Today’s employer-sponsored health insurance market is dominated by defined benefit plans, under which employers determine a set of health insurance benefits that are provided for employees. These will gradually be replaced by defined contribution plans, under which employers pay a fixed amount, and employees use the money to buy or help pay for insurance they choose themselves.

The fundamental driver of this shift is the effort by American businesses to reduce their exposure to healthcare costs. The natural next step will be for employers to strictly limit their health-insurance contributions to a set amount of money that workers could use to buy insurance. Companies will thus eliminate their exposure to unexpectedly high health-care costs.

Health Care Reform Accelerates the Shift

The Affordable Care Act (ACA), or Obamacare if you must, will accelerate the shift to defined contribution plans. Indeed, the legislation may have a larger impact on the type of health insurance plan that employers offer than on their decision about whether to drop healthcare benefits altogether. A survey by McKinsey & Co. has suggested the potential for huge declines in employer-based health insurance. Such estimates are highly uncertain, and what actually happens will probably depend on herd behavior. Employer surveys indicate that most companies will consider dropping their health plans only if other firms do.

If most employers do retain their health plans, the state Health Insurance Exchanges created under the new federal health-care law will make the basic idea of a defined-contribution health plan more prevalent, and thus speed its adoption. The regulations written to carry out the new law will determine how things play out. If defined contribution plans that are sufficiently generous count as employer-based coverage, as is generally expected, the trend toward such plans will probably accelerate.

In any case, the bottom line is that a shift toward defined contribution plans seems likely. I’d be willing to bet that most large U.S. employer healthcare offerings in 2020 will be defined-contribution plans.

As health care consumers, we should be able to see what a service costs in advance of the treatment. We should have access to quality information scored by objective measures and an independent source who maintains the integrity of such information so we can weigh the cost with overall value. Just like everything else we buy.

The Big Secret

When providers and health plans negotiate contracts, they agree on discounted fees for a particular service. Providers bill one fee (higher) and accept a lower negotiated fee, writing off the contractual allowance. What is so frustrating is that there’s considerable variation in cost for the same service between health insurance companies with no discernable difference in quality. Doubly frustrating s the fact that it’s such a big secret. It seems that the payers and the providers all have a vested interest in hiding what the actual costs of services.

Demand Transparency

So what can consumers, all of us, do? Demand transparency and support consumerism, health and wellness. Encourage health insurers to start small by making the top 25 coded services visible to their members. Ask them to create tools and resources to help people become smarter, more informed healthcare shoppers.

Can you imagine if we we had enough information to behave like consumers with our health care resources? A world where we could make decisions to avoid unnecessary care, tools that help us understand that expensive care is not necessarily care and that support us in making better choices where we have the ability.

Private and State Exchanges

Being competitive in the new health reform environment will require a new view of customers. Jeffrey Troutman, Executive Vice President of PNC Healthcare, a division of PNC Bank, N.A., sees a fundamental shift: “The industry is moving from wholesale to retail, and the need to make every interaction simple and user-friendly will drive much of the success for health insurers,” he said. The direct-to-consumer sales process changes the customer mix insurers are used to. Small employers will also be joining the exchange, making up nearly 4 million of the total exchange membership of 2014.

Affordability More Important than Ever

Of those currently uninsured, 76% say they can’t afford it. Affordability is expected to change for this population in 2014 when the government takes two steps: establishes a national floor for Medicaid eligibility and provides government premium subsidies for middle-income Americans. Previously, states set their own standards for Medicaid eligibility; some states were stingy so as to limit spending, and others were generous. But in 2014, Americans whose incomes fall below 138% of Federal Poverty Level (FPL) will qualify for Medicaid. Americans with incomes of 138% to 400% of FPL will be eligible for premium subsidies to buy private insurance in the exchanges. Incidentally, 400% FPL for a family of four is about $90,000.

Customized Products Needed

With this shift toward a retail focus, it will be more important than ever for insurers to know who their customers are so they can meet their needs and build lasting relationships. Their preferences vary based on their backgrounds, demographics, and genders. consumers who are younger and healthier are more open to purchasing health insurance from nontraditional sources, such as a retail store. This is also the group that is less likely to consider price as most important. Younger consumers, consumers with higher incomes, consumers in very good health are the most familiar with the individual mandate. Most consumers would be loyal to a health insurance company that offers incentives for healthy behaviors—except for the young and those in the poorest health. Younger consumers (aged 18 to 34 years) are three times as likely as consumers over 45 to be willing to give up their choice of doctor for a lower insurance costs.

More Than Half Of Individual Health Plans Offer Coverage That Falls Short Of What Can Be Sold Through Exchanges As Of 2014

A paper published in Health Affairs today, uses data supplied by health insurance companies to determine the financial protection they provided in 2010 in the individual and small- and large-group markets, and then compares that protection against the new 2014 standards.

The Affordable Care Act (ACA) creates state-based health insurance exchanges (HIX) that will begin acting as a marketplace for health insurance plans and consumers in 2014. More than half of Americans who had individual insurance in 2010 were enrolled in plans that would not qualify as providing essential coverage under ACA rules for the exchanges in 2014. These people were enrolled in plans with an actuarial value below 60 percent, which means that the plans covered less than that proportion of the enrollees’ health expenses.

Many of today’s individual health plans are below the “bronze” level, the lowest level of plan that can be sold through exchanges. In contrast, most group plans in 2010 had an actuarial benefit of 80-89 percent and would qualify as highly rated “gold” plans in the exchanges. To sell to ten million new buyers on the exchanges, insurers will need to redesign benefit packages. Combined with a ban on medical underwriting, the individual insurance market in a post-health reform world will sharply contrast with the market of past decades.

Key Findings

• The average actuarial value of group plans in 2010 was 83 percent, compared with an average of 60 percent for individual plans.
• Most people (65%) enrolled in group plans were in either the gold or platinum tier; about 28 percent were in the silver tier and 6 percent were in the bronze tier. Fewer than 1 percent were in plans with an actuarial value of less than 60 percent—dubbed “tin” plans by the authors.
• In the individual market, 51 percent of enrollment was in tin plans. Another third of enrollees were in bronze plans, 14 percent were in silver plans, and 2 percent were in gold plans. In the individual market, there were no platinum plans.
• Average out-of-pocket spending per household in the group plans was $1,765. In the individual plans, average household out-of-pocket spending was $4,127. The highest spenders in tin-tier individual insurance plans—including very sick people who incur huge medical bills—had more than $27,000 in annual out-of-pocket spending.

Spike Dolomite Ward is the founder and executive director of Arts in Education Aid Council, a nonprofit organization that is restoring the arts to public schools in the San Fernando Valley. www.aieac.org

I want to apologize to President Obama. But first, some background.

I found out three weeks ago I have cancer. I’m 49 years old, have been married for almost 20 years and have two kids. My husband has his own small computer business, and I run a small nonprofit in the San Fernando Valley. I am also an artist. Money is tight, and we don’t spend it frivolously. We’re just ordinary, middle-class people, making an honest living, raising great kids and participating in our community, the kids’ schools and church.

We’re good people, and we work hard. But we haven’t been able to afford health insurance for more than two years. And now I have third-stage breast cancer and am facing months of expensive treatment.

To understand how such a thing could happen to a family like ours, I need to take you back nine years to when my husband got laid off from the entertainment company where he’d worked for 10 years. Until then, we had been insured through his work, with a first-rate plan. After he got laid off, we got to keep that health insurance for 18 months through COBRA, by paying $1,300 a month, which was a huge burden on an unemployed father and his family.

By the time the COBRA ran out, my husband had decided to go into business for himself, so we had to purchase our own insurance. That was fine for a while. Every year his business grew. But insurance premiums were steadily rising too. More than once, we switched carriers for a lower rate, only to have them raise rates significantly after a few months.

With the recession, both of our businesses took a huge hit — my husband’s income was cut in half, and the foundations that had supported my small nonprofit were going through their own tough times. We had to start using a home equity line of credit to pay for our health insurance premiums (which by that point cost as much as our monthly mortgage). When the bank capped our home equity line, we were forced to cash in my husband’s IRA. The time finally came when we had to make a choice between paying our mortgage or paying for health insurance. We chose to keep our house. We made a nerve-racking gamble, and we lost.

Not having insurance amplifies cancer stress. After the diagnosis, instead of focusing all of my energy on getting well, I was panicked about how we were going to pay for everything. I felt guilty and embarrassed about not being insured. When I went to the diagnostic center to pick up my first reports, I was sent to the financial department, where a woman sat me down to talk about resources for “cash patients” (a polite way of saying “uninsured”).

“I’m not a deadbeat,” I blurted out. “I’m a good person. I have two kids and a house!” The clerk was sympathetic, telling me how even though she worked in the healthcare field, she could barely afford insurance herself.

Although there have been a few people who judged us harshly, most people have been understanding about how this could happen to us. That’s given me the courage to “out” myself and my family in hopes that it will educate people who are still lucky enough to have health insurance and view people like my family as irresponsible. We’re not. What I want people to understand is that, if this could happen to us, it could happen to anybody.

If you are fortunate enough to still be employed and have insurance through your employers, you may feel insulated from the sufferings of people like me right now. But things can change abruptly. If you still have a good job with insurance, that doesn’t mean that you’re better than me, more deserving than me or smarter than me. It just means that you are luckier. And access to healthcare shouldn’t depend on luck.

Fortunately for me, I’ve been saved by the federal government’s Pre-existing Condition Insurance Plan, something I had never heard of before needing it. It’s part of President Obama’s healthcare plan, one of the things that has already kicked in, and it guarantees access to insurance for U.S. citizens with preexisting conditions who have been uninsured for at least six months. The application was short, the premiums are affordable, and I have found the people who work in the administration office to be quite compassionate (nothing like the people I have dealt with over the years at other insurance companies.) It’s not perfect, of course, and it still leaves many people in need out in the cold. But it’s a start, and for me it’s been a lifesaver — perhaps literally.

Which brings me to my apology. I was pretty mad at Obama before I learned about this new insurance plan. I had changed my registration from Democrat to Independent, and I had blacked out the top of the “h” on my Obama bumper sticker, so that it read, “Got nope” instead of “got hope.” I felt like he had let down the struggling middle class. My son and I had campaigned for him, but since he took office, we felt he had let us down.

So this is my public apology. I’m sorry I didn’t do enough of my own research to find out what promises the president has made good on. I’m sorry I didn’t realize that he really has stood up for me and my family, and for so many others like us. I’m getting a new bumper sticker to cover the one that says “Got nope.” It will say “ObamaCares.”

Reprinted from the OP/ED Section of the LA Times on 12/6/2011

President Obama signed legislation Thursday, April 14 repealing the expanded 1099 reporting requirements in the health care reform law and Small Business Jobs Act. The widely unpopular rules would have required businesses to report any purchases of goods or services of more than $600 a year from another vendor to the IRS on a Form 1099-MISC.

President Obama supported repealing this provision and with a bipartisan effort, lawmakers removed a requirement that would have been an undue barrier to small business growth. The many benefits of the health reform law for small businesses remain in place. These tools are already helping small business owners find more affordable and accessible coverage for themselves and their employees.

House Ways and Means Committee Chairman Dave Camp, R-Mich., praised the repeal. “After nearly a year-long battle to repeal the onerous 1099 provisions enacted by Democrats, I am pleased the President has now signed their repeal into law,” he said. “On the eve of Tax Day, small businesses can finally breathe a huge sigh of relief that one of the many burdens the Democrats’ health care law would have placed on them has been repealed. Instead, small businesses can focus more of their energies and resources on creating jobs, not filling out yet another form for the IRS.”

Only 43% of small business owners are familiar with a tax credit that could help pay their health insurance costs for employees, according to a national survey released last week by the Small Business Majority (SBM).

"I'm not surprised," John Arensmeyer of the California chapter of the SBM said. "There has been a lot more heat than light shared on this law, so there's been a lot of confusion."

Arensmeyer has worked on a statewide "listening tour" for the past nine months, talking to small business owners about the creation of California's health benefit exchange and the potential savings from the tax credit.

"People don't really know for sure what's in the bill," Arensmeyer said. "Then when they see what's in it, they're pretty receptive to it."

According to a different SBM study released last month, a lot of California businesses could use the tax credit that allows businesses to declare a tax credit of up to 35% of their health insurance costs beginning last year (if they have fewer than 25 employees with average annual wages under $50,000).

"What we've found in California was that 80% of businesses are eligible for the credit," Arensmeyer said.

That's why Arensmeyer has been traveling the state, he said, to see what people's concerns are about the health reform law, and to make sure people understand what they might get out of it.

He said his organization is summarizing the results of the listening tour and will issue a report about it on Feb. 1. He also plans to do a survey specific to California right after that.

"We'll be in the field in February or March," he said, "and by early spring we'll have some results."

Small Businesses Eligible for Health Insurance Incentive
by David Gorn
CaliforniaHealthline

The Department of Health and Human Services (HHS) has issued a preliminary version of the regulation aimed at controlling "unreasonable" rate increases at the national level.

The draft regulation requires carriers to publicly disclose any individual or small group health insurance rate increases higher than 10 percent. The regulation is still open to comment and subject to change. Double-digit increases will trigger a review by state or federal regulators to determine if they're justified. States will get the first shot at scrutinizing the rate hikes. If HHS determines a state lacks the ability to do a thorough actuarial review of premium increases, federal regulators step in. States are eligible for federal grants to bolster their review capabilities and 45 states have taken advantage of the program to date.

This 10 percent threshold can be adjusted on a state-by-state basis over time. After 2011, a state-specific threshold would be set for the disclosure of rate increases, using data that reflect each state's cost trends.

Significantly, neither the regulation nor the Affordable Care Act gives HHS the power to deny rate increases. If they determine a premium hike sought by a carrier is unjustified it will post that finding on a government website, but the increase will still be permitted unless a state regulator prevents it. Most states already review rate increase proposals and some can deny rate increases on individual and small group medical insurance coverage.

How it Works

The mechanics of the rate review are described in the proposed regulation. If they want a rate increase over 10 percent or greater, the carrier will need to notify HHS and post its justification on the insurer's web site. The HHS will consider whether:

• The rate increase results in a projected future loss ratio below the Federal medical loss ratio (MLR) standard.
• One or more of the assumptions on which the rate increase is based are not supported by substantial evidence.
• The choice of assumptions or combination of assumptions on which the rate increase is based is unreasonable.

Group Health Insurance: What would happen if?

If the rank and file of America's employers, financially overwhelmed by the burden associated with sponsoring group benefit health plans, suddenly opted out? It isn't so far-fetched. In 2010, employers transferred ALL health plan premium cost increases to employees. Employee health costs rose 14 percent. Over the last five years, their costs have risen 47 percent, while wages have increased only 18 percent.

Group Health Insurance: Line in the Sand

It may be reasonable to interpret this action as a line in the sand. Employers are saying, "Enough. This is the limit of our financial commitment. More cost will have to be passed on to someone else." Employer frustration has been percolating for a long time. Various arguments -- both for and against -- recur in the debate over whether employers should sponsor health coverage. On one hand, healthier employees are more productive, and comprehensive health coverage is critical to recruiting and retaining better employers. But on the other, health care's relentless cost inflation renders American businesses that offer coverage less competitive than their domestic counterparts that don't. Similarly, they are less competitive than international firms whose employees' coverage costs significantly less.

Let's Imagine Two Group Health Insurance Scenarios

Most employers are carefully watching the continuing health reform battle and its potential implications. Those could be very different, depending on which side prevails.

In the first, Republicans, backed by a health care industry daunted by he prospect of lower revenues if the health law's cost control provisions remain intact, nullify those provisions. Freed from constraints once again, excessive practice patterns continue unabated and costs continue to soar.

With the economy still weak, employers withdraw even faster to escape the higher costs. With government programs only capable of absorbing some new participants, the number of uninsured people mushrooms. Safety net programs are overwhelmed, and pressure on government to devise a new solution rapidly intensifies.

In the second scenario, the Democrats hold fast. But in 2014, the health insurance exchange provision kicks in, allowing businesses to drop coverage sponsorship by paying a $2,000 per employee penalty, plus costs related to current benefits expenditures. In a recent Wall Street Journal op-ed, Tennessee Governor Philip Bredesen detailed an analysis showing an immediate $146 million dollar yearly savings by transferring coverage of core state employees to the exchanges.

Alice Newton feels as if she just caught a break. Owner of the Newton Books in San Diego, she has been in business for 18 years. Her shop provides group health insurance coverage to seven employees. But premium increases in recent years were so astronomical that health care costs had been eating up 30 percent of the store's revenue, about $78,000 a year. She seriously considered dropping health care coverage altogether. But relief arrived in the form of an early provision of the Affordable Healthcare Law - aka ObamaCare. Beginning this year, the law provides generous tax credits to small businesses struggling to maintain health coverage.

Ms. Newton discovered her store was eligible for the full credit, which will give the business a rebate of $21,000 this tax year. So for now, the Newton Books is still in business, and Ms. Newton and her employees have kept their health insurance.
The government this year is offering a tax credit to companies with fewer than 25 full-time workers and average wages of less than $50,000 a year. To qualify, employers must pay at least 50 percent of their employees' health care premiums. Small businesses with 10 full-time employees or fewer earning an average of $25,000 or less are eligible for the largest credit, 35 percent of their health insurance premium costs. Companies with larger numbers of employees earning more receive smaller credits on a sliding scale.

If you own a small business, it might pay to familiarize yourself with the new provisions in the health care law. They may convince you that you can afford to offer health insurance or keep your existing policy in place. If you're an employee at a small company, you could learn the details yourself and make sure your employer is ready to take advantage of the coming changes. Entrepreneurs are busy and not always plugged into these kinds of administrative changes. Your input may mean the difference between getting insurance or going without.

There is no application process; the business owner simply files one additional form with the company tax return. Start pulling together the figures now, though. The tax credit begins in the 2010 tax year, so the payoff will come as soon as next January.
The tax credit is set to expire in 2016, on the assumption that by then most small businesses will have made the transition to the insurance exchanges, where policies will be more affordable and premium costs will be the same for all participants. Small businesses will have even greater tax benefits once the new state health insurance exchange - the California Health Insurance Exchange - is up and running in 2014. The maximum tax credit will increase to 50 percent at that time -- but companies must buy insurance through the exchanges to be eligible.

The great mystery surrounding the Affordable Care Act is how the corporations that provide group health plans for most Americans -- coverage they know and prize -- will react to the new law's radically different regime of subsidies, penalties, and taxes. Now, we're getting a remarkable inside look at the options AT&T, Deere, and other big companies are weighing to deal with the new legislation.

Internal documents recently reviewed by Fortune, originally requested by Congress, show what the bill's critics predicted, and what its champions dreaded: many large companies are examining a course that was heretofore unthinkable, dumping the health care coverage they provide to their workers in exchange for paying penalty fees to the government.

That would dismantle the employer-based system that has reigned since World War II. It would also seem to contradict President Obama's statements that Americans who like their current plans could keep them. And as we'll see, it would hugely magnify the projected costs for the bill, which controls deficits only by assuming that America's employers would remain the backbone of the nation's health care system.

Hence, health-care reform risks becoming a victim of unintended consequences. Amazingly, the corporate documents that prove this point became public because of a different set of unintended consequences: they told a story far different than the one the politicians who demanded them expected.

Why the write-downs happened but the hearings didn't

In the days after President Obama signed the bill on March 24, a number of companies announced big write downs due to some fiscal changes it ushered in. The legislation eliminated a company's right to deduct the federal retiree drug-benefit subsidy from their corporate taxes. That reduced projected revenue. As a result, AT&T (T, Fortune 500) and Verizon (VZ, Fortune 500) took well-publicized charges of around $1 billion.

The announcements greatly annoyed Representative Henry Waxman, who accused the companies of using the big numbers to exaggerate health care reform's burden on employers. Waxman, chairman of the House Energy and Commerce Committee, demanded that they turn over their confidential memos, and summoned their top executives for hearings.

But Waxman didn't simply request documents related to the write down issue. He wanted every document the companies created that discussed what the bill would do to their most uncontrollable expense: healthcare costs.

The request yielded 1,100 pages of documents from four major employers: AT&T, Verizon, Caterpillar and Deere (DE, Fortune 500). No sooner did the Democrats on the Energy Committee read them than they abruptly cancelled the hearings. On April 14, the Committee's majority staff issued a memo stating that the write downs were "proper and in accordance with SEC rules." The committee also stated that the memos took a generally sunny view of the new legislation. The documents, said the Democrats' memo, show that "the overall impact of health reform on large employers could be beneficial."

Nowhere in the five-page report did the majority staff mention that not one, but all four companies, were weighing the costs and benefits of dropping their coverage

AT&T produced a PowerPoint slide entitled "Medical Cost Versus No Coverage Penalty." A document prepared for Verizon by consulting firm Hewitt Resources stated, "Even though the proposed assessments [on companies that do not provide health care] are material, they are modest when compared to the average cost of health care," and that to avoid costs and regulations, "employers may consider exiting the health care market and send employees to the Exchanges." (Under the new bill, employees who lose their coverage will purchase health care through state-run exchanges.)

Kenneth Huhn, vice president of labor relations at Deere, said in an internal email that his company should look at the alternatives to providing health benefits, which "would amount to denying coverage and just paying the penalty," and that he felt he already had the ability to make this change under his company's labor agreement. Caterpillar felt it would have to give "serious consideration" to the penalty option.

It's these analyses -- which show it's a lot cheaper to "pay" than to "play" -- that threaten to overthrow the traditional architecture of health care.

The cost side

Indeed, companies are far more likely to cease providing coverage if they predict the bill will lift rather than flatten the cost curve. Deere, for example said, "We do expect double digit health care increases as most Americans will now have insurance and providers try to absorb the 15% uninsured into a practice."

Both Caterpillar (CAT, Fortune 500) and Verizon believe the requirement to allow dependents to remain on their parents' policies until age 26 will prove costly. Caterpillar puts the added expense at $20 million a year.

How two new taxes and the employer penalty change the health care calculus

First, there is the "Cadillac Tax" on expensive plans. This is a 40% excise tax on policies that cost over $8,500 for an individual or $23,000 for a family. Verizon's document predicts the tax will cost its employees $255 million a year when it starts in 2018, and rise sharply from there. Hewitt also isn't sure that Verizon can pass on the full tax to its employees; so it could impose a heavy weight on the company as well. "Many [have] characterized this tax as a pass-through to the consumer," says the Verizon document. "However, there will be significant legal and bargaining risks to overcome for this to be the case for Verizon."

In a statement to Fortune, Verizon said it is not, "considering or even contemplating" the plans laid out in the report, though records show the company did send the report to its board shortly after the reform plan was passed by Congress.

Second, the bill imposes new taxes on drug manufacturers, medical device-makers, and health insurance providers. Hewitt leaves little doubt Verizon will be paying for them: "These provisions are fees or excise taxes that will be shifted to employers through increased fees and rates."

Caterpillar and AT&T actually spell out the cost differences: Caterpillar did its estimate in November, when the most likely legislation would have imposed an 8% payroll tax on companies that do not provide coverage. Even with that immense penalty, Caterpillar stated that it could shave $25 million a year, or almost 10% from its bill. Now, because the $2,000 is far lower than 8%, it could reduce its bill by over 70%, by Fortune's estimate. Caterpillar did not respond to a request for comment.

AT&T revealed that it spends $2.4 billion a year on coverage for its almost 300,000 active employees, a number that would fall to $600 million if AT&T stopped providing health care coverage and paid the penalty option instead. AT&T declined comment.

So what happens to the employees who get dropped?

And why didn't these big employers drop employee coverage a long time ago? The Congressional Budget Office, in its crucial cost estimates of the bill, projected that company plans will cover more employees ten years from now than today. The reason the bill doesn't add to the deficit, the CBO states, is that fewer than 25 million Americans will be collecting the subsidies the bill mandates in 2020.

Those subsidies are indeed big: families of four earning between $22,000 and $88,000 would pay between 2% and 9.5% of their incomes on premiums; the federal government would pay the rest. So policies for a family making $66,000 would cost them just $5,300 a year with the government picking up the difference: more than $10,000 by most estimates.

As bean counters know, that's not a bad deal for a company's rank-and-file, and it's a great deal for the companies themselves. In a competitive labor market, the employers that shed their plans will need to give their employees a big raise, and those raises could be higher, even after taxes, than the premiums the employees will pay in the exchanges.

What does it mean for health care reform if the employer-sponsored regime collapses? By Fortune's reckoning, each person who's dropped would cost the government an average of around $2,100 after deducting the extra taxes collected on their additional pay. So if 50% of people covered by company plans get dumped, federal health care costs will rise by $160 billion a year in 2016, in addition to the $93 billion in subsidies already forecast by the CBO. Of course, as we've seen throughout the health care reform process, it's impossible to know for certain what the unintended consequences of these actions will be.