Skinny Plans – Could Lead to Fat Bills
Lately, there has been a lot of talk about skinny plans being an ACA savior for employers with low paid employees. After researching the strategy, I am skeptical that skinny plans will be a viable option for all employers. In fact, in some situations, skinny plans could leave employers with a huge tab. The key to the success of any skinny plan strategy is math. However, before we explore the math behind the strategy, let me briefly describe how and why the skinny plan strategy is worth considering.
The first item that needs to be understood to comprehend skinny plans is the two penalties associated with the Play or Pay Mandate. The first penalty associated with the Play or Pay Mandate, the §4980H(a) penalty, applies to applicable large employers who do not offer minimum essential coverage under an eligible employer-sponsored plan. To trigger the first penalty one full-time employee (defined as an employee that averages 30 or more hours of service per week) must receive a premium tax credit (the 95 percent rules does provide relief to the harshness of the one full-time employee language). If an employer fails the 95 percent rule, the employer will owe $2,000 for each full-time employee in excess of 30 employees regardless of how many employees receive a premium tax credit.
The second penalty associated with the Play or Pay Mandate, the §4980H(b) penalty, applies to applicable large employers who do not offer affordable coverage or the coverage offered does not provide minimum value. If an employer has to pay the §4980H(b) penalty, the employer owes $3,000 for each full-time employee that receives a premium tax credit. The §4980H(b) penalty is capped at the amount of a hypothetical §4980H(a) penalty. The next important item to understand is what individuals can receive a premium tax credit and thus trigger the §4980H penalties.
A premium tax credit is available to an individual with a household income of at least 100 percent, but not more than 400 percent of the federal poverty line. In 2013 the federal poverty line for an individual living in the continental United States was $11,490. Therefore, if an individual’s household income is between $11,490 and $45,960, the individual will be eligible for the premium tax credit.
An individual is only eligible for a premium tax credit if the individual is not eligible for minimum essential coverage under an eligible employer-sponsored plan that is both affordable and provides minimum value or through a government plan including, but not limited to Medicare, Medicaid, or TRICARE. The amount of the premium tax credit depends on several factors including the cost of the monthly health insurance premiums purchased by an individual or household, the premiums for the applicable second lowest cost silver plan in the individual’s rating area, and the household income of the individual compared to the federal poverty line. An individual is entitled to a premium tax credit of the lesser of:
The second lowest cost silver plan for an individual is based on the rating area where the individual resides. For instance, the State of New York has eight rating areas and the second lowest cost silver plan will vary depending upon the rating area where the individual resides. An individual’s applicable percentage is determined by comparing an individual’s household income to the federal poverty line. The applicable percentage works on a nonlinear sliding scale starting at 2 percent for individuals with a household income of 100 percent of the federal poverty line and ending at 9.5 percent for individuals with a household income of 400 percent of the federal poverty line.
As a result of slower accumulation related to the §4980H(b) penalty, employers searched for ways to avoid the harsher §4980H(a) penalty without offering expensive coverage. This is where the idea for skinny plans originated. Skinny plans are only possible because of various provisions scattered throughout the ACA. The first important ACA provision that allows for skinny plans is the provision that all health plans offered in the individual or small group market include the ten essential health benefits. Therefore, in the individual and small group market, health plans must cover ambulatory patient services, emergency services, hospitalizations, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitation services, laboratory services, preventive and wellness services and pediatric services including oral and vision care. Noticeably absent, and critical for the existence of skinny plans, is a requirement that health plans offered in the large group market include the essential health benefits. The large group market consists of employers who employed an average of at least 101 employees on business days during the preceding calendar year and who employs at least 1 employee on the first day of the plan year. Consequently, employers operating in the large group market do not need to offer the ten essential health benefits in their health plans. As a result of these interrelated provisions, skinny plans were born.
Skinny plans will do the bare minimum to comply with the ACA. A skinny plan will cover preventive services along with a limited number of doctor office visits and generic drugs. However, a skinny plan is unlikely to cover hospitalizations or surgeries. The purpose of the skinny plan is to keep the monthly premiums down. It is estimated a skinny plan will cost as little as $50 per month.
Despite skinny plans limited coverage, employers offering skinny plans will have fulfilled their obligation to offer full-time employees the opportunity to enroll in minimum essential coverage under an employer-sponsored plan. The ACA gives an expansive definition of an eligible employer-sponsored plan which includes any plan or coverage offered in the small or large group market within the State. Skinny plans can be offered in the large group market. Thus, so long as an employer complies with the 95 percent rule, the employer will avoid the harshness of the §4980H(a) penalty if it offers a skinny plan to its full-time employees. However, the employer will still be subject to the §4980H(b) penalty.
The §4980H(b) penalty will still apply because the employer’s skinny plan will not satisfy the minimum value requirement. Additionally, an employee who does not enroll in the employer’s skinny plan will still be eligible for a premium tax credit so long as the other conditions for the premium tax credit are satisfied. These two facts will result in skinny plans not being a viable option for certain employers. To determine if a skinny plan is a cost-efficient option the employer will have to do the math.
One of the keys to determining if a skinny plan will be a successful strategy is the difference between the second lowest cost silver plan and the lowest cost bronze plan in the employer’s rating area. This will not be an exact estimate as the cost of an individual’s second lowest cost silver plan and the lowest cost bronze plan is based on where the individual resides and not where the employer is located. However, it is safe to assume the majority of the employer’s workforce will reside in the same rating area as the employer. Not all States have released the numbers related to their Exchanges. Fortunately, New York has released preliminary Exchange numbers for its eight rating areas. To understand why the price of the second lowest cost silver plan and the lowest cost bronze plan in the rating area is critical for skinny plans, consider the Exchange prices in the New York City rating area.
In the New York City rating area, the second lowest cost silver plan on the individual Exchange is $4,644 annually ($387 per month). The lowest cost bronze plan on the individual Exchange in the New York City rating area is $3,696 annually ($308 per month). Using these numbers an employer considering the skinny plan option must examine its workforce’s pay to determine if the skinny plan option makes mathematical sense. If an employee with no dependents is paid $8 per hour and works 2,000 hours per year, he/she would be eligible to receive an annual premium tax credit worth $4,117. Therefore, the employee would be able to receive the more valuable bronze coverage, which costs $3,696 annually, at no cost compared to the skinny plan option. The bronze coverage will be more valuable as it will include the ten essential health benefits. If an employee with no dependents is paid $12 per hour and works 2,000 hours per year, he/she would be eligible to receive an annual premium tax credit worth $3,056. This employee would be able to purchase the more valuable bronze coverage for $53 per month. If the employer is making the employee cover the entire premium for the skinny plan (estimated to be $50 per month), the employee would be able to enroll in the more valuable bronze coverage at virtually the same cost when the premium tax credit is taken into account.
While the numbers do not change dramatically, the Albany rating area demonstrates how fluctuations in the second lowest cost silver plan and the lowest cost bronze plan will impact an employer considering a skinny plan strategy. In the Albany rating area, the second lowest cost silver plan on the individual Exchange is $4,104 annually ($342 per month). The lowest cost bronze plan on the individual Exchange in the Albany rating area is $2,844 annually ($237 per month). If an employee with no dependents is paid $8 per hour and works 2,000 hours per year, he/she would be eligible to receive an annual premium tax credit worth $3,577. Just as was the case in the New York City rating area, the employee would be able to receive the more valuable bronze coverage, which costs $2,844 annually, at no cost. If an employee with no dependents is paid $12 per hour and works 2,000 hours per year, he/she would be eligible to receive an annual premium tax credit worth $2,516. This employee would be able to purchase the more valuable bronze coverage for $27 per month. Again, the employee would likely be in a much better position enrolling in the lowest cost bronze plan.
The Exchange numbers from the New York City and the Albany rating areas show an employee being paid $12 per hour or less will be in a better position rejecting the employer’s skinny plan and enrolling in the lowest cost bronze plan. Not only would the bronze plan be more valuable compared to the skinny plan, but it would also be free or at worst the same price as the skinny plan. If an employer’s employees reject the skinny plan and elect to enroll in the lowest cost bronze plan which logic says the employees should, the employer could be left with an enormous penalty under §4980H(b).
The rating area where an employer is located will have a huge impact on the effectiveness of implementing a skinny plan strategy. As the Exchange numbers are released in the next few weeks, employers exploring the skinny plan strategy should carefully examine the prices of the second lowest cost silver plan and the lowest cost bronze plan in their rating area. With this information and the employer’s payroll numbers, an employer should be able to make an informed decision regarding the skinny plan strategy.
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