Four-day work week: Implications for employer medical benefit plans

For nearly a century since the Fair Labor Standards Act of 1938, full time employment in the United States has been defined as eight hours a day and 40 hours a week. That could change in the near future. Particularly for knowledge work as the four parameters that have defined it – the same job duties performed in one place (a centralized, commute in office) under the same manager and during a set schedule – are breaking down as a new paradigm emerges, hastened by the public health restrictions accompanying the COVID-19 pandemic that shuffled them.

Proposed legislation is pending in the federal government and about a half dozen states to modify the definition of full-time employment to 32 hours a week. That has generated resistance from some employers, particularly those not in knowledge industries where job duties are less portable and having employees physically present to serve customers or work with employer provided equipment is essential.

However, among those that are, they could opt to set the length of their own work weeks. In so doing, they could also undo an institution that has existed nearly as long as the 40-hour work week: employer sponsored medical insurance (ESI). Here’s an excellent summary of its history:

While its origins can be traced back to 1929, when a group of Dallas teachers contracted with a hospital to cover inpatient services for a fixed annual premium, the link between employment and private health insurance was strengthened by three key government decisions in the 1940s and 1950s. First, during World War II the War Labor Board ruled that wage and price controls did not apply to fringe benefits such as health insurance, leading many employers to institute ESI. Second, in the late 1940s the National Labor Relations Board ruled that health insurance and other employee benefit plans were subject to collective bargaining. Third, in 1954 the Internal Revenue Service decreed that health insurance premiums paid by employers were exempt from income taxation.

It could begin first among smaller employers who are not subject to the employer mandate of the Patient Protection and Affordable Care Act (PPACA) requiring employers of 50 or more full time employees to offer medical benefit plans. Those employers already have incentive to exit ESI since they have less bargaining power with health insurers and consequently pay higher rates than larger employers as annual family premiums for employer-sponsored health insurance average $22,463 in 2022 according to the Kaiser Family Foundation, with employees contributing $6,106 toward the cost.

Employers of 50 or more could avoid the mandate by setting schedules for their employees that have them working an average of less than 30 hours a week or 130 hours a month. That’s the definition of full-time employment that triggers the mandate to offer medical coverage under the PPACA. For example, they could define the work week as three 7-hour days and one 8-hour day per week for a total of 29 hours. That would be part time employment and thus not trigger the employer mandate.

Employers that drop medical benefit plans would no longer have the tax expense deduction for them. But some could decide it’s worth forgoing given the rising cost trend of the past two decades that Warren Buffet famously described as an economic “tapeworm” in 2010. If a shift away from ESI occurs, it would also have big implications for the non-group market that could grow substantially as well as the use of tax advantaged health savings accounts.

Shifting political tides portend big changes in 2020s and beyond

Concern about the cost of medical care and prescription drugs is leading to increasingly more aggressive policy stances by both progressives and conservatives that would have been considered too radical a decade ago. In 2009, the idea of a “public option” payer for the non-group and small group markets didn’t advance as the Patient Protection and Affordable Care Act was being drafted. The fear was a publicly operated payer would work against the market-based principles of the Affordable Care Act, intended to shore up these distressed markets and boost their enrollment and actuarial viability. A public plan without the need to earn a return on investment and pay income tax might end up outcompeting and “crowding out” the private payer non-group and small group markets the law aimed to bolster. Now among candidates seeking the Democratic presidential nomination, revising the Affordable Care Act to include a public option is considered a more moderate position compared to expanding eligibility for Medicare to the late middle aged. Or all Americans – Medicare for All — as favored by the left leaning wing of the party.

Conservatives are turning to market-based approaches that similarly would have been considered too radical and disruptive in 2009 such as importing prescription medications from other countries. The Trump administration has issued a rulemaking effective in 2021 designed to shine a bright light of transparency on hospital pricing in the hope that informing people what hospitals pay health plans for 300 common procedures that can be scheduled in advance, they will shop among hospitals for the best price. Traditional conservative ideology favors freedom of markets and the ability to contract. But hospital and payer interests argue the proposed rule would disrupt markets and violate the sanctity of their contracts.

At the voter level, the political sentiment is shifting. Conventional wisdom has held proposals to expand Medicare to cover Americans under age 65 won’t fly. Most working age Americans are covered by employee medical benefit plans and are largely satisfied with them, the thinking goes, and thus aren’t inclined to support Medicare expansion to working age families. That may no longer be the case as employee plans become less generous and workers must pay more out of pocket for medical care and prescriptions. This recent report illustrates:

Californians who get health insurance through their jobs are having to spend a greater share of their paychecks on health care costs, according to a new analysis of employer-sponsored health plans to be released Thursday by the Commonwealth Fund, a nonprofit foundation that researches health industry trends. California workers went from spending 8% of their income on health insurance premiums and deductibles in 2008, about $4,100, to nearly 12% of their income on premiums and deductibles in 2018, about $6,900. That is a 68% jump in employees’ health care spending over the past decade — which far outpaces wage growth during the same period. Between 2008 and 2018, median household income in the state grew just 16%, from about $52,000 to $60,000, according to the report. Workers in California went from paying on average $2,600 in premiums in 2008 to paying $4,100 in premiums in 2018. Their deductible costs went up $1,450 to nearly $2,800 during the same period.

While employee “major medical” plans providing only catastrophic coverage might have been acceptable in the 1950s-1970s, they are less so now as more generous managed care medical plans appeared and then dominated in the following decades. That created an expectation that medical plans should cover utilization at the point of care (increasing due to demographics and declining population health) and not provide insurance against bankruptcy. That rationale has been turned on its head. Now people with employee medical benefit plans with high out of pocket cost sharing are forced into bankruptcy protection from medical bills. At the same time, employers must devote more of employee compensation to medical benefit plans, taking dollars away from direct compensation.

These trends point to big change in the 2020s with the primary policy questions being 1) Whether the role of the public sector in medical care finance and delivery should be expanded and 2) To what extent should the government regulate the cost of care and medications.

Given the dominant role of employee medical benefit plans, if Medicare is expanded it likely will be done so gradually over at least a decade, rolling up Medicaid and commercial non-group and small group. Expect large employers of 500 or more to continue to be permitted to provide medical benefit plans as “private option” with a greater emphasis on value.

“Priced out” or “fleeing the market.” Whatever the preferred terminology, the economic upshot is the same: market failure.

The non-group market has functioned as a remainder market, a market of last resort for those who don’t qualify for government and employer medical benefit plans that cover about 90 percent of those with coverage. Non group plan issuers have thus labored with comparatively lower economic clout when it comes to negotiating the price of medical care with its providers, additionally hindered by high turnover among plan members that might be expected in a market of last resort.

Historically, that has meant relatively higher premiums and cost sharing that makes non-group particularly vulnerable to adverse selection and its dreaded “death spiral.” The market entered this troubled state starting in the early 2000s as premiums rose and threatened to circle the drain if the adverse selection trend wasn’t quickly reversed. The Patient Protection and Affordable Care Act came to the rescue with a mix of incentives and disincentives to preserve the viability of the non-group market with state health benefit exchanges, a ban on medical underwriting like that employed by life insurers, modified community-based rating, and advance premium tax credit (APTC) subsidies. The latter two reforms however only partially succeeded. Modified community-based rating allowed age to be used in setting premiums, though narrowing the differential between younger and older people. The tax credit subsidies didn’t apply to the entire market, but only for households earning less than four times the federal poverty limit. That exposed a portion of the non-group market to market failure, particularly the demographic aged 50-64 likelier to be in their high earning years and who also face higher premiums by virtue of their years.

The U.S. Centers for Medicare & Medicaid Services (CMS) has issued a report Trends in Subsidized and Unsubsidized Enrollment Report. According to CMS, the most recent year of enrollment data shows average monthly enrollment across the entire individual market decreased by seven percent nationally between 2017 and 2018 at the same time premiums increased by 26 percent. It attributed the drop entirely to those ineligible for APTC subsidies, noting unsubsidized enrollment declined by 24 percent, compared to a four percent increase in APTC subsidized enrollment.

“The report shows that people who do not qualify for APTC continue to be priced out of the market,” CMS stated in a news release today.  CMS reported an enrollment drop of 1.3 million unsubsidized people in 2017 and another 1.2 million unsubsidized people leaving the market in 2018. The declines among unsubsidized enrollees coincided with increases in average monthly premiums of 21 percent in 2017 and 26 percent in 2018, according to CMS.

“As President Trump predicted, people are fleeing the individual market. Obamacare is failing the American people, and the ongoing exodus of the unsubsidized population from the market proves that Obamacare’s sky-high premiums are unaffordable,” said CMS Administrator Seema Verma.  

“Fleeing the market” or “priced out.” Whatever the preferred terminology, the economic upshot is the same: market failure. When any product or service is priced above a level that’s affordable by its intended market, there can be no sustainable market unless prices fall or incomes or subsidies rise — or some combination thereof. The federal tax code allows self employed taxpayers to deduct premiums for non-group plans. That provides some benefit, but doesn’t help with affordability.

California with its larger non-group population is attempting to prop up the weak plank of insufficient subsidies by expanding eligibility limits to households earning 600 percent of federal poverty levels starting in plan year 2020, supported by state income tax penalties levied on those without some form of commercial or government coverage. If it has a meaningful impact on affordability in the challenging older subset of the non-group market, federal candidates in the 2020 election cycle who favor keeping the Affordable Care Act’s reforms of the non-group market intact and/or boosting tax credit subsidies won’t be able to point to the state’s success since the results won’t be in until after the election.

Ultimately, market failure in the older age cohort of the non-group segment may lead federal policymakers to conclude it makes better sense to move forward with proposals to bring that population into Medicare via an early “buy in” option rather than tie themselves in knots trying to create a viable market for a relatively small number of Americans.

ACA reforms struggle to stabilize non-group risk pool

The biggest problem with the Patient Protection and Affordable Care Act’s individual mandate isn’t so much due to regulatory change and uncertainty as it is market perception and impossible expectations among young adults. A primary purpose of the mandate is to create a balanced risk pool of relatively healthy younger folks to offset the higher utilization of medical services by older people. The rationale is these “young invincibles” would otherwise lack incentive to enroll in a plan and thus need the forcing function of the mandate. The problem is more with the carrot than the stick. Too many of the younger cohort don’t see the value proposition in protection from catastrophic medical costs. For them, the value they seek is protection from out of pocket costs for less than catastrophic care.

An example is a 30-year-old the subject of a recent Sacramento Bee story who dropped her individual plan after receiving a $1,200 bill for a minor knee injury. Like many young adults, the individual profiled in the story is juggling housing, transportation and student loan costs, likely motivating her to opt for the cheapest plan she could find. The tradeoff of course is higher out of pocket costs. The problem for young adults like this, the tradeoff doesn’t work because they seek the impossible in the current non-group market: low premiums and protection from out of pocket costs given their tight budgets. Unless their coverage offers both, it offers little value to them.

Likely adding to that perception of poor value is a lack of knowledge of how the plans work. In this case, the individual apparently believes she would potentially face medical costs in the tens of thousands even with presumably ACA compliant coverage, apparently unaware of the annual out of pocket maximum. As the Bee story points out, the zeroing out of the tax penalty for not having coverage beginning this year provides additional incentive to go without.

The individual mandate functions as one of primary pillars of the ACA’s non-group market reforms. It’s intended to bring a degree of stability to the non-group risk pool. Here again, that may be asking for the near impossible. The non-group market is inherently unstable with a high degree of churn as people go on and off employer sponsored coverage — the predominant form of medical coverage in the United States for those under age 65 – and onto Medicare for those 65 and over.

The ACA adds to that instability itself by bifurcating the non-group market, offering tax subsidized premiums to households earning less than 400 percent of federal poverty. That has left higher earning households – particularly those with individuals age 50 -64 – facing unaffordable premiums, prompting them to drop out of the pool.

California could insure many more people – but it will come at a price – Orange County Register

Among those the subsidies could help are older adults living in high-cost parts of the state who can pay more than 30 percent of their income just for premiums for the most common plans, the report states.

Source: California could insure many more people – but it will come at a price – Orange County Register

This is a demographic that fell though the cracks of the Patient Protection and Affordable Care Act’s reforms of the non-group medical insurance market. The law initially placed a 9.5 cap on how much households would have to pay in premiums. But that cap doesn’t apply to households earning more than 400 percent of federal poverty levels and thus don’t qualify for advance income tax credit subsidies. That produced the absurd result here of some with adults over age 50 paying a third of their incomes for coverage.

Boosting the subsidy eligibility cutoff to 600 percent of federal poverty is one option California is considering. Also — as several other states are contemplating — imposing a penalty on those who go without some form of comprehensive medical coverage.

However, subsidies to bring households paying 30 percent of their incomes below 10 percent will require substantial funding. That’s unlikely to be generated by penalties for going bare, requiring states to put a lot more money into the pot. That is likely to generate push back as suggested in this article from those who want prioritize bending the rising cost curve over expanding coverage.

Newly installed California governor calls for more flexible federal funding for state health programs, beefing up Affordable Care Act reforms of non-group coverage.

The State Innovation Waiver provision at section 1332 of the Patient Protection and Affordable Care Act does not afford states sufficient federal funding flexibility to develop comprehensive reforms to achieve the triple aim of increased coverage, lower costs and improve the quality of medical care. That’s according to a letter newly installed California Gov. Gavin Newsom sent to President Donald Trump and the congressional leadership this week. “Existing law permits only limited, piecemeal innovation – not the comprehensive reform necessary to address the myriad challenges that Californians face when navigating today’s health care system,” Newsom wrote. The governor also referred to the need for stronger measures to counter an “ongoing cost crisis” in medical care. “The rising costs are unsustainable and are exerting immense pressure on the budgets of state and local governments, employers and families” the governor wrote.  A way to rein in those costs is through a single payer model like Medicare, he added.

To finance such a model, Newsom’s letter implies the pot of federal funding for states should be expanded. Section 1332 waivers allow states to apply federal dollars they receive as premium tax credits, cost-sharing reductions and small business tax credits under the Affordable Care Act to establish alternative financing mechanisms for those in the non-group and small group markets. States can also seek waivers to redesign their Medicaid programs, which are jointly funded by the federal government and the states. Without directly stating, Newsom is suggesting the pot be expanded to include other forms of federal financing of medical care. The biggest of course is Medicare for Americans age 65 and older.

The California governor’s call for increased state flexibility to adopt their own schemes to finance and deliver medical care to their residents coincides with the Trump administration’s policy expressed in regulations and guidance. In recent remarks, Seema Verma, administrator of the Center for Medicare & Medicaid Services, complained states need greater leeway to do so, arguing it was “a mistake to federalize so much of health care policy under the ACA.”

Under Newsom’s proposed Transformational Cost and Coverage Waivers, funding for Medicare and Medicaid could be combined with state funding to create a comprehensive program. Section 1332 waivers must be budget neutral, meaning no new federal dollars. Newsom’s proposed waiver would instead allow increased federal funding to flow to the states using incentives such as reducing uninsured residents, lowering medical costs and improving quality. “The waivers would serve as the funding mechanism rewarding states that are relatively more successful in achieving these goals,” Newsom’s letter states.

Newsom also requested that the Affordable Care Act’s insurance reforms be beefed up in the absence of omnibus reform such as creating Transformational Cost and Coverage Waivers. He suggests reinforcing spread of risk in non-group coverage by restoring the individual shared responsibility mandate and scrapping the current means tested scheme that provides advance premium tax credit subsidies to households earning less than 400 percent of federal poverty for non-group plans purchased on state health benefit exchanges. “Premiums should be capped for all, instead of those fitting under an arbitrary poverty level,” Newsom wrote, noting doing so would increase affordability for about 1 million Californians in households earning above the subsidy cut off and bring more covered lives into the non-group risk pool. Newsom also proposed federal policymakers expand out of pocket cost subsidies to households earning less than 400 percent of poverty levels as well as making permanent the Affordable Care Act’s temporary reinsurance program for non-group plans in order to reduce premium rates by 10 percent.

ACA’s non-group market reform goals remain unfulfilled

Nearly a decade ago, the Patient Protection and Affordable Care Act overhauled the market for non-group medical insurance plans. The goal: to make this form of coverage that covers only a small minority of under age 65 Americans more accessible and affordable. It did so by placing all states under a uniform set of rules governing covered services, eligibility, and rating based on the principle of managed competition. The idea was to bring order to what had been termed a “wild west” market segment where these parameters varied considerably from state to state and create larger and more stable single statewide risk pools.

Now as the sixth year of the reformed individual market is about to begin, the law has fallen short of its goals. The non-group segment is fragmented into multiple silos and affordability remains elusive. The majority share is plans offered on state health benefit exchanges with tax credit subsidies for households with incomes less than 400 percent of federal poverty along with a small number purchased there by higher income households.

The bulk of the balance is so-called “off exchange” plans sold directly by plan issuers and through insurance brokers. As premium rates climbed since the rollout of the Affordable Care Act plans for plan year 2014, the off-exchange market has withered as plans grew increasingly less affordable. Another affordability fueled split hits families trapped between the employer group market and the non-group market in the so-called “family glitch.” It occurs because of another income-based affordability test in the law. If an employee covered under an employer medical benefit plan pays less than 9.5 percent of his or her income for the employee premium share, other family members cannot qualify for subsidized exchange plans. Less generously compensated employees can find the cost of adding family members to their employer-sponsored plan out of reach.

In sum, rising medical care costs reflected in higher premiums and cost sharing have stymied the Affordable Care Act’s goal of bigger and more affordable non-group segment covering everyone not eligible for employer group medical benefit plans or Medicare and Medicaid. The underlying costs are outweighing the envisioned enhanced buy side purchasing power and economies of scale.

The Trump administration has responded with policy that builds on the principle embraced by the Affordable Care Act to maintain employment as the basis of coverage for pre-Medicare eligible Americans. It did so by lengthening and making renewable short term, limited duration medical insurance — traditionally regarded as less comprehensive, bare bones coverage for those between jobs and employer sponsored coverage. Because this form of insurance can unlike non-group plans be medically underwritten, it restores a pre-Affordable Care Act split between those who can pass medical underwriting standards and those who cannot. Under recently adopted administrative rulemaking, even self-employed individuals can join together in association health plans in states that authorize such plans. Finally, the administration issued guidance that allows states to take into account those covered by employer group plans when states seek to use non-group ACA subsidies for State Innovation Waivers under Section 1332 of the statute.

Lawsuits by ACA opponents, supporters unlikely to succeed

Litigation by Patient Protection and Affordable Care Act opponents and supporters is in the early stages in the federal courts. Opponents contend the when the tax bill enacted in late 2017 zeroed out the tax penalty for going without some form of medical coverage, it pulled out a keystone of the law. That was put there in 2012 by the U.S. Supreme Courts’ ruling in NFIB v. Sebelius in which the high court upheld the ACA. The court rejected the argument that requiring people to have coverage is unconstitutional on its face, reasoning the mandate was a tax penalty within the constitutional authority of Congress to impose.

Opponents of the mandate contend in Texas v. United States that by that reasoning, zeroing out the penalty negates the Supreme Court’s rationale because there is effectively no longer a tax penalty. It’s conceivable that argument won’t fly. The reason? The tax penalty is still on the law books and hasn’t been repealed. A tax measure adjusting the penalty to zero doesn’t constitute a formal repeal of the statute. Without actual repeal, the courts aren’t likely to rule in favor of the plaintiffs on such a weighty issue as the wholesale constitutionality of the ACA.

ACA supporters appear on similarly tenuous legal ground in another federal court case filed today. This one challenging the Trump administration’s recent administrative rulemaking permitting the sale of limited coverage short term medical plans with terms of up to 364 days and subject to renewal. VoxCare’s Dylan Scott reports the plaintiffs contend the rulemaking violates the Administrative Procedure Act (APA), which bars federal rules from being arbitrary or capricious. The core of their complaint is the rulemaking is contrary to the intent of Congress in enacting the ACA’s insurance market reforms to make non-group individual coverage more accessible and affordable and on a par with employer group medical benefit plans. (The Obama administration permitted the sale of short term plans with terms up to three months.) While the ACA reforms would presumably reduce market demand for short term plans or the need for them in the first place, Congress didn’t specifically outlaw them. Barring that explicit expression of public policy, the plaintiffs are likely to face an uphill battle.

Inconsistent Trump administration policy on non-ACA compliant non-group coverage options

The Trump administration has adopted an inconsistent policy stance on the sale of non-group medical insurance plans that don’t meet Patient Protection and Affordable Care Act requirements. In February, the administration proposed rules that would extend the permissible coverage period of short term, limited duration policies from the current maximum of up to 90 days to up to 12 months. These plans are not subject to Affordable Care Act standards for individual plans – guaranteed issue and no lifetime limits, 10 essential benefit categories and 3-1 age range rating limits — because they are not categorized as individual coverage. While the administration’s proposed rules don’t refer to the renewability of these longer term short term policies, they don’t specifically bar renewability. As such, they would effectively serve as less comprehensive, lower priced substitutes for Affordable Care Act compliant individual coverage sold with 12-month terms.

Nevertheless, the administration this week warned Idaho not to permit the sale of individual plans that don’t meet Affordable Care Act standards. On one hand, the administration is sanctioning a product that would serve as less comprehensive replacement for Affordable Care Act compliant individual coverage – particularly in 2019 when the federal income tax penalty for not having such coverage in force in the absence of other creditable coverage is reduced to zero. On the other, it’s deterring states from allowing less comprehensive, non-Affordable Care Act compliant “state-based” individual plans.

Will Trump administration proposals for less generous plans, increased access to association health plans provide affordable access to “off exchange” households?

The Patient Protection and Affordable Care Act’s reforms to ensure access and affordability for non-group medical coverage aren’t working out as planned particularly in some less populated states. The law envisioned a fully functional individual market as it’s called. Plans would be kept affordable by pooling all non-group households into single community rated statewide risk pools to achieve an enhanced spread of risk. That enhanced spread of risk – bolstered by a coverage mandate that would help ensure consumer participation — would draw in more plan issuers to compete in the non-group segment. Plan issuers would have further incentive to participate, protected from excessive downside risk through premium stabilization programs (risk adjustment and initially risk corridors and reinsurance). Plan issuers would be required to spend at least 80 percent of premium dollars to cover the cost of medical care for plan members. Premium rate increases would be subject to enhanced federal and state scrutiny.

Households earning less than 400 percent of federal poverty levels get federal income tax credits to offset premiums and very low-income households would get additional subsidies to offset out of pocket costs. Congress and the Trump administration have eliminated those additional subsidies and may do the same with the premium tax credit subsidies.

Rather than from the bottom up, the non-group market is deteriorating from the top down – starting with households that earn in excess of the 400 percent poverty cutoff for premium subsidies for exchange plans. Premiums are rapidly becoming unaffordable for these households, referred to as the “off exchange” market. Self-employed taxpayers can write them off, but they still have to pay them every month and the cash flow burden is growing. Unlike these households, households obtaining premium assistance for exchange plans are protected from premium increases by limits on how much of their income they have to pay for coverage. The “401 percenter” households are not. They are falling off the premium subsidy cutoff cliff into the death spiral of adverse selection. Premiums are increasing to the point where only those that are heavy utilizers highly dependent on ongoing medical care will continue to pay them – if they can. Otherwise, they and the rest of the 401 percenter cohort will have to turn to health sharing ministry plans or go bare.

The Trump administration has proposed regulations making it easier for 401 percenters to find affordable coverage through plans offering less generous benefits and which can be medically underwritten and charge older individuals more than allowed under the Affordable Care Act. But these plans are likely to be inaccessible to those individuals who can’t meet medical underwriting standards. Another proposed administrative rulemaking would liberalize association health plan rules such that self-employed households in a given geographic area or industry could join together specifically to provide their members medical benefits like employer sponsored plans. It remains to be seen if either of the proposed administrative reforms will provide the safety value to ensure access and affordability for 401 percenter households.