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No more ‘skinny’ health plans after year-end, but what is ‘substantial’ hospital coverage?
Update: A final rule,
Minimum Value of Eligible Employer-Sponsored Plans and Other Rules Regarding the Health Insurance Premium Tax Credit, was published by the IRS in the
Federal Register on Dec. 18, 2015.
The IRS has
issued a proposed rule clarifying that the transition relief provided to employers that offered health plans that otherwise met Affordable Care Act (ACA) minimum value requirements but nevertheless failed to provide “substantial” inpatient hospitalization or related physician services is ending on Dec. 31, 2015.
Under the proposed rule, published in the
Federal Register on Sept. 1, 2015, plans that relied on transition relief for 2015 won't meet the minimum value standard for plan year 2016 unless they offer coverage that is “substantial” for both inpatient hospitalization and in-hospital physician services, such as those provided by specialists. An explanation of coverage that qualifies as “substantial,” however, will have to wait for future IRS guidance.
The IRS explained in its proposal that “allowing plans that fail to provide substantial coverage of inpatient hospital or physician services to be treated as providing minimum value would adversely affect employees (particularly those with significant health risks) who may find this coverage insufficient, by denying them access to a premium tax credit for individual coverage” purchased through an ACA public exchange.
A Minimum-Value Glitch
Among the ACA’s
requirements for minimum value and affordability under the employer mandate that applies to applicable large employers (those with 50 or more full-time employees or equivalents) is the obligation to provide to full-time workers health coverage that has at least a 60 percent minimum actuarial value—meaning that the plan pays for at least 60 percent of covered benefits.
To determine whether an employer-sponsored plan provides minimum value, the plan sponsor may use the
minimum value calculator provided by the Department of Health and Human Services (HHS) and the IRS or, alternatively, as explained in
2013 regulations, may avail itself of “an array of design-based safe-harbors published by HHS and the IRS in the form of checklists to determine whether the plan provides MV” (short for minimum value).
“Employers and insurers could plug their plan design details in the HHS’s Excel-based calculator and the calculator generated a government-approved actuarial value reading. But a glitch in the data underlying the calculations allowed health plans to attain a 60 percent or better actuarial value reading without offering inpatient hospitalization benefits,“ explained Mark Holloway, J.D., CEBS, co-director of compliance service at Lockton, a benefits services firm. Holloway wrote
an analysis of the proposed rule for Lockton and provided additional insights in an interview with
As a result of this glitch,
in November 2014 the IRS indicated that health benefits must provide “substantial coverage” for inpatient hospitalization to meet the ACA’s minimum value criteria. But the agency provided transition relief for employers that, as of Nov. 3, 2014, had begun enrolling their employees in a plan (or had entered into a binding commitment to adopt a plan) that met the minimum value requirements without covering hospitalization or related physician services, often by offering preventive and basic care services through so-called “skinny” or minimum-value-lite plans. Employers would not have to pay penalties for failing to provide hospitalization through the end of plan years beginning on or before March 1, 2015.
Noncompliant Coverage Widespread
In August 2014,
Kaiser Health News reported that nearly 1 in 6 companies that planned to offer group health coverage for 2015 would fail to meet all of the ACA’s minimum value and affordability requirements, so the transition relief was surely welcomed.
“These minimum-value-lite plans are used most in certain industries, such as restaurant, retail and hospitality,” Holloway told
SHRM Online. “They can be offered in 2016, but the coverage alone won’t insulate an employer from penalties if the employee declines the coverage and instead purchases coverage on an exchange and gets a tax credit.”
Awaiting Further Guidance
In the proposed rule, the IRS makes clear that there will not be a further reprieve but fails to spell out what constitutes “substantial” hospitalization and related physician services in a plan that otherwise meets the minimum value threshold. “The guidance’s conspicuous absence of any definition of ‘substantial’ and the lack of any further transition relief—or safe harbor—appears to indicate that employers will need to proceed at their own risk” when designing minimum value coverage, Holloway said.
In the proposed rule, the IRS did solicit comments on when coverage is “substantial” for both inpatient hospitalization and physician services, with comments due by Nov. 2, 2015, so resolution may yet be coming on this lingering question.
As to how the federal agencies will ultimately pin down what constitutes “substantial coverage,” Holloway suggested that, “it’s almost impossible to get to a 60 percent actuarial value without covering some hospitalization. In our pricing model, inpatient services generally make up about 20 percent of allowed spending. Referral/specialist services, which excludes primary care physician services, make up another 19 percent of allowed spending. This means that a plan that covered neither inpatient services nor referral/specialist services is, at best, a 61 percent plan. That best-case scenario assumes all other services are covered at no cost to the member—very unrealistic. So, I think that most of these services would need to be covered.”
“Substantial coverage,” he added, “may just effectively mean that they are covered and any cost sharing needs to be subject to the overall out-of-pocket maximum, even if the member is bearing the full cost up to the out-of-pocket maximum.”
Holloway observed that the glitch remains with regard to the HHS’s minimum value calculator, “which has not been updated since 2013.”
Next Steps for Those with Minimum value Plans
While the IRS announcement will be disappointing to some, “the writing was on the wall” for minimum value plans,” said Scott Behrens, JD, assistant vice president and ERISA compliance attorney at Lockton. Employers able to keep these types of plans during the transition period “have generally been surveying their alternatives since the initial announcement last November,” he pointed out.
“These plan were intended to help the employer avoid the ACA employer mandate penalty while providing their employees (usually lower-income workers) with a pretty good benefit. The purpose of this announcement is to encourage employers to offer even better benefits, but the practical result might be the exact opposite,” Behrens warned. “This is in part because from an ACA penalty perspective, there is no difference between offering a plan that provides a decent benefit but lacks hospitalization and offering a plan that provides only preventive care benefits. Certainly, some employers will choose to offer more robust benefits, but those employers will need to take on a larger share of the premium cost to avoid a penalty for offering a plan that isn’t affordable.”
Some employers will be caught in the middle, Behrens noted, “not wanting to offer a very skimpy plan and not being able to afford a very robust plan. These employers might be tempted to find creative ways to interpret the requirement in the announcement to provide ‘substantial’ coverage for both inpatient hospitalization and physician services,” he said.
Whether that sort of “creativity” will pass muster with federal oversight agencies, however, remains to be seen.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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