4 Benefits of 'Bare-Bones' Insurance Plans
When the Affordable Care Act was signed into law in 2010, it was unclear how employers could avoid the $2,000 per worker penalty that they would incur if they did not offer adequate health insurance.
They knew that they would not be subject to the penalty if their payroll remained below 50 workers, and that the penalty would not be levied on part-time workers. The big question was what kinds of health insurance plans would satisfy the Internal Revenue Service.
Now, six months before the full implementation of the Affordable Care Act, after the publication of reams of regulations from the IRS and the Department of Health and Human Services, administration officials confirmed to Wall Street Journal reporters that large employers will not have to meet all the generous standards for health insurance plans offered on the state exchanges, but can offer minimal health insurance to avoid penalties.
These plans are known as “low-benefit,” “bare-bones,” or “skinny” plans.
This is because to comply with the law, employers have to offer “minimum essential coverage.” This turns out to be substantially less generous than the “essential health benefits” required for plans sold to individuals and small businesses.
Of course, not all employers will choose low-benefit plans. In order to retain workers, many employers are likely to offer generous plans, and offset the cost by paying a lower cash wage. However, low-benefit plans are likely to be attractive to employers with low-skill workforces, in the restaurant, retail, and leisure and hospitality industries.
Without low-benefit plans, employment in this sector is likely to move to part-time, where the employer will not be assessed a tax penalty, or become more capital-intensive, using fewer workers.
Firms face an additional penalty, $3,000 per employee, if that employee applies for subsidized coverage on one of the state health exchanges. But this penalty is per worker, not for the workforce as a whole. In almost all cases it will be smaller than the $2,000 penalty, which, if in effect, would apply to the entire workforce after the initial 30-worker exemption.
Paradoxically, small employers with a workforce of between 50 and 100 employees will be required to offer the more expensive “essential health benefits,” including hospitalization, maternity and newborn care, mental health and substance use disorder services, and pediatric services, including oral and vision care.
If low-benefit plans catch on, they will have a number of important ramifications.
First, the real losers will be businesses employing between 50 and 100 workers. Those who employ fewer than 50 will be exempt from penalties. Moving from 49 to 50 employees will be more costly on a per-worker basis than moving from 49 to 100. According to the U.S. Census, in 2010 there were 112,169 firms with between 50 and 99 employees in the United States, representing a total of 7.7 million employees, or 6% of nonfarm payroll employment.
Second, the availability of low-benefit plans is likely to reduce the penalties collected by the federal government. Employers, who can offer less generous plans, and individuals, who will accept the plans, will owe less in penalties. The Joint Tax Committee estimates that these penalties will amount to $185 billion over the next decade — $140 billion from employers and $45 billion from individuals. This might be too high.
Third, as low-benefit plans spread, more Americans will sign up for health insurance from state exchanges because expensive services such as surgery and hospitalization will not be provided by their employers. The amount estimated by the Congressional Budget Office for exchange subsidies and related spending, $1.075 trillion over the next decade, will likely rise.
Fourth, if employers can offer low-benefit plans rather than the generous plans required to be offered on the exchanges, this will reduce the cost of hiring, especially low-skill workers. Greater use of low-benefit plans will lower the cost of employment and encourage more hiring.
It turns out that the only requirements of large employer coverage are that it have no lifetime, annual, or per-beneficiary limits; does not rescind coverage of any enrollee except for in the case of fraud; covers preventive services; covers dependents until age 26; complies with documentation and reporting procedures as directed by the Secretary of Health and Human Services; does not discriminate based on pay; and implements an effective appeals process.
If large employers’ plans include those provisions, then even without emergency and hospitalization services, employers would not be liable for the $2,000 per worker tax. This cuts the cost of insurance to $480 to $1,200 annually, according to The Wall Street Journal, less than the current average price of $5,000 for a single plan. The disincentive to hire additional workers for firms with more than 50 workers would not be as great.
The higher the tax on employment, the lower is likely to be the hiring. Evidence already exists that some employers are reducing hiring and others are shifting to part-time work as a consequence of the new tax. The Bureau of Labor Statistics reported that the number of people working part-time for economic reasons in April rose by 278,000. Data for May are due to be released next Friday.
Employers would still be liable for a $3,000 penalty if their employees chose to buy subsidized insurance through the exchange. If the employer offers coverage in which either the single premium is greater than 9.5% of the employee’s household income, or the plan does not cover 60% of health expenses, then the employee can buy subsidized coverage on the exchange and the employer pays the $3,000 penalty. This is likely to be less than paying $2,000 per worker for the entire workforce, because some employees will get insurance through spouses.
Although large employers can legally offer low-benefit plants, small employers are not allowed to do so. This leads to an extraordinary discrepancy in potential tax payments between small and large employers. Hence, they face both higher costs for insurance and higher tax penalties if they fail to offer such insurance.
Small businesses with 100 or fewer employees were supposed to have access to a small business exchange entitled the Small Business Health Options Program (SHOP) Exchange as of Jan. 1, 2014. However, this exchange is not yet ready, and is not scheduled to open until 2015 — although it could be delayed further.
If low-benefit plans become widespread, they will enable large employers with low-skill workforces to keep hiring. In order to treat businesses equally, small employers should be allowed to offer similar plans. Low-benefit plans and catastrophic health plans with health savings accounts — where people are insured against major expenses and pay routine care out of pocket — should be available for purchase on the exchanges.
In March 2010, then-Speaker Nancy Pelosi said “We have to pass the bill so you can find out what is in it.” The more we find out, the less sense it makes.
This piece originally appeared in WSJ's MarketWatch
This piece originally appeared in WSJ's MarketWatch