As the summer came to a close and the kids headed back to school, I could not help but be thankful for the fun we had in our backyard pool. It suddenly dawned on me that our private swimming pool provided many analogies as it relates to the direction of our federal healthcare reform initiatives.
Many Americans, like my younger sister, will be the first to benefit from affordable coverage without any restrictions for preexisting conditions on Jan. 1. The Affordable Care Act allows older Americans to pay a higher rate than younger Americans, but the community rating band will be broken down by only three different age groups. AARP lobbied strongly for this and it is an absolute boon to the baby boomers and a real shaft to Generation X, Y, and millennials who will bear the brunt of the top third-oldest risk tier by age. As an example, state exchanges will have age rating bands of 3:1 that will prevent insurers from charging an adult age 64 or older more than three times the premium they charge a 21-year-old for the same coverage. Many believe the bands will be modified to reflect more of a 5:1 ratio as the individual market typically uses today.
Roughly 60 percent of Americans receive private health coverage through their employer. Think of each one of these employers as having their own swimming pool. When I look out at my own pool, our crystal blue waters are meticulously maintained by a cleaning crew that our family gets to select. When the job doesn’t get done, we simply hire another supplier to get better results. We also get to decide who goes in and out of our family oasis (aside from a random duck that finds his way every year or so to the deep end). We have control over the environmental factors of our pool, like if I want a salt-water or a chlorine pool. Additionally, we use brushers, skimmers, and a Polaris as preventive measures that keep the water clean and healthy. This is not any different from an employer that sponsors their own corporate health and wellness plan.
On Jan. 1, there will be another option—a public pool. When I was little I used to go to our community rec pool and my mom would pay to gain entry or buy a summer pass. Twenty-seven states have agreed to run a community pool but do not really want to manage it. This leaves the cleanup and maintenance to a much larger pool cleaning company called the federal government. While Kathleen Sebelius and others will try hard to sell annual passes to younger Americans with lower health risk, there are three groups that will likely end up donning their swimming caps and jumping into the water.
1. Early retirees—This pre-Medicare eligible group is one of the most costly to have on your health plan with claims costs that are actuarially equivalent to three times that of the normal working population. A report by the Employee Health Benefit Research Institute shows around 17 percent of employers offered such coverage. The number of non-working early retirees who enroll through their employer is around 2 million lives. In a recent Aon Hewitt Survey, nearly a third of employers who provide early retiree coverage plan to direct them to the individual exchange market. Minnesota based 3M is exhibit A here, after eliminating their group plan for early retirees in favor of redirection to the public exchange pools in each state in 2014. This is typically done through transition credits through a health reimbursement arrangement. Not to blame 3M, as this is a rational market response when comparing premiums under three-tiered banded rates.
2. State continuation enrollees—As the insurer of last resort, state continuation enrollees and participants in the federal Pre-existing Condition Insurance Plan will be another group that will contribute to the losses in the state exchanges. About a quarter of a million Americans fall into this category with more than a dozen states declaring intentions to close their plans in the first six months of 2014. The ACA provides a three-year transition period during which the costs of these programs will be shared across the market. However, many feel the $5 billion appropriation will not be enough to help states offset the costs through ACA.
3. Low-income Americans—There are numerous studies that unfortunately show a direct correlation between low-income wage earners who are uninsured and the propensity to be obese, have chronic illness, and pre-existing conditions. This group will continue to be attracted to the community pool and have higher health risks when compared to their private plan cohort. While those who qualify for subsidies (household incomes of between 100-400 percent of the federal poverty level) are the ones who need it most, their risk factors should predictably drive costs higher each year over private plans. Over two-thirds of enrollments in the exchanges are anticipated to come from those receiving premium credits. This is something for employers contemplating “pay or play” moves should consider as a one-year cost comparison may prove to be short-sighted without thinking through the tax implications and future trends of wading through the public waters.
So what is the x-factor that will help keep public exchange costs in check? Those young invincibles with no claims who are predicted to enroll. Let’s not count on them rushing in for fear of an underfunded IRS staff that will struggle to collect a paltry penalty (the higher of $95 per year or 1 percent of family income) from the uninsured. Keep in mind that the ACA is a law whose details are unfamiliar to two-thirds of Americans. Unless the IRS blocks access to the young-ens’ X-Boxes until they join an exchange, this group is going to take a while to put on their swimming suits. Those of us who studied actuarial science and risk management in college know that the dreaded “death-spiral” can occur when younger healthier risks avoid the pool as costs go up leaving behind poorer risks with costs escalating higher each year.
Advice for Tending to Your Own “Swimming” Pool
An August 2013 Towers Watson survey confirmed that 98 percent of employers surveyed will retain their active medical plans for 2014 and 2015. The rationale given was that they view maintaining their own health plan as an important part of the employee value proposition and a competitive advantage for their companies.
My advice to my colleagues in senior-level HR and benefits who serve as the “lifeguards” of their private pools: Hire the right crew and invest each year in preventive measures that deliver crystal clear waters.
Steve Harris, CEBS has been a leader in the corporate employee benefits and health risk management industry. His responsibilities include developing business strategy, overseeing client relationships, guiding service teams, and advising on strategic business issues related to benefits and corporate insurance. His areas of expertise are in the middle-market to Fortune 1000 client market segments, working with C-suite, finance, and HR executives on innovative insurance and employee benefit programs.