Alice in ACA Wonderland

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ImageAlice: Cheshire-Puss, would you tell me, please, which way I ought to go from here?

Cheshire Cat: That depends a good deal on where you want to get to.

Alice: I don’t much care where.

Cheshire Cat: Then it doesn’t matter which way you go.

Alice: —So long as I get somewhere.

Cheshire Cat: Oh you’re sure to do that if you only walk long enough.

Lewis Carroll, The Adventures of Alice in Wonderland

2013 has arrived and employers now find themselves on the other side of a looking glass facing the surreal world of healthcare reform and a confusion of regulations promulgated by The Accountable Care Act (ACA) and its Queen of Hearts, HHS Secretary Sebelius. Many HR professionals delayed strategic planning for reform until there was absolute certainty arising out of the SCOTUS constitutionality ruling and the subsequent 2012 Presidential election. They are now waking up in ACA Wonderland with little time remaining to digest and react to the changes being imposed A handful of proactive employers have begun, in earnest, to conduct reform risk assessments and financial modeling to understand the impacts and opportunities presented by reform. Others remain confused on which direction to take – uncertain how coverage and affordability guidelines might impact their costs.

If reform is indeed a thousand mile journey, many remain at the bottom of the rabbit hole – wondering whether 2013 will mark the beginning of the end for employer sponsored healthcare or the dawning of an era of meaningful market based reform in the US. HR and benefit professionals face a confusion of questions from their companions – – CFO’s, CEOs, shareholders and analysts.

How will reform impact our business? Will we take a hit to earnings as a result of penalties or the cost of having to expand coverage? Have we reviewed our strategies for modifying our employment practices to mitigate coverage risks? How will we offer benefits in 2014 and beyond? What financial and coverage considerations should guide our ultimate decisions? Do we think we can manage our healthcare costs to low single digit levels of annual medical inflation? Do we have the right funding strategy? What are our competitors likely to do?

It seems that questions only lead to more questions. For many, the future is less certain and for a few doomsayers, ACA is the final chapter in a narrative about a world of entitlements gone mad. Like Alice, benefits decision makers are asking, “Which way should we go?” – – to which the historical response for employers has been: “follow the path of least disruption”. Yet, ACA has set a new normal in motion and with it, the historical axioms of “do no harm” will no longer work in benefits management. There is no path to achieve the holy grail of affordability that does not carry some risk of delay, disruption, confusion and/or increased administrative complexity. The decisions one makes for 2013 will have an impact on costs and plan participation in 2014. It’s time to get moving but you’ll need some advice to safely cross Wonderland:

1. Think like a risk manager – Any risk management professional has been trained to first review risks, evaluate risk drivers, eliminate or mitigate the identified risks and find the most advantageous way to finance the risks. The roadmap to ACA compliance requires similar planning. Equipped with payroll, coverage and actuarial plan value estimates, any employer can quickly determine what, if any, penalties they may face associated with offering unaffordable or inadequate benefits to eligible employees. Once the risk is assessed, you can explore safe harbor and limited penalty scenarios as well as financing solutions designed to direct participants toward “win-win” scenarios that achieve savings for the employer while helping lower paid workers become eligible for more generous federal subsidies.

2. Strategy first, structure second – Planning for reform means understanding where you want to go. Do you believe providing healthcare is an essential part of the social contract between you and your employees? Are your business conditions changing – causing you to rethink what you offer to employees and how you pay for their benefits? Are higher per capita healthcare costs requiring you to think differently about providing compensation, benefits and retirement? Your total compensation strategy may require you to think differently about the road ahead. You may want to tie annual medical premiums to profits through a defined contribution approach. Strategy is essential. It dictates your direction and enables speed. Without it, you are merely running through the forest, hoping to find a path.

3. The reform roadmap requires you to either “play” or “pay” – While certain industries such as retail, manufacturers, hospitality and agriculture are already calculating the additional costs associated with reform, other employers are finding that they satisfy many of the requirements dictated under reform.

Most firms over 100 employees generally offer medical coverage that meets or exceeds ACA coverage and affordability requirements for the majority of their employees. They have little exposure to penalties. However, these same firms are plotting the coordinates of how reform may change the way they think about financing and offering medical benefits. If the Y axis of reform is “Play” (some version of employer sponsored healthcare) and the X axis is “Pay” (electing to pay a penalty either as a result of failing to meet affordability or coverage requirements), employers have a continuum of choices that range from Maximum Play (Cover All Eligible Employees) to Minimum Pay (Drop Coverage, Pay Penalties, Don’t Gross Up People For Lost Coverage). Each direction requires careful planning and an eye toward discrimination and coverage regulations dictated prior and post reform. One thing is clear: there is more than one way to navigate the Affordable Care Act.

4. Don’t feel guilty about reviewing pay or play scenarios – Reform gives any employer a rare opportunity to reexamine their employee benefits strategy. Management has a fiduciary responsibility to explore all the alternatives presented when business or public policy changes. There are obvious risks to course corrections that may steer you away from traditional employer sponsored insurance. They include the inability to attract and retain talent, effects on employee morale and one’s public image in the community. While over 85% of employers surveyed by the International Foundation of Employee Benefits confirmed their intent to continue to offer coverage, many are privately considering a different future. In the last two decades, employers have simply failed to rein in healthcare costs and have been stuck in a perpetual rut of health plan renewals that start with double digit increases and end with the shifting of costs to employees in the form of higher contribution requirements, reduced benefits or lower wages that arise out of lower profit margins eroded by health spending. The question remains: have you really tried to change? Reform will either happen for you or to you. It is essential that you openly discuss every alternative and that you have a robust multi-year dashboard that holds all stakeholders accountable to achieving low single digit medical trends.

5. Wellness is vital for any employer who desires to continue to offer sponsored plans: ACA offers expanded wellness incentives to employers who aggressively embrace health management improvement. If an employee chooses not to participate in an incentive based wellness plan, it remains unclear whether the act of having to pay a higher premium would make the employee eligible for a public exchange subsidy. Assuming that those who choose not to participate in wellness incentive plans are more likely to be less engaged employees, it stands to reason any employee that opts into a public exchange to avoid the accountabilities of a wellness based incentive plan could help an employer sponsored plan improve its own risk profile.

6. Understand public exchange benefits: Private insurers participating in heavily regulated public exchanges will be under intense political pressure to keep costs down. States and HHS have publically noted that double digit annual premium increases will be viewed as “egregious”. Most open access PPO plans continue to be plagued by double digit medical trends. It is likely that while community rated public exchange plans may actuarially mirror private plans, they will attempt to incorporate more stringent medical management controls such as mandatory primary care gatekeepers, narrower PPO networks and aggressive preauthorization oversight to limit overconsumption, fraud and abuse. Additionally, community rating will shift more premium cost to younger employees as age/sex rate bands limits exchange insurers ability to spread premium burdens to older participants. To the degree an employer is actively pushing employees toward a public exchange, the employer must understand that cost and coverage will not mirror private plans. The rules governing healthcare in the public exchanges may comes as a shock to previously coddled private insured patients while it will be a relief to the uninsured.

7. Defined contribution (DC) plans are a way to redistribute costs, not a path to improved affordability: If you do entertain the notion of migrating to a more defined contribution approach for employees, be certain to understand your options can range from a cafeteria style plan using a single insurer supported by on-line decision and enrollment support tools to a third party private exchange where employees are offered an annual stipend and a range of insurer choices. Cafeteria plans have been available since the early 1980s. Many of these plans failed because of their inability to simplify complicated administration and the natural adverse selection that arose when younger, healthier employees chose lower priced coverage options and redirected premium that might have helped offset claims into the purchase of alternative benefits. Choice will always help reduce employee heartburn when confronted with rising costs. People tend to value those benefits that they can choose for themselves. In the case of a single carrier defined contribution plan, the employer remains active as plan sponsor but has the ability to fix annual contributions while offering employees a greater range of medical and ancillary benefits choices. In the case of multiple carrier private exchange, the employer allows the group to fragment as insurers compete for participants. In these instances, it is more likely that an employer becomes an even more passive financial sponsor, defining annual subsidies but over time becoming less concerned over issues arising from excessive utilization, lack of engagement or rising costs. In a future dominated by DC plans, affordability becomes the employee’s problem.

DC is a cost shifting strategy. If plan costs grow at historical trends, employees will become increasingly disgruntled at the eroding value of the benefit dollars they receive to purchase benefits in the private exchange. Without active efforts to control costs, private exchanges will experience a similar limited life expectancy to the myriad unsuccessful state and private group purchasing based arrangements that have preceded them. Despite the risks, some industry experts view the move toward defined contribution medical plans as inevitable and a logical migration similar to the path taken by defined benefit pension plans toward the 401k savings plan.

Some firms will be intrigued with the notion of private exchanges as they allow management to refocus their energies on other strategic human capital priorities. There is increased recognition that national insurers are engaged in synchronized swimming with similar networks, unit cost contracts, and administrative services pricing. Some analysts believe that offering the choice of multiple insurers in a private exchange reduces employer leverage, undermines the ability to self insure and leads to the inevitable deconstruction of employer sponsored healthcare.The path through ACA Wonderland will invariably require crossing the bridge separating defined benefit and defined contribution plans.

8. Self-insurance is 20/20 vision– Health reform includes assessments that stakeholders will pass on to commercially insured and self funded plans. The preservation of group fully insured policies are essential to insurers profit models. The opaque practice of pooling fully insured risk often lead to the overcharging of employers. Many fully insured plans already contain inflated margin, administration and reserve charges as well as hide inflated broker remuneration. For employers under 300 lives, many insurers do not divulge paid claim data that might help an employer better direct their health management strategies. Despite ACA capping an insurer’s overall allowed loss ratio at 85% for their entire block of 50+ life insured accounts, any individual client can still run well below an 85% loss ratio and they may never know it. Self-insurance remains the most efficient method of financing healthcare – provided an employer understands its risk tolerance. Self-insurance, if structured correctly, can limit financial risk while maximizing transparency. Transparency leads to increased competition leading to lower costs. We estimate that post reform, an employer that chooses to self fund may avoid as much as 4% to 8% of additional expenses arising out of ACA insured plan fees, state premium taxes, margin loads for increased risk arising from compliance, the cost of complying with state mandated benefits and the lost opportunity cost arising out of one’s inability to understand what one’s true loss ratio is when negotiating a renewal.

Which way? The road through Wonderland will be serpentine and fraught with blind corners, misinformation, and strange characters. The future of employer sponsored healthcare and market based reform hinges on which direction employers choose to move. Those that understand where they are today and move with a blend of caution and resolve have a higher probability for making it through the looking glass. For those who remain behind, irritated by the hassles imposed by reform, the future will be considerably more complex. Will we eventually navigate this upside down world of regulation and change? Oh yes! But you have to first decide if you are looking for a way forward or a way out. How long will it take to arrive?

That will depend on whether you know where you are going…

The Day After Tomorrow – Human Resources and Surviving Health Reform

Medicare and Medicaid as % GDP
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As the first snowflakes of change fall on the eve of health reform, HR professionals may soon wake up to an entirely transformed healthcare delivery landscape.  The Patient Protection and Affordable Care Act (PPACA) clearly will impact every stakeholder that currently delivers or supplies healthcare in the United States.

While the structural, financial, behavioral and market-based consequences of this sweeping storm of legislation will occur unevenly and are not fully predictable, this first round of healthcare legislation is designed to aggressively regulate and rein in insurance market practices that have been depicted as a major factor in our “crisis of affordability” and to expand coverage to an estimated 30 million uninsured.  However, fewer than 30 percent of employers polled in a recent National Business Group on Health survey believe reform will reduce administrative or claims costs.

Yet, it is unlikely that reform will be repealed.  For all its imperfections, PPACA is the first in a series of storm systems that will move across the vast steppe of healthcare  over the next decade resulting in a radically different system.  Whether reform concludes with a single payer system or emerges as a more efficient public-private partnership characterized by clinical quality and accountability remains obscured by the low clouds and shifting winds of political will.  One thing is certain during these first phases – inaction and lack of planning will cost employers dearly.

As the U.S. government struggles to rein in an estimated $38 trillion in unfunded Medicare obligations, the private sector and commercial insurance will feel the weight of the government’s efforts to reduce costs and impact our $12T of public debt.  HR professionals will have to act thoughtfully to insulate their plans from the inflationary effects of regulatory mandates and cost-shifting.

So while many HR professionals are getting hit from all angles – finding it difficult to  continue to transfer rising costs to employees, unwilling to absorb double-digit trends, under-staffed to intervene in the health of their populations and uninspired to assume the role of market catalyst to eliminate the perverse incentives that reward treatment of chronic illness rather than its prevention – they must forge ahead to address the intended and unintended impacts on the estimated 180 million Americans covered under their employer-sponsored healthcare plans.

To prevail over the elements, one must have a map and a flexible plan.  It also helps to have a qualified guide.  Consider the following as you brace for the “new normal.”

  • Think Twice When Someone Suggests Dumping Health Coverage – Many smaller and razor-thin margin employers will be tempted to drop medical coverage and pay the $2,000 per full-time employee penalty – essentially releasing employees to buy guarantee-issue coverage through health exchanges, which will be available in 2014.  Aside from impacting employers’ ability to attract and retain employees (consider how many of your employees will fall into the class of individuals eligible for federal subsidies), the assumption that the $2,000 will remain the baseline assessment per employee for those choosing to not offer coverage is a dangerous variable.  While it is clear that PPACA as it is currently constructed creates obvious incentives for employers to drop coverage and allow those eligible for federal subsidies to purchase through exchanges, it is unclear how the government can continue to subsidize proportionate contributions on behalf of those buying through exchanges when costs start to inevitably rise.  The General Accounting Office ( GAO) has already forecasted an increase of almost $500B in cost due to rising costs of subsidies as medical costs trend upwards. The forecasted CBO savings of $140B versus the GAO’s estimates of a $500B increase in costs have yet to be reconciled. Whether the $2,000 penalty was intentionally set low to entice employers to drop sponsored coverage and move America one step closer to a national system, or whether someone from the CBO missed a decimal, we expect the employer penalty for dropping coverage to increase as costs rise.  Employers should be certain to model their own costs to subsidize minimum levels of coverage today against an uncertain future of variable taxes that will only increase to fund coverage subsidies.
  • Pay attention to Section 105(h) now. – Many employers may be unaware that self-funded plans that discriminate in favor of highly compensated employees must comply with Code Section 105(h) non-discrimination rules.  As of the first plan year following September 23, 2010, these rules now will apply to non-grandfathered, fully insured plans.  Insurers may choose to exercise their right to either load rates for potential adverse selection or decline to quote because employers have failed to meet minimum participation percentages.  Section 105(h) testing is critical for industries, such retail, hospitality and energy that historically have excluded various classes of rank-and-file employees or provided better contributions and/or benefits to their top-paid groups. Penalties for not complying with the new regulations are $100 per day per employee.
  • Understand the sources of cost shifting pressure – As Congress and state governments wrestle with Medicare and Medicaid reimbursements and begin to focus on fraud, over-treatment and accountability for clinical outcomes, providers will feel the increasing pinch of reimbursement reform and will pivot in the direction of trying to shift costs to commercial insurance.  Physician hospital organizations (PHOs) and other integrated healthcare delivery systems – where health systems operate primary care, specialty and inpatient care – are accelerating – giving more clout to providers in contract negotiations and increasing commercial insurance unit costs, potentially exacerbating already conservative insurer claim trend assumptions.  HR professionals will need to better track employee utilization patterns for in-patient facilities especially in  high-use urban and rural commercial hospitals that also derive a large percentage of their revenues from Medicare. If a hospital derives 60% of its revenues from government reimbursement and 40% from commercial insurance, proposed fee cuts will impact facility revenues and create pressure to cost shift to private insurance.  An understanding of hospital utilization and consideration of tiered networks can help insulate your plans and drive lower costs.
  • Don’t be intimidated by self-insurance – Many employers underestimate the advantages of self-insurance and overestimate its complexity and risk.  But, in a post reform world, firms with more than 200 employees should give serious consideration to partial or total self-funding.  Aside from the total transparency of commissions, fees, administrative expenses and pooling charges, employers own their own data. The sooner employers get comfortable with self-insurance as a risk financing strategy, the sooner HR professionals can construct loss control programs that can mitigate claims costs. By self-funding, employers may better manage their population’s health risk; may avoid a myriad of state-based mandates legislated to fund potential shortfalls should local exchanges prove inadequate to contain costs; and may increase flexibility with respect to plan design. Be certain to understand the economics of your self insured arrangement.  A cheap third party administrator with weaker provider discounts and limited medical management capabilities ultimately costs you much more than services provided by a national insurer with better discounts.  In other cases, insurers may have more than one PPO network and assign the less aggressive discounts to their self funded TPA based clients.  Make sure you press for the best possible discounts.
  • Forget Wellness – Think Risk Management. – Wellness has become a broad-brush term to describe any sponsored effort at health improvement. Forget wellness. Population risk management (PRM) is the operative term to describe a process of understanding embedded health risks and structuring plan designs to remove barriers to care and keep people healthy. PRM requires access to clinical data, cultural engagement and designs that have consequences for employees who do not engage. If employers do not understand the risk within their workforces, it is impossible to improve results or be confident that plan changes will drive a desired result.  For example, more than 50 percent of claims arise out of modifiable risk factors and as few as five percent of employees drive 50 percent of claims.  The great news is PPACA actually increases employers’ ability to charge up to 30 percent more in premium for individuals who do not actively get and stay healthy.  Also, employers that establish comprehensive workplace wellness programs and (1) employ less than 100 employees who work 25 hours or more per week and (2) do not provide a workplace wellness program as of March 23, 2010 can take advantage of available government grants.
  • You are the “market forces” everyone keeps talking about and you need to use this power to influence on-going reform. – Employers purchase healthcare for more than 180 million Americans – about 60% percent of all individuals who have healthcare coverage, but ironically feel less empowered, informed or in control of their spending or their employees’ behavior as they access the system.  HR professionals must become activists for public health improvement and change – promoting healthy behaviors, transparency and accountability while putting an end to public-to-private cost shifting, overtreatment, fraud, abuse and clinical variability. Congress will only listen to employers because the other stakeholders have a perceived conflict of interest in how health reform is ultimately resolved.  Employers must build up the courage and resolve to begin to reshape the local, regional and national delivery models that result in overtreatment and lack of accountability for poor outcomes.

As we look out the window, the full force of reform is still swirling somewhere off in the distance.  As business hunkers down and adopts PPACA legislation, the question for many in HR is simply – will reform happen for me or to me?

Michael Turpin is Executive Vice President and National Practice Leader of Healthcare and Employee Benefits for USI Insurance Services. USI provides a range of business and risk brokerage, consulting and administration services to mid-sized and emerging growth companies across the US. USI is privately held and is a portflio company of Goldman Sachs Capital Partners.  Turpin can be reached at Michael.Turpin@usi.biz