Skinny health insurance plans under the Affordable Care Act

President Barack Obama and Jon Favreau, head speechwriter, edit a speech on health care in the Oval Office, Sept. 9, 2009, in preparation for the president’s address to a joint session of Congress. Credit: Wiki Commons

There’s been a lot of talk lately about businesses opting to provide their employees with so-called “skinny health insurance plans” instead of something more comprehensive such as a PPO, to circumvent the essential benefits of the Affordable Care Act’s employer mandate.

The Wall Street Journal broke the news about skinny health insurance plans last week and allegedly confirmed from federal officials that they’re a viable and legal option. Now other major media outlets have picked up the story and spread the word.

Let’s take a look at what the fuss is all about.

In an article by Forbes contributor Avik Roy, Roy dissects the Journal’s reasoning for “skinny plans”. So far his is one of the more balanced approaches to the issue.

Roy starts by describing the employer mandate and the different penalties faced by businesses for not complying with it. As a primer, here is how the different penalties are applied.

If a business with 50 or more full-time workers does not offer them a health insurance option then the business is penalized $2,000 for each employee minus 30. For a business just at the 50-employee mark that would mean a total penalty of $40,000.

A business can also be penalized for not offering insurance to their employees at a low enough price or insurance that is comprehensive enough. If that’s the case and some workers opt to get their health insurance at the public exchange then the business is penalized $3,000 for every worker who chooses to do that.

Roy calls the penalty for not providing health insurance the ‘strong’ penalty, while the penalty for employees who choose to get their insurance at the exchange is the ‘weak’ penalty.

Now not every employee would want a comprehensive health insurance plan or not every employee would go to the exchange, so that makes the weak penalty significantly cheaper than the strong penalty. Which gets to the heart of the matter.

A business will want to pay as small a penalty as possible. So if they had a choice they’d go for the weaker penalty, right?

Maybe you’re thinking, wait how could they get away with offering their employees a crummy plan and not pay the ‘strong’ penalty?

Because of some vaguely defined language in the Affordable Care Act legislation choosing the weak penalty over the strong penalty is a viable route for companies. Again, this was allegedly confirmed as nice and legal by the Wall Street Journal from a source in the federal government.

Let’s dive a little bit into the Affordable Care Act legislation. Employers subject to the mandate must provide their employees with “minimum essential coverage” to avoid the so-called ‘strong’ penalty, according to the legislation.

But what is minimum essential coverage? According to Roy who looked up the definition in the Internal Revenue Code (IRC):

Section 5000(A)(f) of the Internal Revenue Code. The IRC states that minimum essential coverage can consist of either (a) government-sponsored coverage, such as Medicare or Medicaid; (b) an “eligible employer-sponsored plan”; (c) a plan “offered in the individual market within a State”; (d) a “grandfathered health plan”; or (e) anything else that the Secretary of Health and Human Services deems appropriate.

Alright, so what we’re focused on here is letter b, “an eligible employer-sponsored plan”. More definitions?! What does this one mean?

Again according to Roy quoting the IRC:

Paragraph 2 of Section 5000(A)(f) defines one as “a group health plan or group health insurance coverage offered by an employer to the employee which is [either a government-sponsored plan] or “any other plan or coverage offered in the small or large group market within a State.”

Wait a minute? Any other plan or coverage offered in the small or large group market within a state? Wouldn’t that mean just about any health insurance plan sold in the state meets the requirements of an eligible employer-sponsored plan? That’s what Roy goes on to talk about for the rest of his article.

With this in mind, it’s possible for a business that’s not keen on providing a comprehensive health insurance option to its employees to just not do it. They can instead opt for a smaller less comprehensive ( cheaper) plan and avoid the harsher penalty.

This has some pretty dire implications for the Affordable Care Act if employers decide this is the way to go. Workers who had hoped for employer-sponsored insurance will find themselves having to choose between a lackluster insurance plan or a potentially pricey insurance plan on the health insurance exchange.

This certainly won’t affect all sectors of the job market. Highly skilled, in-demand workers simply wouldn’t stand for their boss offering them a low-end health insurance plan. Of course, the Affordable Care Act was never intended to help that sector of the economy. Its goal has always been those 45 million low-skilled, blue-collar, uninsured Americans who can’t afford health insurance on their own.

What’s more likely though is that low-income hourly workers who the Affordable Care Act was supposed to help will be disproportionately impacted by this practice if it catches on, which seems likely.

It comes down to the fact that businesses simply don’t want to be forced to pay for health insurance. Between fierce competition, regulations, taxes, and government oversight businesses, their bottom lines are already stretched to the limit. At the end of the day, how much is going to be left over to pay for employee health insurance that covers everything imaginable health issues under the sun?

The Wall Street Journal and Roy’s analysis finds a clear loophole in the Affordable Care Act. With an economic incentive to save money wherever possible these ‘skinny plans’ might become the new normal for a large sector of the economy.