take a fresh look at whether the law, should it remain in force, is designed to result in government-run health care.


Company mandate


The Affordable Care Act does not mandate employer-provided coverage, but under "pay or play," employers that do not provide "minimum essential coverage" to full-time employees (and dependents) will be subject to an additional tax to help finance the coverage for their employees. (Exceptions are made for small businesses – those with fewer than 50 employees.)

In any given month in which employers fail to meet the coverage requirements, that tax would be equal to the product of one-twelfth of $2,000 and the number of full-time people employed by the employer during the month.

Although the penalty would apply to employers with 50 or more workers, they could subtract the first 30 workers from the payment calculation. In a hypothetical example, if a company has 100 full-time employees and does not offer minimum essential coverage, it would pay an amount equal to 100 minus 30, or 80 times the applicable payment amount up to $2,000 per full-time employee.

Under "minimum essential coverage," if employer-provided insurance exceeds 9.5% of the employee's W-2 income, or the employer plan has an actuarial value of less than 60% of covered claim costs, the coverage will not qualify as minimum essential coverage. (For smaller businesses, the ACA provides a temporary sliding-scale small employer tax credit to help offset the cost of employer-provided coverage.)

John Healy, senior account executive for M3 Insurance, said minimal essential coverage is well defined in the state-run health exchanges established under the ACA. There are four different levels of plans – bronze (the minimum), silver, gold, and platinum, and the bronze level plan is defined as covering 60% of the cost.

"Actuarially, the plan must cover 60% of the cost," Healy explained. "For a $10,000 hospital bill, the employer has to pay at least $6,000 of that $10,000. It's defined as 60% actuarial value, but in the industry we've reverted to talking about it in terms of the percentage of the dollars it's supposed to cover."

The extra tax, he added, will provide funding for those who are eligible for a premium credit. An employee is eligible for a premium credit when his or her contribution for an employer-provided plan exceeds 9.5% of his or her income – not household income, but an individual's W-2 income.

"So there are two tests – if the cost of the plan for individual employees exceeds 9.5% of an individual's take-home pay, or the plan is actuarially covering less than 60% of the costs, then there will be a premium credit, which will result in a penalty for the employer."

While most employers in Wisconsin have plans that are well over the 60% value, many also have plans that are significantly more than 9.5% of "their lower-paid employees' wages or W-2 income," Healy noted. "Really, the balancing act for an employer is to make the plan less expensive but also, in a lot of cases, less high quality so the employee can afford it and the employer can avoid paying the penalty."


Not so fast


Many believe that employers will be tempted to drop their insurance plan, meet the minimum actuarial requirements under the ACA, and pay a penalty that is less than the per-employee cost of health insurance coverage. Daniel Stafford, president and CEO of Stafford Financial Consulting Group, said the decision is not as cut-and-dried as it appears. He said Web-based actuarial tools have been developed that show that dropping coverage is not the right financial move.

"Basically, there is a misnomer out there right now," Stafford said. "Some people say, 'I'll just drop my plan and pay the tax or fine' or whatever you want to call it. But in reality, nine times out of 10, depending on the structure of the company and the number of employees that are coming on who have health care, it's really significantly higher to drop your plan and go into exchanges because there are some cost differentials on the deductibility or non-deductibility of the employee contributions to health care costs. It's a significant number."

In one hypothetical case developed by the aforementioned Web-based product, Stafford said a landscape company – with 60 of 170 employees enrolled in the health care plan – made the decision to drop its plan. The decision increased overall health care costs to the company by 134%; in some cases, he said, the increase was as high as 300%. "Frankly, there is a lot of misinformation out there in the marketplace right now," he stated.

Dropping the health plan with the intention of meeting the minimum coverage requirement is considered a risk from the standpoint of employee retention because of the potential for high out-of-pocket costs.

Barbara Zabawa, an attorney with Whyte Hirschboeck Dudek, said employers must think about whether the benefits they offer are used to recruit and retain employees. "How important is that benefit to the employees' morale, to employee productivity, and to the ability to grow as an organization?" she asked. "Employers really need to re-evaluate the value of providing health coverage."

What next?

Based on her reading of the Supreme Court's transcripts, Zabawa thinks the court is going to strike down the entire law. If that happens, employers and stakeholders will have to re-examine the actions taken since its passage in March 2010 and think about what they might need to "unwind" some of the agreements and policies they put in place.

For example, if employers have contracted for any preventive health services that are 100% covered, they would need to look at that. If they have issued a policy about covering all 26-year-old children of employees, they would have to reconsider that. Ditto if they received any money under the ACA for wellness or early retiree coverage. The list goes on and on.

"These are all questions they will need to answer if the law is entirely struck down," she stated. "The Supreme Court does have retroactive applications. There are provisions on constitutional questions retroactively important so that everyone, employers and the state, must realize that everything that has been done up to this point, over the last two years, will have to be re-evaluated in light of the court's decision – not just things going forward, but also the things that have already been done."

Since Wisconsin is one of the states that filed suit to challenge the law, Zabawa said businesses should be able to get some guidance from state government, which has suspended work on the health insurance exchanges established under the law.

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