Ryancare hits the workplace

The voucherization of American health insurance may already be upon us.

No, Paul Ryan has not gotten his proposed "premium support" system for Medicare enacted.  But increasing numbers of employers are adopting or considering a shift from "defined benefit" to "defined contribution" insurance plans -- a shift that mirrors the transformation of pension benefits over the past twenty years (as Peter Orzag pointed out in a Dec. 2011 column).

Under a defined contribution model, as described in a recent Booz & Co. report, "instead of designing and offering defined health benefits, companies make cash contributions to savings accounts that employees use to purchase insurance products of their choice. This model allows the company to cap its healthcare cost at a desired threshold" (p. 4).

To meet the nascent and anticipated demand for this model, health insurers and benefits consultants are rolling out private healthcare exchanges enabling employers to outsource the benefits management. these exchanges provide a menu of health insurance options to the employees of companies that buy in. Such exchanges have been a feature of health plans for retirees for some time; companies are now beginning to offer them to current employees.

Adoption of this system may be accelerated by the coverage mandates the ACA imposes on employers that provide health insurance -- e.g., the ban on annual and lifetime benefit caps, the requirement to offer coverage to employees' children up to age 26, the free provision of preventive care, and other mandates.

Question: given the ACA requirement that employer plans cover a minimum 60% of participants' average medical costs, and cap participants' annual out-of-pocket expenses at $6250 per individual/$12500 per family, and meet the minimum essential benefit requirements that govern the ACA exchanges or potentially pay a penalty,* how can an employer control its costs by capping its "defined contribution"?

Answer:  most employers currently do better than the ACA's required coverage minimum. "Remapping Debate," a reporting service sponsored by the Anti-Discrimination Center, explains:

A plan is able to meet this first test of “affordability” under the ACA even if it pays only 60 percent of the average medical costs of what the Department of Health and Human Services determines to be a “standard population,” and leaves 40 percent to be paid for by the enrollees.  This calculation is known as “actuarial value.”

According to Lynn Quincy, a senior policy analyst at the Consumers Union, 60 percent represents a low floor compared to current employer-sponsored health insurance plans, which typically have an actuarial value above 80 percent. Quincy told Remapping Debate that the ACA’s definition of an “affordable” plan is not much different from what is currently known as catastrophic coverage — a high deductible plan that provides a safety net of coverage in case of hospitalization or serious illness but leaves the vast majority of medical costs to be paid by the enrollee.

Moreover, an “affordable” plan with an actuarial value of 60 percent contains no guarantee that any individual enrollee will actually pay only 40 percent of his health costs — only that all those enrolled in a plan will collectively pay 40 percent of its health costs.

Thus, employers wishing to cut coverage have a lot of running room.  Perhaps the new private exchanges will help them mask their reduced commitment by offering an elaborate array of plan options. Perhaps outsourcing benefits management to a third party will make the reduced coverage appear as something imposed by outside forces.  And who knows, perhaps competition within the private exchanges, and creative benefit and incentive structures put up by plans competing within them, really will really will help to control healthcare costs in ways that don't harm plan participants.

Providing good healthcare benefits to employees remains a competitive advantage for employers -- albeit one that, like retirement benefits, can be ratcheted down if everyone gets in the boat together.  At the same time, if employers can find ways to control healthcare costs without harming employees' physical or financial health, the viability of providing good health benefits as a competitive advantage will erode less quickly. Employers, like federal and state government and private insurers, are in a sense pitted against healthcare providers: struggling to pay less for care, or pay for less unnecessary care.
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* While employers do not have to meet the minimum essential benefits requirements of the ACA, there is a penalty for failing to do so if employees consequently opt for coverage within the ACA exchanges. Buck Consultants explains:

An employer that fails to offer minimum essential coverage (MEC) to its full-time employees and their dependents may be subject to a nondeductible "play or pay" penalty if any full-time employee enrolls in Exchange coverage and receives a premium tax credit or cost-sharing reduction. The maximum annual “play or pay”penalty is $2,000 for each full-time employee of the employer,  disregarding the first 30 full-time employees.