Skinny Health Plans—Good Idea or Not?

So-called skinny health plans could give larger employers a way to minimize shared responsibility penalties under the Affordable Care Act.

Beginning in 2015, the Patient Protection and Affordable Care Act (ACA) will require all employers with 50 or more full-time equivalent (FTE) employees to offer their full-time employees coverage that is affordable and meets a minimum value standard. Employers that fail to meet this requirement could become liable for “shared responsibility” payments.

An Important Oversight?

The Affordable Care Act requires all health plans, unless they are grandfathered, to cover certain preventive care services with no out-of-pocket expense to insureds, even if they haven’t met their annual deductible. Health plans created or bought before March 23, 2010 are grandfathered. All other health plans must provide free coverage of certain preventive services, such as blood pressure and cholesterol tests, immunizations, preventive services for women, and more.

The Affordable Care Act also requires all health plans offered in the individual and small group markets, both inside and outside of the health insurance exchanges, to 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. 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. (Until 2016, some states define “large groups” as 51 or more employees.) Although large group plans must cover preventive care services with no copayment, they do not have to cover “essential health benefits.”

The Skinny Plan Cost/Benefit Calculation

Skinny plans designed to meet ACA requirements for large employers would cover the ACA-required preventive services. To keep premiums low, however, they would not cover the essential health benefits, or would place a very low limit on those benefits, such as $100 per hospitalization. Some insurers are developing skinny plans that cost as little as $100 per month per employee — less than one-tenth of the average cost of large group major medical coverage (based on an Aon Hewitt projection in the fall of 2012).

Although skinny plans would meet the ACA’s affordability standard — because they don’t cover much — they would not meet the minimum value standard. A health plan meets this standard if it’s designed to pay at least 60 percent of the total cost of medical services for a standard population.

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.

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

• If you don’t offer insurance, the annual payment equals $2,000 for every full-time employee (excluding the first 30 employees).
• If you do offer insurance, but the insurance doesn’t meet the minimum value requirements, the annual payment is $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.

To see how this works, let’s consider three companies, all with 101 full-time employees.

• Company A offers comprehensive health benefits to its employees with a high- deductible health plan. It pays $5,000 of the $6,000 annual premium for employee-only coverage. Premiums total $505,000. Company A can deduct these premiums as a business expense; it also does not have to pay its share of employment taxes (Social Security, Medicare and Federal Unemployment) on premiums. Tax savings equal approximately 35 percent. Net cost: $328,250 (approximately).
• Company B offers no health insurance. Five employees of Company B go to the health insurance exchange to buy coverage. One qualifies for subsidized premiums because his low income qualifies him for subsidies. Company B’s shared responsibility payment would equal $2,000 per full-time employee, minus the first 30, for a total annual penalty of $142,000. Company B cannot deduct the amount of this payment from taxes. Net cost: $142,000.
• Company C offers a skinny plan to its employees, which costs $100 per month. Two employees of Company C want more comprehensive health insurance, so they go to the health insurance exchange and qualify for subsidized premiums. Company C’s total annual shared responsibility payment would equal $3,000 x 2 employees, or $6,000 (nondeductible). It would also pay $121,200 in premiums for the skinny plan (101 employees x $1,200 annually). Shared responsibility payment plus premiums equal $127,200, minus approximately 35 percent for premium-related tax savings. Net cost: $83,000 (approximately).

The Skinny on Skinny Plans

Obama administration officials have said that skinny plans would qualify as health insurance under the ACA. Ironically, skinny plans designed to minimize penalties under the ACA will resemble limited-benefit health insurance plans, sometimes called “mini-med” plans. The ACA was supposed to end mini-med plans in 2014 and provide affordable, high-quality coverage options to all Americans by phasing out limits on a plan’s annual coverage of “essential health benefits” such as hospital, physician and pharmacy benefits.

Employers can combine skinny plans with other health plans to provide comprehensive coverage for their employees and meet minimum value requirements. Does it make sense to have only a skinny plan and pay any employer shared responsibility payments? This might make sense for certain low-wage, high-turnover businesses in areas with high unemployment. But if you want to retain employees, remember that health benefits rank near the very top of the list of what employees value most in a job, along with salary, scheduling flexibility and opportunities for growth.