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Designing the Right Health Plan

06/06/2016

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Market options for employers to consider for their health plans.

Note that these options can be blended in creative ways, and one plan may not be suitable for an employer’s diverse classes of employees. We invite you to consider each plan for each class, and through this method, build a comprehensive plan design that will best serve your business. 

For questions on this edition or any other issue, please contact LBMC at 615.377.4600 or email us at info@lbmc.com.

Current Plan Designs

For the employer who would rather not be in the business of health plan design, Professional Employer Organizations (PEOs) understand and are here to help. PEOs can offer a compliant means for employers to satisfy their employer mandate requirements without actually sponsoring a plan via co-employment arrangements. PEOs have been approved in federal regulations as valid means of preparing for PPACA and can be a much more valuable alternative than opting out and paying excise penalties. PEOs can offer other benefits beyond health plan access, as well, though these benefits go somewhat beyond the scope of this article.

Health Indemnity Plans

A popular option pre-PPACA for some employees was known as a “mini-medical” plan. These plans featured strict limitations on the amount of coverage offered by the plan, which in turn reduced costs. PPACA, with its prohibition on annual and lifetime limitations, made mini-medical plans noncompliant.

Mini-medical plans still live on, however, in a new form known as health indemnity, or fixed indemnity. These plans are not health plans, thus not subject to PPACA. Instead, these plans indemnify individuals against medical events, paying the individual upon the occurrence of a medical event. While the distinction may be a hair’s width from medical plan classification, indemnity plans are historical and compliant with PPACA purely through avoidance of the strictures of the law.

While health indemnity plans can offer an inexpensive means of covering employees, key features must be pointed out. 

  1. Health indemnity plans do not satisfy the employer mandates because they are not subject to PPACA. It would be an odd circumvention of the law if the opposite were true. As a direct result, health indemnity plans do not satisfy the individual mandate either.
  2. Health indemnity plans are not a stand-alone solution for applicable large employers’ full-time employees. However, these plans may remain viable in conjunction with other plans. In fact, under regulations released in May 2014, health indemnity plans must be combined with a plan subject to PPACA offering minimum essential coverage or else the health indemnity plan may not be sold. This rule is imposed upon insurance brokers, with the onus on the purchaser to disclose access to minimum essential coverage.

While some industry professionals have scoffed at the lack of enforceability of this new provision, the rule could prove quite impactful on some employer plan designs. For example, many employers have considered offering health indemnity plans to part-time employees. However, without a minimum essential coverage option, employees will not be able to enroll in the indemnity plan. The only minimum essential coverage option for such employees would be a public exchange plan or individual major medical plan. These plans would likely mitigate entirely the need for the indemnity plan altogether, calling into question an employer’s need to offer such plans in the first place without a minimum essential coverage option as well.

Minimum Essential Coverage (MEC) Plans

MEC plans have waxed, waned, and waxed again in the health plan industry. MEC plans are undoubtedly the most efficient plan design compliant with PPACA. MEC plans maximize efficiency by only covering federally mandated benefits, which are chiefly preventive and wellness benefits. Self-insured, MEC plans avoid state-mandated benefits otherwise imposed on fully-insured plans, leaving the plans with nicknames such as “skinny” or “bare bones.”

For employers facing increased coverage issues (covering more or new employees they would rather not cover), MEC plans can be a saving grace. MEC plans offer a compliant means to offer coverage in satisfaction of the first employer mandate and the individual mandate. Most MEC plans actually cost less than the opt out penalty, making them a natural solution for many employers.

The difficulty with MEC plans is the fact that MEC plans cannot meet minimum value. Thus, MEC plans cannot protect employers against both employer mandates. Exposure to excise taxes cooled enthusiasm for MEC plans.

Savvy MEC plan designers have since offered the market a fully compliant MEC solution which combines MEC plans with minimum value offerings to achieve satisfaction of both employer mandates. The means by which MEC plans do this vary widely, and some arrangements are superior to others. Thus, while MEC solutions are encouraged for employers seeking a plan to cover newly eligible employees causing increased coverage issues, careful selection is equally encouraged. When examining MEC plans, be sure to ask how the plan satisfied both employer mandates, how the plan is funded (beware of “group trust” or “association” arrangements), and how the plan maintains financial stability (beware of being on the hook for most claims).

MEC and Indemnity Plans

As mandated by new regulations, MEC plans can be combined with indemnity plans to offer a more robust benefits package to employees. Though this model seems to be federally approved from the indemnity plan side, great caution must be exercised in the structuring of this plan from the MEC plan side. The caution is required due to unfortunately ignored provisions in the tax code which discuss coordination of health plans subject to PPACA with health plans not subject to PPACA.

The federal government takes a dim view of employers attempting to circumvent PPACA. Abuse of plans which are not subject to PPACA to gain an advantage with a plan subject to PPACA will incite audits, penalties ($100/employee/day), and unwinding of the arrangement if improperly constructed. As coordination issues are often overlooked by industry players, consultation with a trusted advisor who understands coordination rules is strongly encouraged.

Major Medical Plans

Major medical plans are more traditional health plans, offering an array of benefits with deductibles, co-pays, and maximum out of pocket expenses. Most major medical plans, due to PPACA, will contain a specific list of benefits known as “essential health benefits.” This list includes items such as emergency room care, laboratory work, and rehabilitation services.

Major medical plans are offered to two different markets in two different forms. The markets are individuals and groups (employer sponsored plans). The forms are self-insured and fully-insured. Note that individuals cannot self-insure a health plan, as such a plan would clearly circumvent the individual mandate.

Individual Major Medical Plans

Employers cannot sponsor individual major medical plans. However, employers can direct individuals to individual market plans in certain arrangements. Defined contribution health plans often attempt to use employer dollars to pay for individual market coverage, with typically noncompliant results. Without a specific reason to educate employees on individual market options, these plans do not offer much utility to employers.

Group Major Medical Plans

Most health plans in the United States are group major medical plans. These plans are the standard off of which other plans are measured in terms of efficiency and desirability among participants. Manager and executive level employees generally require some sort of major medical plan to maintain attraction, retention, and motivation.

Major medical plans differ in a number of ways, but they generally all offer the same benefits. The variability of these plans is derived from deductible amounts, coinsurance arrangements, out-of-pocket amounts, and additions to plans such as health reimbursement arrangements, health savings accounts, flexible spending accounts, or more robust wellness programs.

A key, but less discussed feature of major medical plans, revolves around their provider networks. Provider networks include the medical service providers who accept the coverage of the plan. Different provider networks are able to negotiate different prices for medical services, which in turn affect the efficiency of the plan overall.

When examining a major medical plan, employers should consider for whom the plan is meant, and how attractive the plan must be to earn participation and the resulting boost to productivity and morale that should follow a benefits offering. Plans which are too beneficial will not see the return on investment for the cost of the plan. Plans which are not beneficial enough may not see the required participation insurers (and reinsurers of self-insured plans) mandate under threat of rate increases. Employers must be wary of two clauses in every major medical plan: minimum participation requirements and minimum employer contribution requirements.

Minimum participation requirements state that without a certain percentage of participation from eligible employees, premiums will go up. Furthermore, deviation of participation by a certain percentage mid-year could also increase rates. These provisions have typically been less prominent in the past. However, due to some employers’ strategy of opening eligibility to all full-time employees to one major medical plan, regardless of whether the newly eligible employees are likely to participate, will cause these provisions to increase rates to the detriment of the employer. Note that since most employees will contribute as much as legally permissible prior to a rate increase, employers will bear 100% of the cost of rate increases.

Minimum employer contribution rules render the 9.5% rule moot, discussed. Minimum employer contributions often exceed 9.5% of monthly adjusted gross income for lower to mid-level employees (though not for minimum wage employees in most cases). Thus, this provision will add employer expense to the major medical plan.

Self-Insured Plans vs. Fully-Insured Plans

The decision to self-insure or fully-insure should be based on a number of considerations. Is discrimination potentially an issue? Fully-insured plans currently avoid those rules. Is efficiency prized over risk? Self-insured plans tend to be more efficient when risk is managed effectively. Overall, employers should consider both options and fully examine the costs associated therewith for premiums, reinsurance rates, and claims expenses before making a decision. Salespeople who have only one form of plan to sell do not provide the full picture.

Private Exchange Plans

Private exchange plans are worth consideration, but they come in many different forms. Some private exchanges involve multiple carriers, some are offered by a single insurance company, and others are simply noncompliant with PPACA. Based on the incredible variety competing for superiority of the “private exchange” title, a reasonable breakdown cannot be provided in the general terms of this step. Instead, employers are encouraged, should a private exchange salesperson present this option to them, to consult with independent advisors, either internal or external to the business, to consider the potential value, risk, and compliance status of the private exchange plan.

Conclusion

The time for making decisions on the future of your health plan is now. From this list, and more likely from a combination of plans on this list, employers will find the program which best suits their business for PPACA. Note that, aside from PEOs (which can service all levels of employees), for lower level employees, the top of the list tends to be more appropriate, while the bottom of the list favors higher level employees. Properly mixing the two provides the highest chance for efficiency and an edge on industry competition.

LBMC can help you navigate through the extensive ACA requirements, determine any penalty exposure, and develop strategies to eliminate or reduce future penalty exposure. Learn about our ACA Compliance Consulting and Tracking services.

External PPACA Resources: