There are as many opinions as there are people about the PPACA and what the health care and health insurance industry will look like five years or even one year from now.  Step back and restate what we all know ... so far.

Medical Loss Ratio (MLR) numbers with a shrinking number of pools will have little affect. 
There are some groups that look at this whole set of communications over the past two years and ask ... "What is all of this about?"  Good question.  Most groups have received refund amounts that are so small, the cost to distribute the refund in any meaningful way far outweighs any benefit to the plan participants.  So, it appears that the real "marketplace" has indeed kept the excess margins that the carriers were frequently accused of making as just a "straw man". 

Rates are going up ... Suuuhprize!
Often we remind folks that if a free car wash and oil change was added as a monthly benefit to auto insurance, as a mandated requirement, auto insurance would rise and so would the price of those services in a not so free marketplace.  If we added to that the cost of unlimited liability exposure for even the most minor of errors of service, auto insurance would soon be unaffordable to many and over time even shrink the market reach and growth.  So by adding "essential benefits" to every plan and the age banding of rates, increases are being dumped on many just as they enter the later years of their careers, still trying to get their retirement plans to recover from the market / government blunders of 2008 and 2009.

Adverse Selection RULES!
We all learned early that people who need insurance buy insurance.  This simple reminder of human nature applies to the PPACA.  Open Enrollment ends in just a little over 60 days from this post.  So far, less than 25% of the Marketplace enrollments are the young healthy types that need to fund the cost of providing the care to the 75% of this group that could NOT get insurance elsewhere or wants the low cost premium that the subsidy allows.  If this trend continues, indeed the carriers will form a line to the left for bale outs because they are "too big to fail". 

Groups may end up King in the marketplace
Many in the industry have worried about groups, particularly small groups usually under 50 lives, can survive.  Based on what we are seeing in rates, renewals and the various strategies being implemented, small groups will maneuver to keep their group contract health offering a a recruiting and retention tool, even at the cost of wage increases.  Actually, at the expense of wage increases.  Most market segments and industries do not have the excess margins that are frequently portrayed in media reports.  There are cycles in every market segment begun by innovation and investment, rolling and growing, expansion and maturation, then contraction and resorting to begin anew.  These cycles have grown shorter and more pronounced.  I remember my boss in the mid 1980's complaining about buying a $700 fax machine because no one else he knew had one.  A few years later, this same man told me I was going mad because I suggested that everyone on our traveling staff needed portable phones and portable computers. 

All this to say ... small businesses that make up the small group market of less than 50 lives are 95% of all the businesses in our great country and 98% of the workforce. (US Chamber of Commerce)  The pressure that the PPACA is putting on small business is severe, but not a blow that will end this creative and vibrant part of the landscape we call America. 

The bottom line is this ...
The PPACA is loved only by the few that benefit from the redistribution of costs it perpetuates.  Once given, benefits are impossible to reduce or eliminate, so like it or not, we are already a long ways down a historically One Way street.  I remember COBRA being the end of all Group Insurance when it was passed.  Rates went up and life went on.  Indemnity Health Insurance died a slow death, and HMO's were going to kill us all, and HSA's and HRA's moved into the marketplace.  Maybe the health insurance industry will eventually run out of ways to package the "orderly transfer of health care cost risk" but since there is "nothing new under the sun" we should just keep working for the innovative geniuses that define our clients and coworkers.

We get questions about one type of discrimination under the new rules of the PPACA almost every day.  These questions are about how and how much can/should the employer contribute to the premium costs of group health insurance offered to employees.  The answer really has to be given in three parts.

Part 1 - Carrier Contract Rules
Group contract will continue to have both participation and contribution guidelines for the plan sponsor (employer).  Of course, these will need to be understood and followed.  Enough said.

Part 2 - Contribution Discrimination

These rules remain vague and not in a final form for implementation ... discrimination for contributions could occur either by dollar or percentage amounts.  Here are two examples that MIGHT work. 

First ... understand the reason this is now an issue is because of Age Banding of Rates.  Moving forward with renewals in 2014, the single rate or family rate are totally reformatted.  So, now this new dynamic will cause compliance headaches for most employers ... some will NOT be able to comply and be "fair"!

Contribution Discrimination Compliance is focused on the comparison of the contribution dollars or percentage paid on behalf of the two groups of employees that are defined under ERISA ... HCE's (Highly Compensated Employees) and NHCE's (Non-Highly Compensated Employees) as well as groups or individuals defined and covered under Title VII of the Civil Rights Act ... (Age, Sex, Race, National Origin) and probably Military Service History and Marital Status.  One way to provide Contribution Neutrality is to just "pay" employees a fixed dollar or percentage amount of their compensation for benefits or pay it based on years of seniority.  Either, if applied consistently should result in a Contribution Discrimination test that passes.

Part 3 is where the real headache begins when employers realize this set of issues ... our responses will need to be client specific.

Part 3 - Section 125 Premium Conversion Compliance.

Unless the employer pays 100% of the health premiums for the employee, there will be a payroll deduction and that deduction will be done pre-tax under Section 125.  Even the Premium Conversion provisions of Section 125 Plans have ERISA discrimination tests ... and unlike the PPACA contribution issue in Part 2 above, Section 125 tests are well established and clearly defined ... but widely unknown or misunderstood.

Section 125 Discrimination rules are clear that the HCE's can ONLY receive 25% of the total benefit of the Premium Conversion Plan.  Said another way ... for every dollar that is deducted pre-tax from the total group of HCE's there must be three (3) dollars deducted from the NHCE's. 

At first glance, this seems like a non-issue.  But, the HCE's tend to be older and a far higher percentage of family coverage.. 

So, if the employer contribution is 50% of the single rate, it could look like this ...

In this chart, the company is paying 50% of the single rate.  All the NHCE's are on single and average $300 per month premium.  The HCE's have some family coverage and are older so their average premium is higher and the single rate for HCE's used is $600 per month.  BOTH the contribution test and the Deduction tests FAIL!  HCE's get double the $ amount in contribution even though the percentage is used and the HCE's are getting 61% of the benefit of the pre-tax Section 125 deductions.

The New Issue is a Double Bind

In the chart above, if the employer increases their contribution for NHCE's to make that more equitable, it will just make the Section 125 calculation move further away from the required 25/75% split that favors NHCE's.  If the employer tries to reduce the deductions by increasing the contributions, that makes the contribution numbers worse.

So, what will work?  This is going to be a significant problem.  The core issue is the age banding of premiums will cause the gap between the premiums paid by HCE's and NHCE's larger.  Trying to close the gap may only be possible by forcing the HCE's to pay an increasing about of their "share of the premium" with taxed dollars.  It is an ugly but compliant solution.

What clients do will vary greatly from one group to the next, but this will need to be addressed, sooner rather than later because it involves deduction calculations that are cumulative on a calendar year basis ... and now it seems appropriate to say ... Happy New Year!

Now, we get to have a front row seat.  One of the biggest disappointments to many will be the way the rate structure works ... age banding has never looked so ugly.

Since the forth child under 18 is free, family rates have doubled for many.  Just today I saw a family plan go from $1,200 per month to $2,500 per month for the same plan as last year.  The younger rates went up 10% and this age band for families more than doubled.  OUCH!

It seems to me that the age banding is really shoving the total premium for many groups higher.  So, younger employees pay far less than their older co-workers but the total group premium year over year is also showing a dramatic increase as well.

Part of this is simple to clearly communicate ... simply said "free benefits" are NOT free ... but rather more like the old Prego Spaghetti Sauce commercial ... "it's in there!"  So it is.  The preventive care coverages raise the cost of the premium because the actuaries will assume 100% use and it will be far less than 75%.  The "catchup" will come later, in the MLR (Medical Loss Ratio) calculations.  But, that is another issue with this first round of premiums ... The carriers would be foolish to leave any money on the table ... so ... put enough in the premium to make sure that all the bases are covered and they get to retain the highest possible amount of premium allowed.

I want to be clear ... there are no bad guys here.  Anyone that labels either the government, regulators, IRS, care providers, carriers, brokers or insureds as bad or less than ethical is just trying to place blame.  There is enough of that to go around!  At almost every level, there is some "hedge" placed to protect the interests of the party that can have some controls.  The carriers may charge more than they really need to but it is in their interests to "hedge" on the side of being financially sound.  Providers will continue to have a spread between what the carriers pay and the "full price" for services as a huge multiple ... a practice I have never understood.  Insureds will continue to "fail to shop" and fertilize the "hedges" of the pharmacies, providers and carriers because they are uninformed.  Let me give a positive example.

Most of us know that the "real" price for care, procedures, surgeries and such is somewhere between the amount paid by the insurance company and the full price that is listed on the EOB (Explanation of Benefits).  Just the other day, I was speaking to a fellow business owner who also has a really HDHP (High Deductible Health Plan).  So high that toward the end of the year, if he is no where near his deductible, he "negotiates" with the provider for a "cash price" for services INSTEAD of turning it in on his insurance ... He has saved thousands.  I have done this too.  That reminds me of another commercial.  Life Cereal ... Mikey. 

"Hey Mikey, give it a try!  Hey ... he likes it ... Mikey likes it!"  Saving money is always enjoyable.  Over time, this could FIX the system by injecting real demand to real supply ... Economics 101.