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Health Care Reform: New Insights and Actions for CFOs

Even with the Affordable Care Act (ACA)'s shared responsibility penalties deferred until 2015, many companies are struggling with their strategy for health reform. What does the ACA mean for CFOs and other finance executives? What are the implications for your organization, what are your choices and how will decisions impact your workforce and brand? More than 2,600 CFOs, finance executives and others tuned in to the January 15, 2014 Dbriefs webcast to explore these challenges.

Deloitte Consulting LLP principal Brian Schmidt, specialist lead Patrick Travis and Deloitte & Touche LLP partner Ken Weixel discussed ACA-related developments of concern to the finance function, including  regulatory changes, the status of implementation and adoption, practical steps for addressing waste, promoting wellness, and opportunities to contain cost and achieve compliance.

The following are the presenters' responses to select questions submitted by participants during the webcast.

Participant questions

Question: Defined contribution — does that mean an account based plan like a Health Savings Account (HSA)?
Answer: Defined Contribution in this arena refers to the employer's fixing of its subsidy of the cost of benefits provided to employees. There are a multitude of approaches to Defined Contribution, including through a Private Healthcare Exchange vehicle.

Question: Does the defined contribution to the Private Exchange have to be equal or consistent for each employee or can the employer pick and choose how much it contributes to the Private Exchange for each employee (i.e. employee spouse has coverage).
Answer: An employer can vary its contribution so long as the approach does not favor highly-compensated employees or discriminate against any protected class of workers. It is commonplace for contributions to vary among coverage tiers (employee-only, employee-plus-spouse, etc.).

Question: Are you seeing payers that operate in private exchanges offer value-based insurance program designs that lower costs to employees for services focused on specific chronic conditions?
Answer: Generally no, at least on a widespread basis. We are seeing value-based design features with increasing regularity, but Private Exchange vendors are more focused on "traditional" designs and standard/metallic designs that are uniform across all plan sponsors, insurance companies and geographies.

Question: How wide spread is the private exchange idea? I have not heard about this before.
Answer: The Private Healthcare Exchange model has approximately one million enrolled employees, so no more than 1% of the employer marketplace. However, the Exchange model may grow to 20%-35% of the market in the next 3-5 years. Most Exchange models offer employees more choice than what is provided in traditional employer-sponsored benefit programs.

Question: What is the ideal company/employee base profile for going to private exchanges?
Answer: First movers in the Private Exchange market share several characteristics including high worker turnover, low average wages and low union representation. More recent adherents have deviated from those characteristics as Exchanges are becoming more commonplace in nearly all business sectors.

Question: In a private exchange, what happens if the employee selects a plan that is less than the amount funded into the Health Reimbursement Account (HRA) by the employer?
Answer: Although this seems unlikely — it would be analogous to an employer paying a worker to take a certain medical plan — the excess dollars would remain in the HRA account for purchase of other benefits for coverage in future years, in accordance with employer-established rules. The employee cannot "cash out" the excess dollars.

Question: Is there a recommended private exchange for a company with 700 or less employees? We found that right now the private exchanges are only offering their services to large companies.
Answer: We have found several vendors that focus on the 250-1,000 employee market segment. In fact, many of these vendors have been operating Private Exchange solutions for several years, as opposed to the jumbo market which is very new.

Question: Will private exchange (group insurance) purchase opportunities be available to unemployed individuals?
Answer: No. Private Exchange solutions are priced based on the employer-specific experience of the plan sponsor. There is no pooling or risk, so there is no opportunity for individuals not affiliated with the group to enter the risk pool.

Question: Will a shift to a private exchange have a negative impact on talent implications?
Answer: Yes. Or no. It depends on several factors, key among them being the amount of the company contribution to the employee HRA account, how the employer chooses to subsidize dependents, how the program is communicated, etc. In helping clients develop business cases around the Private Exchange concept, we encourage executive interviews and employee focus groups to test the talent question.

Question: In private exchanges, are employees of more than one employer covered in a plan?
Answer: No. Each employer stands on its own experience, regardless of whether in a fully-insured or a self-insured model.

Question: Do you have any idea how you will know if they go to exchange? And what is the timing of that data capture?
Answer: Public exchanges will capture workers enrolling in state/federal exchanges and provide these details back to employers. The mechanics of this have not been fully established yet.

Question: You said that you will see a trend where employers subsidize spouses less. Don't you think that will penalize families where the other spouse is not employed by choice? (Stay at home moms or dads.)
Answer: Yes it will. Employers are balancing this "take-away" with the strong objective of not wanting to cover any spouses that have access to coverage elsewhere.

Question: Can an employer pass the safe harbor test for affordability but have the employee still qualify for a subsidy based on household income?
Answer: In a word, no. The worker can only get a public exchange subsidy if his or her employer fails the two-part affordability & actuarial value test. If the employer offers a qualified and affordable plan, the employee can still go to a public exchange, but will get no subsidies. (The foregoing is how the law 
reads — the extent to which the technological underpinning of this will work seamlessly is yet to be known.)

Question: Do the penalties apply to an organization under 50 employees that offer health care to its employees?
Answer: No, penalties apply only to employers with 50+ full-time employees.

Question: Can employers choose both? "Pay" option for lower-paid employees and "Play" option for higher earners?
Answer: Technically no, but some employers are toying with strategies that come close to accomplishing this. These "hybrid" strategies may encounter adverse talent implications as simplifying assumptions typically do not hold true for every employee (e.g., low-paid workers do not always have low household income).

Question: Do you expect a move to an employer/employee 50/50 split for higher employer engagement is possible? This probably must go hand in hand with a slightly higher increase in gross salary.
Answer: Some industry sectors are nearly at 50/50, while others quite a distance from that threshold. Still others may find a 50% share for employee may threaten the 9.5% affordability test. We have not seen, however, that higher employee cost sharing universally leads to increased employee engagement. Sometimes higher costs contribute to a greater sense of entitlement in benefits, and a decrease in engagement.

Question: My understanding is wellness credits are not available to smaller employers, is this correct?
Answer: Under HIPAA, an employer of any size can establish wellness-based incentives and disincentives within its health care benefit program.

Question: When does a fully insured program vs. a self-funded plan make sense? Fully insured does at least provide predictability which addresses the stability issue?
Answer: The pros and cons of self-insurance vs. a fully-insured arrangement are too numerous and involved to fully address here. In a Private Exchange setting, a fully-insured arrangement will provide cost stability — but only for 12 months at a time. Under both self- and fully-insured arrangements, cost volatility can be reduced if the employer is willing to transfer the cost volatility risk to employees by strictly adhering to an ongoing fixed-dollar HRA subsidy. (Of course there are possible talent implications to this approach as workers' cost will be highly unpredictable.)

Question: Do you see the age-rated pricing model continuing in view of the age discrimination implications with employers?
Answer: Age-rating is built into the Affordable Care Act (ACA), so in the Public exchanges, it would seem age-rating is here to stay for the foreseeable future. We are not aware of any Private Exchange (group-based) model for active employees' coverage that uses age-based rating, but the marketplace is fluid, and this could happen!

Question: Are the subsidies really large enough that "many employees can likely access less expensive health care" coverage? Are there examples of people who have lost employer insurance and found less expensive insurance in the exchanges? Everyone I know in this situation has experienced the opposite result.
Answer: The answer to these questions is: Quite possibly, yes. Unfortunately, the ‘actual' results are still too early to see much in terms of ‘trends.' The answer depends on whether the subsidies available based on household income are greater to or equal to the employer ‘contribution' to the funding of employer-sponsored insurance coverage. Individuals buying insurance in the public Marketplaces (Exchanges) are eligible for subsidies if their household income is less than 400% of the Federal Poverty Level (FPL) for their family size. For a family of 4, that equates to family income of more than $94,000 in 2013. That means many employees are likely to find themselves eligible for some subsidies in the public Marketplace. Whether or not the subsidies are more than what their employer ‘contributes' towards their employer-sponsored insurance coverage would be determined in each household's circumstances. Subsidies can be quite substantial as again, they are determined in a way to limit total out of pocket costs to 9.5% of household income.

Question: If the credit is paid directly to the insurer is the premium paid by the employee/enrollee a net payment?
Answer: Yes, credits (eligibility subsidies on the public marketplaces for both the Advance Premium Tax Credit and the Cost Sharing Reduction payments) are paid directly from the Federal Government to Insurers, and Insurers are then responsible for collecting only the ‘net' premium remaining from the enrollee.

Question: I understand that the unions are exempt. Does this mean that the information in this presentation is solely for non-union employee situations?
Answer: No, unions are not exempt from the requirements. Although early drafts and lobbying efforts may have raised exemption as a possibility, the final legislation did not exempt unions from the requirements.

Question: Is the federal government providing reinsurance to insurance companies, effectively giving them a "bailout" if their costs exceed their expectations?
Answer: The Federal Government has provided for 3 different ‘transition' programs to ease insurers' risks associated with providing insurance to previously uninsured/underinsured/pre-existing condition populations. These programs are a Reinsurance program, a Risk Corridor program, and a Risk Adjustment program (sometimes referred to in the industry as the “3 R's”). The Reinsurance and Risk Corridor programs are ‘transitional' as they exist under Federal law for just 3 years – 2014 through 2016. The Risk Adjustment program is a permanent program. States are permitted to offer similar programs if they choose.

Question: Actually, do you see the ultimate goal of the ACA as the collapse of the private insurance market, being replaced by "The Single Payer?"
Answer: The stated goals of the ACA are to increase access, improve quality and decrease the rate of increase in health care costs.

Question: How are the subsidies being funded?
Answer: The ACA (of which subsidies are a part) is funded through a combination of cuts to Medicare and other programs as well as taxes and penalties on individuals and businesses (e.g., the medical device tax).

Question: How can an employer know if an employee smokes? Is there a penalty (other than termination) for those that lie? How good is charging more for smokers when I would bet that 95% disclose that they are non-smokers. How do you enforce?
Answer: Some employers' test and screen employees on a regular basis to determine this. Often for those that smoke, employers will offer smoking cessation programs. Some do in fact penalize workers who smoke by increasing their premiums, deductibles and co-payments.

Question: Do you think that we will ever be allowed to split from our spouse/family to buy a plan that fits the person (be a better consumer based on your health not the sickest person in your family)?|
Answer: Employers and Health Plans are designing products that meet the needs of different consumers and there are more choices today than there were in the past.

Question: If employers are using "sticks" what allowances do they employ for genetics?
Answer: This is an ethical question that employers wrestle with when designing their wellness programs. Employers are required to ensure any programs are compliant with federal anti-discrimination laws including the Genetic Information Non-Discrimination Act (2008).

Question: If price negotiation with a narrower network of providers is expected to provide significant savings going forward, why have companies not taken advantage of this savings strategy in the past?
Answer: In certain markets this is happening aggressively. Sometimes it is driven by direct contracting between self-insured employers and the health care providers in that market. In other cases the development of private and public exchanges is driving the narrowing of networks.

Question: If the government is funding states to assist individuals and businesses in signing up for market place health care, why do you feel some states refuse to employ individuals to assist. Isn't this hurting the population of people who need health care?
Answer: This aspect of the ACA is playing out differently state by state so it is hard to draw broad conclusions.

Question: How does a narrow network save money? Is it just through lower fee for service and if so, does that attract lower qualified care?
Answer: Providers are often willing to negotiate on prices for health care services when they are able to be the “exclusive” health care provider for a certain population.

Question: Why does the Medicare projections not change based on the scenario?
Answer: The actuarial analysis in the study we referenced was meant to look at the potential changes in employer sponsored health insurance. The Medicare population was held constant to allow for the impact on employer sponsored health insurance to be isolated and evaluated.

Question: There is no limit on the cost of the subsidies other than the general treasury. Correct? Is there not a risk that a person could have to repay their subsidy if their income increases beyond their projection
Answer: The estimated cost of subsidies in the presentation is an estimate by the Congressional Budget Office (CBO). Actual subsidies are based on household income and as that changes either up or down, it affects the level of subsidy and whether some is eligible for a subsidy.

Question: If we have mostly low paid employees, it might be cheaper to drop coverage and pay the penalty, but what's the dollar impact on losing workers to competitors' who do pay insurance?
Answer: The employer sponsored health insurance market is very fluid right now and most employers are going through a process of evaluating and considering their options. Competing for talent is one consideration, amongst many.

Question: How are employers manipulating systems to minimize cost? How do employees change their behavior under each of these methods? Do the changes result in cost changes?
Answer: Wellness programs have been in place for many years with debatable returns on investment. Employers are being more purposeful in implementing wellness programs that improve the health status of their workforce and demonstrate a return on investment.

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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