Why Health Law’s ‘Essential’ Coverage Might Mean ‘Bare Bones’

It came as a surprise to some that the Affordable Care Act seems to allow large employers to offer health insurance that pays for preventive care and not much else. Check out our story on “skinny” plans quoting a consultant saying that for employers with 50 or more workers, “the feds imposed no minimum standard on how skimpy that coverage can be other than to say, in essence, it’s got to be more robust than a dental plan or a vision plan.” (The Wall Street Journal broke the story here in May. Subscription required.)

Retailers, restaurant chains and temporary staffing companies are said to be interested.

But how can a law praised for expanding coverage — one that includes an “employer mandate” to offer “minimum essential coverage” — allow companies to offer insurance that might not even cover hospitalization?

Take a walk through the ACA weeds to see why.

First of all, there is no outright ban on skinny plans — even after the employer mandate kicks in in 2015. Instead, large employers — those with 50 or more full-time employees — run the risk of fines only if the coverage doesn’t conform to ACA rules. The regulations published so far, however, seem to allow skinny plans with a penalty that many employers may choose to pay because it is less costly than offering fuller coverage.

There are two fines in the health law for large employers failing to offer adequate coverage. First, any company that does not offer “minimum essential coverage” is liable for a $2,000-per-worker penalty (minus the first 30 workers), triggered when at least one employee enrolls in subsidized coverage in the online marketplaces known as exchanges.

But what is minimum essential coverage? Not as robust as you might think. To start, don’t confuse it with “essential health benefits,” including maternity benefits and prescription drugs, that must be included in plans sold to individuals or small employers.

If health insurance is merely sponsored by an employer, it passes one test for minimum essential coverage.

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Now how good does that employer insurance have to be? The regulations are obscure, defining minimum essential coverage largely in terms of what it is not. For example, “limited-scope dental or vision benefits” are not minimum essential coverage. Nor is “coverage only for a specified disease or illness.”

Neither the law, nor the regulations say much about what minimum essential coverage offered by a large employer is. As a result, many experts believe large employers can shield themselves from the $2,000 penalty by offering a plan that covers the health law’s required preventive care, but still leaves workers vulnerable to thousands in bills if they’re hospitalized. If employees sign up for such plans, which may cost as little as $50 a month, they would also be protected from health-law penalties levied on individuals without coverage.

The health law also fines employers that don’t offer “minimum value” in their health plans, says Alden Bianchi, a Boston-based benefits and compensation lawyer. Skinny coverage flunks that test, based on regulations that measure minimum value against “benchmark plans” in each state, Bianchi said. But the employer penalty is only $3,000 for each worker enrolling in subsidized exchange coverage. That’s likely to be much less than the fine for not offering minimum essential coverage, which is $2,000 for nearly every employee in the company, even if most don’t buy policies in the exchanges.

But what about other rules governing health benefits? What about the part of the health law that bans insurers from cutting off benefits at a certain dollar level? Not a problem for skinny plans. Unlike the “mini-med” plans in common use before the law was passed, they don’t impose a dollar cap; they merely exclude large categories of care, which also keeps down costs.

What about new rules limiting out-of-pocket expenses for consumers? For 2014, your plan can’t make you pay more in co-pays and deductibles than $6,350 for individuals and $12,700 for families. (That may temporarily be higher if your employer has separate administrators for drug benefits and doctors and hospitals.) Skinny plans pass the test again. Out-of-pocket caps are for covered care only, and skinny plans don’t cover much care.

What about restrictions on self-insured employers (the large majority of large companies are self-insured) offering a rich-benefit plan to managers and a limited-benefit plan to hourly workers? Skinny plans survive this one, too, says Ed Fensholt, a senior vice president at Lockton Cos., a large insurance broker. These non-discrimination rules contain exceptions for high-turnover workers, he said. And they require employers only to offer the management plan to hourly workers, not for the workers to enroll.

“That plan would be priced at a place where relatively few rank and file employees would want it,” Fensholt says. “And then they’d offer the skinny plan to the rank and file.”

When asked about the situation, the Obama administration said consumers lacking good coverage “can enter into the marketplaces and choose a health insurance option that works for them.”

Bianchi, who represents large employers, says the people who wrote the law intended to give companies a bare-bones option.

“The ability to offer such plans is a result of conscious policy decisions by Congress, as implemented by the regulators,” he wrote in an industry brief.

The Cato Institute’s Michael Cannon, on the other hand, suspects the administration “had no idea what they were doing,” as he wrote on the libertarian think tank’s blog.