One of the more controversial aspects of the Patient Protection and Affordable Care Act (ACA) is the employer mandate, which applies to “large” employers with 50 or more full-time employees. The impact that the employer mandate will have on employer-sponsored health insurance plans, many of which are governed by the Employee Retirement Income Security Act (ERISA), will remain unknown for some time — predominantly due to the delay in its implementation. But whatever effect the employer mandate will have, it will likely arise out of its penalty provisions.
The employer mandate was originally scheduled to go into effect this year, but in 2013, the Obama administration announced a one-year delay to 2015. More recently, the Treasury Department announced a further delay to 2016 (at least for the imposition of penalties) for smaller businesses with 50 to 99 employees.
There are two types of penalties under the employer mandate for “large” employers who fail to offer their employees the opportunity to enroll in “minimum essential coverage.” First, if an employer fails to offer its full-time employees any health insurance coverage and at least one employee enrolls in health insurance through a public exchange, the employer’s penalty is equal to $2,000 times the number of full-time employees beyond 30. So, for example, if a company with 130 full-time employees failed to offer its employees the opportunity to enroll in “minimum essential coverage,” the employer’s penalty would be $200,000.
The second type of penalty applies when an employer does offer “minimum essential coverage,” but the coverage does not meet the affordability requirements under the ACA and at least one employee enrolls in insurance through a public exchange. Under that scenario, the employer’s penalty is $3,000 for each employee who obtains insurance through a public exchange.
The term “minimum essential coverage” is defined so broadly that some commentators believe it could potentially include any available health insurance plan. If that is the case, it could fundamentally alter the level of coverage provided by employer-sponsored health insurance. The theory is that the penalty provisions will incentivize employers to offer cheaper health insurance coverage (e.g., catastrophic, high deductible insurance) that is comparable or only slightly better than similarly priced coverage available on the public exchanges. The employee’s ability to choose between employee-sponsored coverage and coverage through the public exchanges would potentially shield the employer from any backlash that would otherwise result from reducing coverage. And for employers that did not previously offer coverage, cheaper coverage would likely be an attractive option.
Another factor that could potentially drive the shift away from more traditional employer-sponsored health insurance is the so-called “Cadillac Tax,” which imposes a 40 percent tax on employers offering more generous health insurance plans. This tax is scheduled to go into effect beginning in 2018. Some commentators believe that this “Cadillac Tax” will cause more employers to move toward “defined contribution” rather than “defined benefit” plans as a means of avoiding the tax while still offering attractive health insurance benefits.
Under a “defined contribution” model, the employer provides a certain amount of money to each employee who then shops for insurance through private exchanges and picks an insurance policy that is suited to that employee’s individual needs. Several employers, including some major ones (IBM, Walgreens, Trader Joes), have already adopted or have made plans to adopt such “defined contribution” health insurance plans. If “defined contribution” plans are the future of employee-sponsored health insurance, a major uncertainty yet to be resolved is whether ERISA would govern such plans. While ERISA was designed to protect employees, in practice, it also offers substantial protections to insurers and employers.
One such protection is the preemption of state bad faith insurance laws. Bad faith liability can significantly cost insurers in the form of extra-contractual damages, including emotional distress damages, punitive damages and attorneys’ fees. Furthermore, litigation of ERISA-governed claims is stream-lined and generally less expensive. Trial usually consists of a court trial (i.e., oral argument) on the “administrative record” (typically, the claim file), and discovery is extremely limited. In short, ERISA saves insurers and employers tremendously in litigation costs.
Time will tell the extent to which such protections will remain and how the employer mandate will reshape the landscape of employer-sponsored health insurance.