On March 23, 2010 the Patient Protection Affordable Care Act was signed into law by President Obama. The act is now known simply as the Affordable Care Act or ACA. One of the components of the ACA is what is known as “essential health benefits”. Essential health benefits will apply to all plans that are offered by the state and federal exchanges as well as non-grandfathered individual plans and non-grandfathered, fully insured small group plans through private insurers. Large group fully insured plans, self-funded plans and grandfathered plans are not required to add essential health benefits.
Essential health benefits as defined by the law must include items and services within at least the following 10 categories:
States expanding their Medicaid programs must provide these benefits to people newly eligible for Medicaid.
Essential health benefits vary from state to state. There can also be differences within the state from insurance company to insurance company. The primary focus of essential health benefits was to regulate the individual and small group fully insured market. Under the ACA, a small group is defined as 49 employees or less. Individuals mean a sole individual and his or her family. This marketplace is extremely volatile for insurance companies and in many cases insurance companies actually lose money from year to year.
During the debate on the ACA, insurance companies voiced strong opinions on how essential health benefits should be set up. The main concern of most insurance companies is “cherry picking” (as they like to call it). This is when an individual or small group is permitted to select benefits that only suit their needs. At first glance, it appeared that the insurance companies were being selfish; however, their decision to do this was based upon their increased risk factors required under the ACA. This risk was the elimination of any pre-existing condition exclusions and medical underwriting. As an example, this means if a pregnant woman was uninsured, at the time of her pregnancy she could go to the insurance company and obtain coverage for herself and her baby even though she was already pregnant. Prior to the passage of the ACA, this would not have been possible. Similarly, it would not have been possible if the person had cancer, diabetes or a heart condition. By eliminating the pre-existing condition clause, the additional financial risk to insurance companies is an additional 15%. In order to mitigate this increase, the insurance companies lobbied that individual and small group plans sold in this market must include all of the items listed as essential health benefits.
Thus, an individual who is 62 years old would be required to have coverage for pregnancy when it would be very impractical due to their age. Prior to the ACA, states permitted employees to choose plans that best suited their individual needs. Now under the ACA, any fully insured plan in the individual and small-group market must include these essential health benefits in order to reduce overall healthcare cost. The theory is that the entire country’s cost would be reduced by spreading risk across the population of individual and small group markets. As an example, people who are beyond the childbearing age would not use pregnancy coverage; however, the premiums associated with that would offset the premiums for younger people who are still in their childbearing years. Conversely, coverage for arthritis and Alzheimer’s would offset the cost for older individuals by what the younger groups would pay.
Even though the focus on essential health benefits was for individuals and small employers, large employers (whether fully insured or self-funded) and grandfathered plans are exempt from the essential health benefits requirement. Large employers are considered to be 50 or more full-time employees (defined as working 30 or more hours per week). Even though large employers are exempt from essential health benefits, their plans must offer a minimum value of at least 60% of the total value of the benefits provided under the plan. All essential health benefits that large employers do offer cannot have any lifetime limits. The 60% minimum value is derived by examining the program to see if it meets the safe harbors that are established under the law. If this is not the case, the employer has an opportunity to use an actuarial valuation or mathematical formula established by the law to calculate the minimum value of the essential health benefits.
Another interesting aspect that large employers have is that if they choose to self-fund their program, they can choose essential health benefits from any state even though they might not be sitused in that state. This aspect of the ACA is fluid to say the very least! As a matter of fact, large employers that are self-funded can actually draft their own essential health benefits in order to meet the minimum standard. Generally, a large employer will tend to choose essential health benefits from a state that they consider not to be that stringent. A good example of this would be in New York where one of the essential health benefits is infertility coverage. Conversely, Utah has the smallest number of essential health benefit requirements.
If a small employer decides to self-fund their program, then they would have the same options as a large employer. However, since small employers are 49 employees and under, self-funding could be a risky endeavor. Because the group is small, a high claims’ year could drastically increase their liability and potential cost in subsequent years. The one advantage of self-funding, whether the group is small or large, would be to eliminate the 2.3% premium tax required for fully insured plans under the ACA.
Since the passing of the ACA, many of its requirements have come into greater focus; some people have been critical of the duality of how individual/small employers and large employers are affected. Advocates of the law wanted everyone to be treated equally for continuity purposes; however, through the debate and the final product, the reality arose that small groups and individuals would be treated differently than large groups. As we move forward with the ACA law, it is apparent that there will be numerous changes to address some of these issues. Whether it is uniform for all or still based upon size, the changes will come sooner than we all think.
For more information regarding this topic, please contact your local UHY LLP professional or the author of this article, John DePalma.
Wednesday, April 24, 2019 | 7:30 AM – 9:30 AM EDT | The Hartford Club