Does the ACA protect workers against the risks of defined contribution plans?

Four provisions of the Patient Protection and Affordable Care Act (ACA) — a minimum value standard, a maximum percentage of household income rule, an out-of-pocket limit, and an “essential benefits” package — appear to offer some protection against limitless cutbacks by large employers, but leave the door wide open to reductions in the coverage that many large employers currently provide.

The ACA requires all coverage provided by a large employer (those with 50 or more workers) to be “affordable,” and defines affordability as meeting the minimum value and maximum percentage standards. If employers do not offer affordable coverage, their employees will be eligible to join a public exchange. In addition, for those employees whose annual income is less than 400 percent of the Federal Poverty Level, the ACA provides for a federal tax credit to partially subsidize the purchase of insurance in a public exchange (that translates to partial subsidies for individuals with incomes up to $44,680 and to families of four with incomes up to $92,200).

The minimum value standard

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. “It’s not measuring what a specific individual will pay, but what a population paid. It’s…a summary measure,” Quincy said. In a plan with a diverse risk pool, she explained, healthy people will probably pay more than 40 percent of the cost of their health care — possibly much more — in order to offset the cost of sick people who use more health services, and having reached their plan’s out-of-pocket spending limits, wind up paying less than 40 percent of their health care costs.

A final rule on how to calculate actuarial value has not been issued.

The maximum percentage of annual income rule

The ACA limits the amount an employee can be required to pay towards his or her annual health insurance premium to 9.5 percent of the employee’s household income. This is the second ACA measure of “affordability.” There are two important caveats.

First, the percentage cap applies only to premiums; patient advocates warned against mistaking it for an out-of-pocket maximum. Other costs borne by employees (deductibles, co-pays, additional fees for out-of-network doctors) could push employees’ total out-of-pocket medical expenses significantly higher than 9.5 percent of their income.

Second, most people who have interpreted the ACA believe that the 9.5 percent maximum applies only to premiums for individual coverage, not to family coverage. According to Sara Collins, vice president for affordable health insurance at the Commonwealth Fund, as long as a large employer offers a plan in which the premium for an individual policy is below 9.5 percent of an employee’s household income, that employee will not be eligible for subsidies in the public exchanges — even if the family policies offered to the employee have premiums significantly greater than 9.5 percent of her household income.

Here, too, a final rule has not been issued. In the meantime, it remains a source of contention in Washington.

Out-of-pocket caps

The ACA does prohibit out-of-pocket limits that are greater than the federally set limits for Health Savings Accounts. In 2013, the maximum out-of-pocket spending limit will be $6,250 for an individual and $12,500 for a family. These limits will be adjusted annually along with the percentage increase in average per capita premiums. Nevertheless, these limits still represent an enormous burden for many families. The 2013 out-of-pocket spending limit for families represents 25 percent of median household income in the U.S. in 2011.

Essential Benefits Package

The ACA also contains a provision specifying 10 general categories of service every insurance plan must cover. These are known as the “Essential Benefits Package.” Observers have raised questions about the extent of protection that the package will provide because, according to proposed federal rules, the specification of the special services to be covered is left to each individual state. As long as a state selects benefits equivalent to those currently offered by one of the three largest insurers in each category of health plan (for example, small group, state employees, etc.), no additional requirement applies. Thus, any state could select a service package that mimics the least robust of the top three plans. States that currently have insurers that only offer limited benefits would not be required to enhance those benefits except to the extent of ensuring each of the ten broad categories of service be included in some fashion.

In any event, the Essential Benefits Package does not apply to the large group market. Large corporations like Sears Holding Co. and Darden Restaurants Inc., therefore, will not be legally required to offer the same essential benefits that must be offered by plans in the public exchanges.

Even so, many health care experts, including Quincy and Collins, argue that competition for employees will likely keep corporations from cutting their policies below the level of the Essential Benefits Package. In addition, if employers were to slash their benefits below the level at which their plans met the required 60 percent minimum actuarial value rule, their employees may become eligible for subsidies in the public exchanges and, if so, the employer would face a penalty.

On the other hand, many current employee health plans provide benefits well above the level of the Essential Benefits Package, so there is lots of potential for cutting benefits under a defined contribution model before the essential benefits threshold is reached.