The Supreme Court continues to mull the fate of the Affordable Care Act.  The House of Representatives continues to push budget bills that would defund ACA programs.  Many state legislatures have adjourned for the year without taking significant action to implement state exchanges.  But ACA implementation continues its onward march as the federal agencies — the Departments of Health and Human Services, Treasury, and Labor — press ahead deeper and deeper into the jungle of the detailed requirements and procedures on which implementation depends.

Much of this is being accomplished through “guidance”– notices, requests for comments, bulletins, and frequently asked questions.  Some of this guidance attempts to respond to questions that have arisen regarding provisions of the ACA as to which final rules have already been issued.  Other guidance addresses issues that must be sorted out before the legislation is finally fully implemented on January 1, 2014, only twenty months from now.  Proposed and final rules on these issues will presumably follow in due course, but for now, the agencies, realizing that insurers, employers, and the states are already preparing for 2014, are signaling their intentions so that planning can proceed.

In a number of instances the agencies are also genuinely asking for ideas:  How can particular provisions of the ACA be implemented so as to maximize their intended value for Americans while minimizing the administrative costs they impose on employers, insurers, and the state and federal governments?  This guidance has been largely ignored by the media and the public, but it in fact addresses issues that will affect millions of Americans, their employers and insurers.

The Medical Loss Ratio

On April 20, 2012, HHS released a technical guidance with questions and answers regarding the implementation of the medical loss ratio requirements of the ACA.  The medical loss ratio requirement of the ACA requires insurers to spend at least a minimum percentage of their adjusted premium revenue (80 percent in the individual ands small group market, 85 percent in the large group market) on health care claims and quality improvement initiatives.  Insurers that fail to do so must rebate the difference between their actual expenditures and the target to their enrollees.

Rebates will first be paid on August 1 of 2012 for 2011 coverage and annually thereafter. A Kaiser Family Foundation study of preliminary insurer reports found that insurers project they will pay $1.3 billion in rebates for 2011 to nearly 16 million Americans.  While the rebates to enrollees will be comparatively small, $127 in the individual market and $76 in the small group market, they represent the first tangible benefits from the ACA that many Americans will see.

The real purpose of the MLR requirement, however, is not to generate rebates, but rather to drive insurers to become more efficient and to limit their premium increases to increases in their actual claims costs.  There is evidence that this strategy is working:  Projected rebates for 2010 would have been a third higher than the projected 2011 rebates, demonstrating that insurers are in fact better aligning premiums and claims costs.

The MLR Technical Guidance addresses a number of issues that are in fact very technical — how reinsurance should be handled or whether insurers can pay rebates with debit cards — but a number of the questions address issues of more general interest.  The guidance clarifies that the MLR provision does not apply to self-funded, Medicaid managed care, or Medicare Advantage plans.  While it should have been obvious that a provision that regulates insurers does not apply to self-funded plans, this may be the clearest ruling yet that Medicaid managed care and Medicare Advantage plans are not group or individual health coverage regulated by the ACA.

The Guidance also clarifies that the ACA only recognizes individual, small group, and large group coverage.  State regulatory provisions that recognize “blanket health insurance policies” as a separate category; that treat “groups of one” (consisting of sole proprietors and their spouses but including no other employees) as small group rather than as individual coverage; or that treat individual association policies as group policies, are to be ignored for purposes of the MLR regulation (and presumably for all ACA provisions).   The Guidance also says that state law provisions requiring a higher minimum medical loss ratio standard than the federal minimum will only be applied in calculating federal MLR rebates if the state law provision was adopted since the enactment of the ACA on March 23, 2010.  This is apparently the case in Massachusetts, New Mexico, and New York.

Finally, and perhaps most interestingly, the Guidance provides that state and federal exchange fees are treated as regulatory fees for purposes of the MLR, and are thus subtracted from premium revenue (that is, essentially disregarded) before the MLR is calculated.  This should provide a significant incentive for insurers to participate in the individual and small group exchanges going forward, since user fees (unlike their other marketing costs) will not be treated as administrative expenses.

Verifying Access To Employer-Sponsored Isurance …

Another guidance published by HHS on April 26 addresses the question of how exchanges will verify whether or not applicants for premium tax credits have access to employer-sponsored insurance.  Under the ACA, individuals with employer-sponsored coverage are not eligible for premium tax credits as long as the coverage is affordable and provides “minimum value.”  For each month that a full-time employee of a large employer receives a premium tax credit because employer coverage is not affordable or does not provide minimum value, the employer will owe a penalty equivalent to an annual amount of $3000 up to a maximum annual amount of $2000 times the number of the employer’s total full-time employees.

There is currently, however, no available database that identifies whether individuals in fact have access to employer-sponsored insurance, much less whether that insurance is affordable or meets a minimum value test. HHS is considering a two-stage approach to this problem.  For years 2014 and 2015, HHS is proposing that it develop a standardized template or method for collecting and communicating information on available employer coverage. Applicants for premium tax credits could request this information from their employers before applying for tax credits or employers could simply make this information available to all employees.

The Guidance also proposes a verification process, under which applicants for premium tax credits would attest to lack of access to affordable and adequate employer-sponsored coverage.   The exchange would verify this attestation to the extent possible based on any databases it has available that might contain information on employer-sponsored insurance.  If it found an inconsistency in the information, it would provisionally approve the applicant for up to 90 days during which the inconsistency would be resolved. The exchange would then manually verify attestations for a representative sample of enrollees, gathering information directly from employers.  This approach would maximize accessibility to tax credits while minimizing the burden on employees and providing some assurances of the integrity of the determinations.

For 2016 and beyond, HHS would attempt to develop a database, perhaps based on reports that employers must file on coverage beginning in 2015 (described below), that would provide real-time verification of employer coverage.

… And Ensuring That Employer-Sponsored Coverage Meets Minimum-Value Requirements

A Notice published by the IRS on April 26, 2012 addresses the subsidiary question of how minimum value will be determined for employer-sponsored plans for purposes of determining eligibility for premium tax credits.  Calculation of “minimum value” for self-insured and large employer-sponsored insurance presents a conundrum.  The ACA provides that an employer-sponsored plan does not provide minimum value “if the plan’s share of total allowed costs of benefits provided under the plan is less than 60 percent of such costs.”  The ACA also provides that the percentage of total allowed costs is supposed to be determined under the rules that HHS promulgates for calculating actuarial value of exchange-based qualified health plans (QHPs).

The actuarial value of QHPs, however, is calculated based on their provision of the essential health benefits (EHBs), while self-insured and large group employer plans are not required to cover the EHBs.  How can HHS determine whether a large-group or self-insured plan covers 60 percent of benefits if there is no requirement as to which benefits it must cover?

Fortunately, the problem is likely to be limited in scope.  Employer-sponsored coverage is generally relatively generous.  A research brief published by HHS concluded that only 1.6 to 2 percent of employers have employer-sponsored insurance that covers less than 60 percent of allowed costs.  But a standard still must be established.

The IRS proposes three approaches to determining minimum value. First, it proposes to create a minimum value (MV) calculator to be used for calculating the value of self-insured and large group plans that would be like the actuarial value calculator it will create for determining the actuarial value of QHPs.  (Small group employer plans must cover the EHBs and could use the QHP actuarial value calculator for determining minimum value.)  The MV calculator would be based on claims data reflecting typical self-insured plans.  An employer-sponsored plan could enter its benefits, coverage of services, and cost-sharing terms into the calculator to determine whether it provides minimum value.

Rather than being based on the EHBs, however, the calculator would consider the cost of four categories of services: physician and mid-level practitioner care; hospital and emergency room services; pharmacy benefits; and laboratory and imaging services.  These categories account for the vast majority of actuarial value.  While plans would not be required to cover these services, virtually all plans in fact do.  The calculator would also, as required by the ACA, take into account employer contributions to health savings and reimbursement accounts (HSAs and HRAs) in calculating minimum value.  An employer contribution to an account would be treated like a similar payment for first-dollar insurance coverage.

Alternatively, the IRS proposes to create design-based safe harbor checklists. Employer plans that cover the four core benefit categories with cost-sharing attributes (deductibles, co-pays, coinsurance, and maximum out-of-pocket costs) that are at least as generous as those specified in the checklist could be deemed to provide minimum value without performing any calculations.  Finally, plans with very unusual benefit designs could qualify as providing minimum value by providing an actuarial certification based on tables and guidance provided by the IRS and recognized actuarial standards of practice.  The IRS requests comments on a number of issues related to implementing this strategy.

A practical enforcement plan, but potential risks for employees, particularly the sickest. The IRS approach achieves a practical interpretation of the statute that should minimize the burden on employers of compliance with the minimum value requirement.  Presumably most employers will simply ensure that their plan complies with the safe harbor checklist.  If employers see the safe harbors as an invitation to reduce benefits to a required minimum, however, employees will be the losers.

Moreover, the IRS requests comments as to whether employers should be able to adjust the value identified by the MV calculator to take account of other benefits, such as wellness benefits.  Although wellness benefits are quite popular with employers, they make consumer advocates nervous because they tend to reward the healthy rather than provide care for the sick, the traditional function of health insurance.  Allowing employers to meet the minimum value requirement through the provision of wellness benefits could potentially undermine coverage for those who need it most at a time when employer-sponsored coverage is already tending to decrease in value to employees.

In addition, the IRS published two requests for comments on April 26, 2012.  IRS Notice 2012-32 requests comments on how the IRS should implement requirements under ACA section 6055 requiring health insurers, self-insured plans, government-sponsored health plans, and other providers of minimum-essential coverage to file reports identifying individuals for whom they provide minimum essential coverage for purposes of determining compliance with the minimum coverage requirement (individual mandate).  Notice 2012-33 requests comments on the implementation of ACA section 6056 which requires large employers to file reports on the availability of employer-sponsored coverage for purposes of determining compliance with the employer responsibility provisions of the ACA.  Reports are due under these provisions beginning in 2015.  The IRS is seeking comments as to how to implement these reporting requirements while minimizing the administrative burden on reporters and duplication of reporting.

Stop-Loss Coverage And Self-Insured Plans

Finally, on April 27, 2012, HHS, Treasury, and Labor published a Request for Information Regarding Stop Loss Insurance.  The concern that drives this is the potential of stop loss-insured self-insured employer plans destabilizing the small group insurance market post-2014.

Employers have always had reasons to self-insure.  Plans that are self-insured escape state regulation, including state mandates, and can be less expensive than commercial insurance for low-risk groups.  The Affordable Care Act (ACA), however, increases these incentives dramatically.  Insurers understand this, and are actively marketing “self-insured” products to small groups. These products offer administrative services and “stop-loss” coverage that shields small employers from the risk that would otherwise make self-insured status unattractive.  They often have very low “attachment points,” which define when the employer ceases to bear risk and the stop-loss insurer takes over.  Some stop loss plans are almost indistinguishable from high deductible health plans, except that the risk remains nominally with the employer rather than the employee.

Self-insured plans become more attractive to small groups under the ACA for two reasons.   First, they are subject to fewer regulatory requirements than are insured plans.   Whether in or out of the exchange, small group plans must offer the essential benefits package, include their members in a single risk pool, participate in the risk adjustment program, offer the same premiums without regard to health status, and offer the precious metal tiers.  Self-insured plans are not, however, subject to these requirements.   Moreover, neither self-insured plans nor the stop-loss coverage that makes self-insurance possible for small groups are subject to the ACA’s minimum medical loss ratio requirements.  Self-insured plans are also exempt from a fee imposed on insurers under ACA section 9010 and stop-loss plans do not need to justify unreasonable rate increases.

Second, once the ACA establishes guaranteed issue and bans health status underwriting and pre-existing condition exclusions for small groups in 2014, the risk to small employers of self-insuring will be dramatically reduced.  Under current law in most states, a self-insured small employer faces the prospect of significantly increased stop-loss rates or lack of affordable access to conventional insurance if the group’s risk profile deteriorates (e.g. an employee or dependent gets cancer or needs an organ transplant).  But, beginning in 2014, insurers (in or out of the exchange) will not be able to refuse to insure higher-risk small groups or exclude preexisting conditions, and will have to insure them at standard rates. SHOP (small employer) exchanges cannot have open enrollment periods for employers but must admit small employers whenever they apply for coverage.  The threat of adverse selection to the exchanges could be substantial.  Healthy small groups will be able to self-insure with stop-loss coverage and then leave that coverage and enter the exchange at standard rates the moment an employee or dependent suffers a serious illness or accident.

Without stop loss insurance, however, self-insured small group plans become much less viable.  Few small groups can fully take on the risk of self-insuring without stop-loss.  As of this point, stop loss insurance for small groups is not regulated at the federal level and largely unregulated at the state level.  The term “self-insured” is not defined in the ACA, and the agencies clearly have the authority to define when a plan with stop-loss coverage is in fact so fully-insured that it ceases to be self-insured.  In the request for information, the agencies are seeking to determine how common stop-loss coverage is, how it operates, how insurers decide which employers to insure and how much they charge, and how stop loss insurance is regulated.   Presumably regulations will follow.