On November 4, the U.S. Department of Health and Human Services
(HHS) and Department of the Treasury (including the Internal
Revenue Service) (the "Departments") released guidance advising that health plans offered by
large employers that don't provide coverage for inpatient
hospital services do not provide "minimum value" under
Affordable Care Act (ACA) regulations. As a result, employees who
are offered these "skinny plans" will be eligible to
receive premium tax credits if they elect to obtain coverage
through the federal or state insurance exchanges established under
the ACA. Employers who fail to offer plans with "minimum
value" will be subject to a penalty of $3,000 per year for
each employee who purchases coverage through an exchange and
receives a federal subsidy.
The new guidance, Notice 2014-69 ("Group Health Plans that
Fail to Cover In-Patient Hospitalization Services"), observes
that the government's online "minimum value
calculator," created to assist employers in structuring their
insurance plan offerings, may not produce valid actuarial results
for "unconventional plan designs that exclude substantial
coverage for in-patient hospitalization services." Using the
calculator, a plan could omit basic benefits but still be
ACA-compliant as long as it has equivalent actuarial value to the
lowest-level ("bronze") plans sold on exchanges. The
Departments believe that some of the results that can be produced
by the calculator were not intended by the ACA regulations, and
said they will propose amendments to the regulations to explicitly
provide that plans that do not cover both physician services and
inpatient hospital services do not provide minimum value.
The guidance stated, "A plan that fails to provide substantial
coverage for these services would fail to offer fundamental
benefits that are nearly universally covered, and historically have
been considered integral to coverage, under typical
employer-sponsored group health plans."
The ACA requires that health plans in the individual and
small-group markets cover 10 "essential health benefits,"
including hospital services. Large employers (those with at least
50 full-time employees) and all self-insured employers, however,
need not follow that rule so long as the plans they offer cover at
least 60% of their employees' estimated health costs. Skinny
plans have been designed to satisfy the literal requirements of the
ACA's minimum value rules, but it has been generally recognized
that they do not comport with the spirit of the ACA.
Most employers that have adopted or expressed interest in skinny
plans have been in industries with many low-wage workers, such as
restaurants and retail stores. By covering preventive services, as
required by the ACA, but excluding pricier hospitalization
benefits, employers could offer employees a low-cost, technically
compliant plan, and thereby avoid the "play or pay"
penalties that would be imposed on the employers for failure to
offer affordable insurance to their employees.
Existing skinny plans that appeared to comply with the ACA based on
use of the online minimum value calculator may be grandfathered if
they were adopted before the guidance was issued. The guidance will
be the basis of new regulations expected to be issued on or about
March 1, 2015, that will apply to all plans that are adopted on or
after November 4, 2014, or whose plan years begin after March 1,
2015. The new regulations, which will be effective immediately upon
adoption, will also prohibit employers that offer "skinny
plans" from stating or implying that their having offered the
plan precludes their employees from receiving premium tax credits
if they purchase coverage through an exchange.
It should be noted that even after the new regulations are adopted,
skinny plans will probably not go away completely. Although they
will no longer be a solution for employers seeking to avoid the
$3,000 "affordability" penalty by making their employees
ineligible for premium tax credits, offering a skinny plan should
still allow an employer to avoid the separate penalty of $2,000 per
year per full-time employee for failing to offer all full-time
employees "minimum essential coverage." Large and
self-insured employers currently need not offer their employees all
10 "essential health benefits" in order for the coverage
to qualify as "minimum essential coverage" (the level of
coverage that an individual must maintain in order to meet the
"individual mandate" under the ACA), and it appears
unlikely that the new regulations will change this. And if,
notwithstanding the availability of a premium tax credit, an
individual employee chooses not to enroll in an insurance plan
through the exchange, the employer will not be subject to the
$3,000 penalty for that employee. If a skinny plan were offered
alongside a low-cost "fixed indemnity" hospitalization
plan, employees might be even less likely to go into the exchange
in search of more comprehensive coverage.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.