Through Thick and Thin: Using Skinny Plans and Fat Plans to Cut Health Care Costs

In a previous issue (September 2013), we discussed so-called “skinny plans,” a strategy some employers plan to use to cut healthcare costs under the Affordable Care Act. Others are planning to use the opposite strategy: high-cost plans with rich benefits, or “fat plans.”

The Affordable Care Act requires all health plans to cover certain preventive care services with no copayment. They also must meet standards for affordability and minimum value. In addition, plans offered in the individual and small group markets, both inside and outside of the health insurance exchanges, must offer a comprehensive package of items and services, known as essential health benefits. The law prohibits plans from placing annual dollar limits on these essential health benefits for plan years starting January 1, 2014.Stethescope EOB

Skinny Health Plans

The essential health benefits provision—arguably the most costly portion of the law—does not apply to large group health plans. This creates a loophole for large employers, generally those with 101 or more employees. Although large group plans must cover preventive care services with no copayment, they do not have to cover “essential health benefits.”

Skinny plans designed to meet ACA requirements for large employers would meet two of the three requirements for ACA-compliant coverage. They would cover the required preventive services. They would be affordable, because they would not cover the essential health benefits. This omission means they would not meet the minimum value standard, which requires a plan to pay at least 60 percent of the total cost of medical services for a standard population.

Fat Plans

Other employers are taking the opposite tack and plan to offer their employees plans that meet the ACA’s preventive benefit and minimum essential coverage requirements but do not meet the affordability standard. Either the plan will be high-cost due to a rich benefit package, or the employee’s share of premium will exceed the affordability standard. The ACA requires the employee’s share of premiums for single-only coverage not to exceed 9.5 percent of the employee’s household income.

The Strategy

Some large employers have done the math and have figured that it will cost them less to offer inexpensive coverage that doesn’t meet minimum value requirements, plus a shared responsibility payment, than to offer comprehensive health coverage to their employees. Others figure it will cost less to offer high-cost plans that some employees might take up, but most will reject due to cost.

This works because the amount of the employer shared responsibility payment depends partly on whether the employer offers health insurance.

  • If you don’t offer insurance, the annual penalty equals $2,000 for every full-time employee (excluding the first 30 employees. For 2015 only, the penalty will be calculated by reducing the employer’s number of full-time employees by 80 rather than 30.)
  • If you do offer insurance, but the insurance doesn’t meet the minimum value or affordability requirements, the annual penalty equals $3,000 per full-time employee who qualifies for subsidized coverage in the health insurance exchange.

Shared responsibility payments will apply to employers only if at least one of their employees applies for coverage in the health insurance exchanges created by the ACA and qualifies for premium subsidies.

Obama administration officials have said that skinny plans would qualify as health insurance under the ACA. However, using either skinny or fat plans to avoid covering employees might backfire as an employee recruiting and retention strategy in all but low-wage, high-turnover businesses in areas with high unemployment. Health benefits rank near the very top of the list of what employees value most in their jobs, along with salary, scheduling flexibility and opportunities for growth.

We can provide other suggestions for controlling health care costs. For more information on structuring a health plan or complying with the Affordable Care Act, contact us.

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