A Business Guide to the Failure Points of the ACA
We are now over 10 years out from the initial implementation of the Affordable Care Act (ACA), and the experiment has not gone as planned. If you recall the days when the law was being lobbied for, we were promised that healthcare costs would go down. The reality, however, is that costs have not decreased—they have only accelerated at an alarming rate. Why is this the case if the law was supposed to lower costs? The answer lies in the lack of foresight that should have been present. In this post, we will break down three critical failure points for employers and provide solutions to address the problems they face.
Critical Failure 1: Direct Regulation of Insurance Companies
The first critical failure of the ACA is its direct regulation of insurance companies, particularly those offering traditional, fully-insured health plans. These plans are common in both the group and individual markets. The regulation requires that health insurance companies spend either 80% or 85% of premiums collected on claims. If they do not meet this threshold, they must refund any surplus to policyholders and cannot raise their rates the following year.
The problem is twofold: First, what incentive do insurance companies have to refund overpaid premiums? Second, what company doesn't want to grow? They can't grow without raising rates, and since their gross profit is fixed, rates must increase to allow for revenue growth and to satisfy shareholders.
Why is this a critical failure point? The main reason is simple economics. The goal of insurance should be to minimize expenses—namely, claims. While it's true that insurance companies have a history of egregious profiteering, forcing them to meet a certain loss ratio defies standard business practices. As a result, insurance companies and their actuaries have become extremely adept at ensuring their loss ratios align perfectly with regulations. This means they set reimbursements and adjudicate claims with one thought in mind: How do we hit the loss ratio? The consequence for you and your employees is that you are likely paying inflated prices for services to ensure the insurance company meets its goals.
Solution: The easiest way to combat the risks presented by this ACA failure is to start embracing some level of self-funding or self-insurance. Fully insured contracts, as we've discussed, are not focused on controlling costs; rather, they are designed to get the carrier to the exact level they need for maximum profits. A self-funded program essentially creates a mini insurance company that you own. Much like your primary business, the focus is on keeping costs down while delivering quality healthcare to your employees. The self-funded strategy allows you to better control the cost of claims, manage costly conditions more effectively, and ensure your employees access high-quality healthcare.
Critical Failure 2: Removal of Caps on Individual Losses
The second critical failure of the ACA stems from the removal of caps on losses for an individual person. Before the ACA, Medicaid essentially served as a catastrophic risk pool for people whose conditions required them to exceed these caps, which were often around $1,000,000. The issue with this was that it required a “spend down,” forcing people to offload assets and wealth before qualifying for the pool. We can all agree that people shouldn't have to go broke simply to get care for a condition they didn't ask for.
However, removing the cap greatly diminished an insurance actuary's or underwriter's ability to properly assess risk. They now have no clear idea of what the top end of their risk could be. As a result, they must charge significantly higher premiums to hedge against the possibility of a catastrophic underwriting decision with every single group. Moreover, this change has allowed the healthcare community and pharmaceutical companies to exploit these failures. Before the ACA, a $1,000,000 or higher claim was highly unusual—a statistical anomaly. But once the law passed and these communities realized the loophole, the costs of care and pharmaceuticals skyrocketed because the bank account was, in effect, forced to never run dry.
Solution: Combating this issue is challenging because we can't eliminate unlimited risk. However, we can take steps to better address and mitigate these risks. A good starting point is considering a captive arrangement. A captive allows you to maintain the level of risk your business is willing to take while also providing a buffer between your maximum risk and claims that hit the traditional stop-loss market. This approach yields two significant benefits: First, by adding a captive layer, you effectively reduce a fixed cost expense by derisking the traditional stop-loss carrier. Second, if the captive layer is profitable, it often entitles your plan to receive a refund of excess premiums, further lowering your costs. A word of caution: not all captives are created equal. As with any aspect of your health plan, ensure you thoroughly vet different options and select the one that best fits your needs.
Critical Failure 3: Pressure on Small to Midsize Businesses
The third and final failure is the pressure the ACA has placed on small to midsize businesses. Large and enterprise-level businesses are better equipped to handle the compliance measures created by the ACA, but small to midsize businesses continue to struggle. Unfortunately, many small and midsize companies have been forced out of the marketplace due to their inability to comply with the regulations. This has allowed enterprise businesses to scoop up their market share without paying a dime for it.
The reasons for non-compliance are varied but often stem from employers struggling to meet the requirements for Applicable Large Employers (ALEs), defined as companies employing more than 50 Full-Time Equivalent Employees (FTEs). We typically see three specific areas of non-compliance. The first is not properly calculating FTEs. For example, if you have 100 part-time employees working 30 hours a week, you have at least 50 FTEs based on a proper calculation. Yes, part-time employees are part of the calculation and act as fractional units of a full-time employee. The second failure point is meeting what is identified as the “small penalty,” which occurs when an employer fails to provide coverage that meets the requirements of Minimum Essential Coverage (MEC). The third and final common issue is employers not meeting the Minimum Value standard with their offered plans. The penalty here is called the “large penalty” and results when an employee accesses the Marketplace and qualifies for subsidies.
Solution: The number one recommendation for employers facing these challenges is to seek good advice! A solid benefits consultant can go a long way in helping you understand and address areas of inadequacy, but there is no replacement for having a compliance firm or attorney on your team. I strongly advocate for periodic, independent audits of your health plan to ensure you are meeting or exceeding all requirements set forth by both the ACA and the Consolidated Appropriations Act (CAA) of 2021. The great thing is that when deficiencies are found, a good compliance firm or attorney can help build a roadmap to compliance.
Conclusion
In conclusion, the Affordable Care Act and the Consolidated Appropriations Act of 2021 are not going anywhere anytime soon. Instead of digging our heels in and complaining about the regulations, we should find ways to use them to our advantage. I can tell you that businesses I work with who understand the challenges and put forth the effort to comply find their costs coming down and their benefits value going up—both of which better position their business for success!