Health Care Reform: Reality into Practicality
How Businesses Can Benefit From Healthcare
By Thomas (Tom) E. Hamilton
Senior Advisor & Consultant
Hamilton Edwards Consulting Group
December 30, 2012
Healthcare Reform: Reality into Practicality
Health care reform in the U.S., creates the largest change and challenge in the way health benefits are
offered through employers since World War II when freeze on employee wages brought about the
current system. The radical restructuring of employer‐sponsored health benefits will force employers to
make choices that have never been made in the 70 years of offering health insurance to employees.
Employers are seeking alternatives that will consist of dropping employee health coverage, even if it
means a tax penalty in the mix, move to a defined contribution program or keep their group health
benefits but choose a structure with the least financial damage. Bottom line, just like with the freezing
of wages in World War II, innovation will once again eliminate a problem the government created.
Many of the provisions that came out of the legislation in 2010 will go into effect in 2014. Research
from McKinsey & Co. indicate that when employers become more aware of the economic and social
incentives embedded in the law and of the option to restructure benefits beyond dropping or keeping
them, many will make “paradigm shift” type changes. The McKinsey Report also shows that out of 1,300
employers across industries, geographies, and employer sizes, health care reform could cause over 30%
of the employers to drop coverage and upwards of 60% to pursue an alternative to traditional employer
All roads lead to a shift in employers dropping coverage, moving to a private health exchange, while
maintaining the same tax advantages of group insurance and those employees incentivized (subsidized)
to move to the public health exchange will still maintain ties with employer benefits. Higher‐income
employees not eligible for the subsidy in the exchange will still be afforded health coverage with
defined, tax free dollars by the employer. These employers are thinking about moving from employer
sponsored coverage not because they don’t care about their employees, but because they realize that,
after 2014, employer sponsored plans may not be the most practical way to provide health insurance.
Another eye opener, from McKinsey Research, shows that contrary to what many employers assume,
more than 85% of employees would stay with their place of employment even if their employer stopped
offering employer group health insurance, but 60% would expect increased compensation. Employers
will need to review quickly the impact of health care reform on their benefit and workforce strategies,
not seeing it from a risk side, but from the area of opportunity.
Reform Alters the Social Agreement between Employer & Employee
Health care reform alters the fundamental structure inherent in employer sponsored health benefits
and how employees value health insurance as a form of compensation. One of the main purposes of
the new law is to guarantee the individual the right to purchase health insurance no matter what the
medical status of that individual is. This provisional mandate minimizes the moral obligation employers
may feel to cover the sickest employees who would be denied coverage in the standard individual
health insurance market. Health reform does preserve the corporate tax advantages of health benefits
in the workplace. The only exception currently is the high‐premium “Cadillac” insurance plans.
When January 1, 2014 comes around, employees who do not have access to affordable health insurance
through an employer will have access to a subsidy, through an established health exchange. The
employee (individual) and their family will receive the subsidy based on number of dependents and their
total AGI (Adjusted Gross) household income. The highest subsidies will offered to the lowest‐income
workers. If the individual’s total household income is below 133% of the federal poverty level (FPL),
they will eligible for Medicaid. If the employee’s AGI is between 138% and 400% of FPL, the subsidy will
be available to them. Below is 2011 chart and example of the federal exchange coverage.
The subsidies will cap the amount lower and middle income individuals and families will have to spend
on health coverage. The subsidies will also keep the cost of insurance through the exchanges below
what many employees now pay toward employer sponsored plans, especially for those whose income is
less than 200% of FPL.
This subsidy along with all health insurance guaranteed to issue in 2014 and beyond, will create a more
equitable playing field between the employer sponsored health plans and individual health insurance
for the employee. Over the past decade, individual health insurance has remained stable in the cost
year after year. Increases with individual insurances have been minimal compared to group plans. For
those eligible for the subsidy, it will be more advantageous, in most cases, for the employee to go
through the exchange. Thus, this will increase the options for the employer. As a result, whether to
offer employer sponsored health plans after 2014 becomes a true business decision. Employers will
weigh the options based on all the penalties and tax advantages of offering or not offering the various
types of coverage.
For employees and/or employers, who might have an idea of which employees fall under the 400% FPL
based on the employees total AGI, and want to estimate how much subsidy a family would be eligible
for, they can go to: www.kff.org/insurance/subsidycalculator.cfm. There they can calculate the subsidy
based on income.
Laws and Requirements the Game Changer…
Reform requires all employers with more than 50 employees to offer health coverage to every full time
worker or the equivalent or pay a penalty of $2000 per person minus the first 30 employees. With all
the new statutory Essential Health Benefit (EHB) requirements , provisions and mandates that health
insurance will have, medical cost for many companies will be significant. Other factors the employer
will need to consider are the premiums to be paid for the employee for this “expensive” coverage. If
the employer does not cover the “required” contribution amount towards the “employee portion” of
the employer sponsored plan equal to or more than 9.5% of an employee’s household income, the
employee will be able to go to the exchange at a $3000 expense (penalty) to the employer. If enough
employees go to the exchange versus being covered under the employer’s sponsored plan, employers
will be required to pay the full penalty as if they do not have group health insurance. It’s important to
note that the penalty for not offering coverage is set significantly below these costs.
Exploring Options that Businesses Maximize ROI in Benefits
Employers have major decisions about how they want to offer benefits or if they want to continue to
offer some form of benefits, specifically health insurance to their employees. The overall “want” to
change coverage or the way business is done now with health benefits will be slow for employers.
Employer’s response to the Affordable Care Act will be guided by cost and other factors such as concern
for risk to their reputation and their ability to attract and retain talent . Employers will have options.
Innovation and the desire to find solutions that minimize the challenges an employer may face, is here
and will continue to evolve along with health care reform. We are going to cover the current options
that employers will have available to them in 2014 and beyond at the time of this publication.
Drop coverage all together and allow employees under the 400% FPL go through the public exchange
to receive the subsidy. Those not eligible for the subsidy would go to the open market (public exchange
not excluded) to purchase affordable health insurance that met the requirements set by HHS (Health &
Human Services) for individual mandated coverage.
Approximately 50% of U.S. small businesses with less than 50 employees do not offer group health
insurance to their employees. This figure is expected to greatly increase as ACA is fully implemented in
2014. These are the reason why:
1. Employer Contribution Requirements – Insurance companies require a minimum percentage of
the premium for each employee that must be paid by the employer, or the entire plan is
2. Employee Participation Requirements – Insurance companies require a minimum percentage of
employees join the group plan, or the entire plan is cancelled.
3. Cost per Participant – Group health plans (SHOP and Self Funded) for 2013 and especially 2014
are facing the greatest increase in the history of U.S. health benefits, due to increasing health
care costs and new coverage requirements imposed by ACA (Health Care Reform).
As mentioned before, employers who eliminate their employer sponsored health benefits would not be
hurting most employees (over 60% of the workforce ) (KFF) that work for them in the U.S. In fact,
because of the subsidies, many low‐income employees will be able to obtain better health care
coverage, for less out of pocket, through the exchange than from the employer.
Service and blue collar industries that have part time workers that equate to over 50 full time
equivalent employees, offer employer sponsored plans to full time employees and allow part time,
lower‐wage employees (under 30 hours/week) qualify for the exchange subsidies. The challenge here is
that employers will have to estimate and plan for the potential cost they could incur for offering and
contributing to health insurance coverage. This will be difficult since employers have no way of
knowing what their employees’ household incomes are or how many people are in their household.
Employers also will not know if their plan is “affordable” for their employees, because of not knowing
Businesses with fewer than 25 full time employees and average annual wages of less than $50,000
that pay at least half of the cost of health insurance for their employees are eligible for a tax credit . The
full credit is available to employers with 10 or fewer employees and average annual wages of less than
$25,000. The credit phases‐out as firm size and average wage increases. The credit is capped based on
the average health insurance premium in the area where the small business is located.
In 2014, eligible small businesses that purchase coverage through the state Exchange may receive a tax
credit of up to 50% of the employer’s contribution toward the employee’s health insurance premium.
Employers are eligible to take the tax credit for two years. Tax‐exempt small businesses meeting these
requirements are eligible for tax credits of up to 35% of the employer’s contribution toward the
employee’s health insurance premium.
Businesses with Fewer than 100 employees will be able to purchase coverage through Small Business
Health Options Program (SHOP) Exchanges beginning in 2014. These state‐based exchanges are
intended to allow employers to shop for qualified coverage and more easily compare prices and
benefits. In 2017, states will have the option to allow businesses with more than 100 employees to
purchase coverage through the SHOP Exchanges.
The potential challenge with this option goes back to the minimal essential health benefit requirements
that will be placed on the SHOP exchanges. The states are being required to structure plans as a
benchmark for these exchanges using the top three health insurance plans from the top carrier (s) in
their state. The top three selected plans are by far not going to be the cheapest, using top Actuarial
Values (AV) and statutory mandates. The employer will have limited choices and employees with
companies above 50 FTE can still potentially qualify for exchange subsidies if premiums are above 9.5
percent of their household income. This means that these employers would pay a $3000 penalty for
each employee going to the exchange and receive a subsidy.
Self Funded Plans will be another consideration for employers to have some flexibility and choice to
design plans more suitable for employer’s needs and budget. The employer has more control over cost
by avoiding community rating along with creating more flexible and effective wellness programs. These
plans could be structured effectively enough to meet PPACA guidelines and keep employees from
jumping to the exchange.
Self‐Funded Plan4 : An insurance arrangement in which the employer assumes direct financial
responsibility for the costs of enrollees’ medical claims. Employers sponsoring self‐funded plans typically
contract with a third‐party administrator or insurer to provide administrative services for the self‐
funded plan. In some cases, the employer may buy stop‐loss coverage from an insurer to protect the
employer against very large claims.
Fully Insured Plan4 : An insurance arrangement in which the employer contracts with a health plan that
assumes financial responsibility for the costs of enrollees’ medical claims.
Although self‐funding is beneficial, employers should realize there will be changes in their plans. Cash
flow, stop‐loss insurance protection, annual discrimination testing and other administrative duties can
produce a complex environment for a business used to having fully insured plans.
Separating into two or more companies to keep businesses under the 50 FTEs for the purpose of
avoiding penalties is another option for owners. In this same scenario, if it was above 50 FTE and the
owner felt compelled to leave it that way, a set up where one company had management and corporate
employees receiving employer sponsored plans could be done. The other company would have low
wage employees who could go through the exchange for the subsidy. No doubt, all employees would
be better off in this scenario but the challenges of common ownership could still be a problem. Just like
in the other options, there is still the uncertainty of plans being structured in a way that would keep
employees from the management or corporate office from going to the exchange.
Defined Contribution and Private Health Exchanges
Defined Contribution, and in an “online format” is more popularly known as “Private Health Exchange”,
are the best of all the options for most employers that can provide a benefit structure for the
employees, but not have to be responsible for all of the health care reform regulation. Defined
Contribution allows the employer to “get out of the health insurance business”.
Employers, instead of having a “Defined Benefit” (Employer Group Sponsored Health Insurance) where
decisions on type of plans and cost are to be spent, a decision is made on the amount of dollars is to be
given to the employee “tax‐free” to go into the private exchange to purchase the health insurance along
with other personal insurance needs. No longer does the employer have the kind of administrative and
regulatory responsibility like they did before with a “defined benefit” plan. Employees become much
more involved with their choices that are right for them and their household based on a budget they can
feel comfortable with. Because the employee is making their own decisions on coverage, tools and
advisors should be made available to help in the decision making process.
According to the 2012 Employer Health Plan Study by J.D. Power and Associates, 47% of employers say
they “definitely will” or “probably will” switch to defined contribution health care. In a July 2012
report by the Employee Benefit Research Institute on health insurance exchanges it states that “there is
are a number of potential advantages to both employers and workers in this structure,” including fixed
cost for employers and greater choice and portability for employees. EBRI indicates that both health
care reform and employers’ need to control the cost of health benefits and state “ this is a field that is
likely to grow”.
Types of Defined Contribution Programs
Defined Contribution Health Reimbursement Arrangements (HRAs), which are employer‐funded, and
in which employers receive the tax benefits. Under this tax‐advantage arrangement (not an “account”)
employees can receive reimbursement for qualified medical expenses, including health insurance
premiums. An HRA can supplement a group policy or provide employer funds for a personal health
policy. All employees, former employees, and retirees qualify to have an HRA. HRAs must be 100%
funded by employers.
Premium Reimbursement Arrangements (PRA), may also be called Premium Reimbursement Plans or
Accounts. A PRA allows employers and employees to pre‐tax individual health insurance premiums,
saving employers 7.65% in payroll taxes and employees 20‐30% in federal and state taxes. Essentially, it
is a way for employers who would not otherwise offer health benefits to offer them with no
contribution from the company. Employees benefit by paying health insurance premiums with pre‐tax
rather than after‐tax dollars. In addition, employees are able to choose the individual health plan that
works best for them, their spouse, and their dependents, unlike a group sponsored health plan. They
can even choose to cover the cost of supplemental coverage such as dental, vision, critical illness,
hospital indemnity or accident insurance with these pre‐tax dollars.
Outside Premium Reimbursement Arrangements (OPRA) is a Section 125 plan. It has many of the
components of a group sponsored health insurance plan with the pre‐tax structure. Employers have
more latitude with the contribution dollars provided to the employee, allowing the employee to spend
those dollars not only on health insurance and supplemental premiums, but also contribute the dollars
to an HSA or FSA depending on what health plan has been purchased.
OPRA must be set up and administered with a TPA that has knowledge and expertise with all Flex plans.
They should also be an expert with self funded plans and understand the various moving parts that help
make an OPRA plan one of the more comprehensive models that is in the defined contribution arsenal.
Below is a chart of the different defined contribution models and how the flex plans, HSAs and FSAs,
work with OPRA.
Reg. 1.125-1 (m)
Regulation 1.125-1 (m)
Reg. 1.125-5 (m)
Reg. 1.125-1 (m)
Sect. 223 & 125(d)(2)(D)
Who may Contribute
Employer or Employee
Employee (final rules
$6,450 (family) for 2013
Employer; usually total
Must have HSA-qualified
health coverage ($1,250+
single / $2,500+ family)
Employee must open
Health Insurance Premiums
IRC 213(d) Expenses w/ No
+ IRC 213(d) as Determined
new Bank Account?
but no Personal
Unused Funds to
(2014 and Beyond/No)
Determined by Employer
Limited-Purpose or Post-
With HRA or HSA
With HRA, HSA, or
Deductible FSA or HRA
PRIVATE HEALTH EXCHANGE
Private health insurance exchanges or “private exchanges” have been a hot topic of discussion recently.
But what is a private exchange? At its core, a private exchange is a private business – typically operated
by brokers, benefits consultants, or insurers – that sells health insurance (both fully‐insured and self‐
insured) to consumers through an online product.
In general, there are three private health exchange strategies that employers can opt into:
Single‐Employer, Single‐Carrier – Under this strategy, a single‐employer could work with a private
exchange and offer a wide‐variety of fully‐insured or self‐insured group health plans to their employees
through a single insurance carrier or third party administrator funded through an HRA.
Multiple Employers, Multiple Carriers – Under this approach, multiple employers band together,
effectively increasing the employers’ risk pool, and fund – through an HRA – the purchase of fully‐
insured group health plans made available by multiple insurance carriers through a private exchange.
Individual Market Plans – the employer allows its employees to purchase a health plan in the fully‐
insured individual health insurance market, funded through an HRA, PRA and/or OPRA structure.
Automation with Love. It will be critical for broker agents, carriers and TPAs to provide superior
services through automation. Group presentations and Individual enrollments are still a very viable way
for employees to elect their benefits, but video conference and online portals with “Chat” functions will
become more prevalent as Defined Contribution and Private Health Exchanges take off. The more
important aspect of structuring a private health exchange for businesses will be in the area of “Decision
Support”. This part of an enrollment process for an employee is an important time where education,
communication and possible hand holding is key. Education of what a private health exchange is and
what it means to the employee can make the enrollment process more acceptable, helpful and less
stressful. Education can be done through videos, Welcome Packets, links and pages on the broker
Communication about the employee’s current medical situation or their families can be done by phone,
video conference or even in person. Employees are connected with advisors who are licensed,
experienced and knowledgeable. They “advise” the employee about their plan options based on a
detailed understanding of each employee’s health care options and economics. The process eliminates
potential headaches and confusion for the employee and with their spouse and helps with the decision
making process. This would also help eliminate wasted time including over insuring, paying for benefits
not needed or duplication of coverage. When the employee gets to connect with their advisor to enroll
in person, by phone/video conference or through a call center, the decision at that point should be clear
and process for applying for coverage simple.
Decision Support – A key ingredient to a private exchange is providing decision support to help the
employee determine which major medical health plan or health insurance package (e.g., a major
medical plan, coupled with a supplemental policy or policies) is best for him or her to elect. One of the
more sophisticated forms of decision support is referred to as “recommendation technology.” Here, the
employee is asked a series of questions relating to, among other things, the employee’s expectations of
care utilization (such as pregnancy or prescription drug use), along with the employee’s risk tolerance,
financial position, and the amount of the employer’s subsidy. The “recommendation technology” aligns
the answers to these questions – along with any available claims data – with the major medical plans
and supplemental insurance products offered through the private exchange, and it recommends a plan
or benefit package that best fits the employee’s needs.
New Mix of Services will come out of ACA and health care reform. No matter whether an employer
stays with employer sponsored coverage or goes to a DC/private health exchange, it will be important
for employees to have products and services that will meet the demands caused by health care reform.
Because the low wage earners will have subsidies and higher‐income earners will not be so price
sensitive, products and services that provide convenience and peace of mind will be more important
than cost. Having a suite of supplemental products such as life, disability, dental, or vision insurance
will become more important for employees with more discretionary income. Because of the gaps or
other out of pocket expenses are more prevalent with health insurance now, insurance products like
hospital indemnity, accident and critical illness are needed more than ever. Memberships in concierge
or patient advocacy services, along with telemedicine, will become even more important with the
anticipated shortages of doctors, specifically in general practice.
Employers Interested In Moving to a DC/PHE Structure Need to Know…
There are a number of legal issues that a defined contribution/private health exchange presents. For
example, the Patient Protection and Affordable Care Act (“PPACA”) enacted a number of new rules that
may adversely affect the use of HRAs as a funding mechanism for the purchase of a health plan – namely
the restriction on annual limits on the dollar value of “essential health benefits” and the “shared
responsibility” requirement (otherwise known as the “employer mandate”). In addition, employers
adopting a private exchange strategy must ensure that their health plans do not discriminate in favor of
“highly compensated individuals,” regardless of whether the arrangement is self‐insured or fully‐insured
(but enforcement in the fully‐insured context won’t occur until additional guidance is issued). Moreover,
compliance with the new requirements under PPACA and the existing rules applicable to group health
plans under the Internal Revenue Code, and in most cases, ERISA is required.
The Good News Is...
There are attorneys and Third Party Administrators (TPAs) who provide counsel to private health
exchange companies so they know and understand how private exchanges work. Legal guidance is
provided to employers via TPAs/Attorneys working with these companies. They can also advocate for
policy changes and a resolution of any legal uncertainties to ensure that private exchange strategies can
continue to be viable and successful.
Employers will struggle with the decisions that have to be made regarding their employee benefits, not
only in the near future, but over the next several years. Unless PPACA is rejected by Congress, the states
or current administration, realizing the magnitude of the negative consequences that health care reform
has created, the burden will be on the well informed entrepreneur to help provide guidance. Some
changes and adjustments will be made with health care reform regarding regulations and mandates, but
real solutions will come from health care reform innovators. Employers do have options and as health
reform laws continue to evolve and impact businesses, innovation will be there to make regulations
more palatable. Health care reform will change the economics of the workforce and benefits, as well as
how employees value coverage. Grasping the concepts available in the marketplace will enable
companies to gain a competitive advantage in the increasingly dynamic market for talent.
McKinsey Quarterly, June 2011, How US Health Care Reform Will Affect Employee Benefits
Shubham Singhal, Jeris Stueland, and Drew Ungerman
Determine who are Full‐Time Employees for Penalty Purposes (over 50 Employees)
A full time employee with respect to any month is an employee who is employed on average at
least 30 hours of service per week. The term "full‐time equivalent" refers to the full‐time
equivalent of a company's part‐time employees. It is often used to calculate the size of a
company based on hours worked by all W‐2 employees.
The number of full‐time equivalent employees (FTEs) is equal to the company's full‐time
employees plus full‐time equivalent part‐time employees rounded to the lowest whole number.
To calculate the number of FTEs, the company should do the following:
First, the company should determine the number of full‐time employees (i.e. those working 30
or more hours per week).
Next, the company should determine the full‐time equivalent of its part‐time employees (i.e.
those working less than 30 hours per week) by:
1. adding up all hours for which wages were paid to part‐time employees in a month and
2. divide that number by 120
Example: Company has 40 Full Time and 20 Part Time (<30 hrs/wk) employees. 20 Part Time
employees work a total of 2000 hours per month. To determine Full Time Equivalent (FTE)
employees take 2000 hours divide by 120 hours = 17 FTEs (rounded up). This means the
company has a total of 57 FTE employees and would be considered a large company under ACA.
For those employees that are not paid on an hourly basis, IRS has suggested three different
ways to calculate hours of service:
If an employee is determined to be full‐time during look back period, then the employee will be
considered full‐time during the stability period
Look‐back period – 3 months up to 12 months
Stability period – no longer than look‐back period
Change of status of an employee during stability period may result in change of
determination of whether that employee is full‐time – regardless of status during
Section 1302(b)(1) of the Affordable Care Act provides that EHB (Essential Health Benefits)
include items and services within the following 10 benefit categories: (1) ambulatory patient
services, (2) emergency services (3) hospitalization, (4) maternity and newborn care, (5) mental
health and substance use disorder services, including behavioral health treatment, (6)
prescription drugs, (7) rehabilitative and habilitative services and devices, (8) laboratory
services, (9) preventive and wellness services and chronic disease management, and (10)
pediatric services, including oral and vision care.
booz&co. Booz & Company, Inc. “The Future of Health Insurance Demise of Employer
Sponsored Coverage Greatly Exaggerated” (2011) by Gary D. Ahlquist, Paolo F. Borromeo and
Sanjay B. Saxena, M.D.
2012 Kaiser/HRET Employer Health Benefit Survey http://www.kff.org/insurance/index.cfm
State Health Facts (kff.org) http://statehealthfacts.org/comparetable
Small Business Health Care Tax Credit for Small Employers, http://www.irs.gov/uac
J.D. Power and Associates , Employer Health Plan Study, June 18, 2012. The 2012 Employer
Health Plan Study is based on responses from 6,579 employers, with quotas to assure an
adequate distribution of small, medium and large companies. The study was fielded between
April and May 2012. http://www.jdpower.com, Westlake Village, CA
http://NY Post.com, April 30, 2011, “Doc Holiday” Behind the Coming Physician Shortage
by Michael D. Tanner.
http://Online.WSJ.com, April 12, 2010, Medical Schools Can’t Keep Up, As Ranks of Insured
Expand, Nation Faces Shortage of 150,000 Doctors in 15 Years
http://www.nytimes.com, July 28, 2012 Doctor Shortages Likely Worsen with Health Care Law
by Annie Lowry and Robert Pear