The IRS has significantly reduced the group plan affordability threshold — which is used to determine if an employer’s lowest-premium health plan meets the Affordable Care Act rules — for 2024.
The threshold for next year has been set at 8.39% of an employee’s household income, down significantly from 9.12% this year. The lower threshold will likely require employers to reduce their employees’ premium cost-sharing level for their lowest-cost plans in 2024, to avoid running afoul of the ACA.
This is happening just as group health plan premiums are expected to climb at a much faster clip in 2024 than the last three years.
Under the ACA, “applicable large employers” — that is, those with 50 or more full-time or full-time equivalent employees (FTEs)— are required to offer at least one health plan to their workers that is considered “affordable” based on a percentage of the lowest-paid employee’s household income.
The lowest level yet
The new level is the lowest affordability threshold since the ACA took effect, and almost one-and-half percentage points lower than the 9.89% threshold in 2021. The new threshold will apply to all health plans when they incept in 2024. For plans that incept after Jan. 1, the 2023 threshold will apply and change to the new rate when they renew later in the year.
Employers can rely on one or more safe harbors when determining if coverage is affordable:
- The employee’s W-2 wages, as reported in Box 1 (at the start of 2022).
- The employee’s rate of pay, which is the hourly wage rate multiplied by 130 hours per month (at the start of 2022).
- The federal poverty level.
Example: The lowest-paid worker at Company A earns $25,987 per year. To meet the 2024 affordability requirement, they would have to pay no more than $2,180 a year in premium (or $181 a month).
Employers with a large low-wage workforce might decide to utilize the federal poverty level ($14,580 for 2024) affordability safe harbor to automatically meet the ACA affordability standard, which requires offering a medical plan option in 2024 that costs FTEs no more than $101.94 per month.
If an employee’s coverage is not affordable under at least one of the safe harbors and at least one FTE receives a premium tax credit for coverage they purchase on an ACA exchange, the employer may have to pay a penalty, known as the “employer shared responsibility payment.”
The shared responsibility payment for 2024 will be $4,460 per employee that receives a premium subsidy on an exchange, up from $4,320 this year.
As 2024 nears, you should review your health plan costs and premium-sharing to ensure that your lowest-cost plan complies with the affordability requirement.
We can help you assess affordability to ensure you don’t run afoul of the law. It will be particularly crucial in 2024, considering the significant drop in the threshold.
A new report by Aon warns employers to expect average group health insurance costs to increase 8.5% in 2024, as inflation starts hitting the cost of delivering care as well as pharmaceuticals.
The report predicts that employers will pay an average of $15,088 in 2024, compared to the average this year of $13,906. The cost hike is almost double the 4.5% increases employers saw in 2022 and 2023.
Despite the large expected premium increases, employers still seem to be reluctant to pass on more of the premium cost to their covered workers. For example, for this year, employees saw their premium payments increase an average of just 1.7%.
The challenge will be for employers to properly budget for these cost increases, while not pushing too much of the hike onto their employees, particularly in this highly competitive job market.
The cost drivers
There are a few reasons rates are climbing:
Health care inflation — This is the main culprit behind the expected rate hikes. While health care providers have been contending with inflation since 2021, they’ve been unable to pass them on to health insurers because they usually enter into three-year contracts with locked-in rate hikes.
As these contracts are renewed, health care providers are demanding higher fees for services due to their own costs increasing, particularly for staff wages, equipment and supplies. For example, the cost of emergency services supplies, including ventilators, respirators and other critical equipment, increased by almost 33% between 2019 and 2022.
New technologies — New technologies that hospitals use are also increasing in cost, as is the cost of servicing and installing the equipment.
Catastrophic claims — Every catastrophic claim requires varying levels of intervention and care. Many will require specialized medical care, extensive rehabilitation, advanced medical equipment and potential vehicle and home modifications. Catastrophic claims costs are increasing due to:
- Hospital staffing shortages
- More high-cost injectable drugs
- Increasing cancer rates
- Longer hospital stays resulting from multiple conditions, complications and complex procedures
- Higher medical equipment costs
- Skyrocketing costs of home modifications.
Pharmaceutical costs — There are two significant drug cost drivers:
- Specialty drugs: These are significantly more expensive than their traditional drug counterparts, often costing more than $2,000 per month per patient. However, some pharmaceuticals cost much more. The drug Tretinoin, which can help manage complications of leukemia, costs $6,800 a month. Others cost upwards of $100,000 per year. The cost and utilization of these drugs is growing, according to Aon.
- New weight-loss drugs: The newest pharmaceutical cost driver is the proliferation of trendy new weight-loss drugs like Wegovy, Saxenda and Ozempic, which cost more than $1,000 a month. These have proven to be highly effective in helping people lose weight and are in high demand. Insurers typically won’t cover these medications if someone simply wants to lose weight, though.
The report predicts that employers will be hesitant to make significant changes to how much their employees contribute to their health plan premiums.
Aon estimates that the average employee premium contribution in 2023 is $2,682, while they pay out another $1,993 in deductibles, copays and coinsurance.
“We see employers continuing to absorb most of the health care cost increases,” Farheen Dam, North American Health Solutions leader at Aon, said. “In a tight labor market, plan sponsors are hesitant to shift significant cost to plan participants and make benefits less affordable.”
Talk to us about your options as 2024 approaches. We can help you with different plan designs and cost-sharing arrangements that may reduce your firm’s premium outlays.
If you are running a business, you need to get an early start on preparations for your small group health plan open enrollment, particularly now as so much confusion abounds about the state of health insurance in the country.
With recent new regulations, options have changed for employers and you need to stay focused on maximizing your outcomes within your budget. You also want to drive participation, as that too can reduce overall rates for you.
Understand your options
Familiarize yourself with the various options that you have:
Health maintenance organizations – HMOs are typically the least expensive plans because they require enrollees to visit their personal physicians and tightly controlled in-network doctors. Going out of network is discouraged with high out-of-pocket costs. An HMO will usually only pay for care outside of the plan network when it’s an emergency or another unusual situation.
Preferred provider organizations – PPOs contract with hospital and provider networks to help control costs. While they will cover services outside of the network, the cost is higher than going in-network. PPOs are more flexible than HMOs, but premiums are often higher – as are some out-of-pocket costs.
One difference from an HMO: PPO enrollees don’t need a referral from their primary care physician if they are going to a specialist.
Point of service – A POS health plan is a mix between an HMO and a PPO-style health insurance policy. With a POS health plan, your staff has more choices than with an HMO, but they will usually need to select a primary care provider and need a referral to see a specialist.
Exclusive provider organizations – The EPO is also a PPO-HMO hybrid. Enrollees need to receive covered services inside of the network, except in a few instances, but they can also see a specialist without a referral from their primary care doctor.
Besides the above, you will also need to decide if you want to reduce the premium for your organization and staff by offering high-deductible health plans. These plans can be either an HMO or a PPO, but they have the same feature of having a high deductible that needs to be met before benefits really kick in.
For 2024, for a plan to qualify as an HDHP the deductible must be at least $1,400 for an individual and $2,800 for a family. The average HDHP deductible is $2,349, but many plans exceed $3,000.
These plans usually have an attached health savings account to which your workers can transfer funds pre-tax from their paychecks to use for paying deductibles, copays and other medical expenses.
Check your budget
In 2022, group health insurance premiums averaged $659 a month ($7,911 annually) for single coverage, and $1,872 per month – or $22,463 per year – for a family, according to a survey of employers by the Kaiser Family Foundation.
You can reduce your premium outlays by imposing higher premium cost-sharing requirements on your staff. But, make sure you stay within the guidelines of the Affordable Care Act, which requires that plans be “affordable,” meaning they cannot cost more than 9.12% (in 2023) of an employee’s household income. This number changes each year, and the percentage has not yet been set for 2024.
Be mindful, though: if you try to unload too much of the premium on your workers, you may see people leave your plan and, if too many decide not to participate, you may not be able to offer the policy. Try to offer plans that will be valuable to your staff as well as affordable.
If you want to find out what your employees expect from their benefits, you can run a survey of all your staff. It can cover the basic elements of the plans you are going to choose from, and ask them which ones they would find most valuable. Then, move forward organizing your plan based on their response.
Your goal is maximum participation, and you can work with us to start disseminating materials and reaching out to those who may need plans explained to them. Give them some time to look the plans over. Employees want to know what changes are being made to their benefits packages in advance, so make sure you give them time to look through the offerings.
Next, plan to hold a meeting a month before open enrollment starts, in order to go over the plans and options with your staff, as well as any significant changes you’ve made.
During the meeting, highlight the value of each of the plans you are offering. Unfortunately, there will be those among your staff that haven’t really paid attention at all to the plan documents you gave them earlier.
Focus on the basics:
- What each plan costs them.
- What’s covered under the plan, and
- When and how to use it.
Since the COVID-19 pandemic, more employers are allowing their staff to work remotely on a permanent basis, often allowing them to never have to set foot in the office again.
This newfound freedom for American workers has allowed many of them to leave the cities they were living in for small towns or even more remote areas around the country. But for employers who have instituted work-from-home policies, they are faced with navigating a more confusing employee benefits landscape.
This is becoming more common as more people work from home. The ranks of remote workers have boomed in recent years, increasing to 27.6 million (or 17.9% of the working population) in 2021 from 9 million (5.7%) in 2019, according to the 2021 “American Community Survey” conducted by the U.S. Census Bureau.
Employers will typically purchase group health insurance with networks that are mainly local or regional. This makes sense for a company with one location or multiple locations in a city or region, since all the employees will be living near work.
But when an employee moves, they can’t take the network with them, and the employer will need to make new coverage arrangements.
If you allow your employees to work remotely, you have a few options for those who plan to move out of state.
The PPO option
If they are currently enrolled in a health maintenance organization, they would have to give up their plan, since HMO plans contract just with medical providers in a specific area. Preferred provider organizations also have networks with which they contract, but some of the nation’s largest PPOs offer more flexibility.
The main thing is having a way out of the HMO contract, as that usually requires a “qualifying event.” If an employee moves out of state or out of an HMO’s service area, that would likely be considered a qualifying event to allow them to choose a new health plan.
The answer for most employers is to place the worker in a nationwide PPO. One of the most common choices is Blue Cross/Blue Shield because of the breadth of its coverage. But some other large players may also offer a good PPO plan that can be used anywhere in the country.
As your health insurance broker, we can help you with this process and ensure that your employees are set up with coverage, wherever they are moving.
Some employers are taking another approach to out-of-state remote workers. They are setting up individual coverage health reimbursement arrangements (ICHRA), which they fund with pre-tax money that the employees can use to purchase a health plan on an Affordable Care Act exchange.
ICHRAs were made legal during the Trump administration to give employers another option for helping their workers secure health coverage. Some ICHRA administrators are also available to help ensure that the contributions comply with the ACA affordability test and to help plan enrollees choose coverage that is best for them.
Employees moving out of state?
During your next open enrollment, if you have workers who live out of state, you’ll want to ensure they have a plan that they can use in their area. If they are already enrolled in a PPO, that’s a good start, as they are more likely to have dispersed networks.
We can help you review your current plan offerings, and in particular your PPOs. We’ll look for PPOs that have networks that allow enrollees to use in-network benefits in any state.
It’s important that you have a policy requiring your remote staff to notify you if they plan to move out of state, so you can start the process of changing health plans. Both you and the employee (and their family) will want to ensure that they have continuity of coverage if they move.
New legislation that’s wending its way through Congress is taking aim at some of the more egregious practices by the country’s largest pharmacy benefit managers, but it’s uncertain that the measures will actually reduce costs.
PBMs play a significant role in the health insurance ecosystem by contracting with insurers and self-insured employers to control their drug costs. But reports over the past few years have questioned just how well these influential players help employers, health plans and enrollees actually save money. They’ve also been accused of keeping most of the savings they generate instead of passing them on to their clients and health plan enrollees.
Bipartisan legislation has been introduced that takes aim at some PBM practices that have come under fire. The main measure that’s in play is Pharmacy Benefit Manager Reform Act (S. 1339), sponsored by Senators Bernie Sanders (I-VT) and Bill Cassidy (R-LA):
The bill addresses the following practices that have come under fire for driving up payer costs:
Spread pricing – A PBM charges health plans more than it pays the pharmacy for a medication and retains the difference in costs. The bill would ban this.
Rebates – PBMs receive rebates from drugmakers in exchange for the PBM giving their products preferred status and greater market share on the plan formularies. The bill would require that rebates drug companies pay PBMs be passed through to plan sponsors.
Clawbacks – These are remuneration fees that pharmacies that dispense Medicare Part D (outpatient) drugs have to pay PBMs, which can charge these fees long after a pharmacy has filled a prescription. The bil; would ban certain clawback provisions.
Why it likely won’t work
The problem with this legislation is that it’s a double-edged sword and it’s not a panacea that will reduce costs for payers.
According to the National Alliance PBM Playbook Report, there are a number of areas of concern (that the bill doesn’t address):
Vertical integration – PBMs and their business affiliates control the drug supply chain from the initial sale by the manufacturer through the final sale to a consumer.
PBM-owned pharmacies – PBMs send patients to mail order and specialty pharmacies that they own. When they own the pharmacies, PBMs choose which drugs are dispensed. And coincidentally, they typically choose the most profitable and most expensive medications.
Market consolidation – Three PBMs (“Big 3”) control more than three-quarters of all the prescription drug business in the US.
Biased & conflicted requests for proposal – The largest PBMs pay significant referral fees to pharmacy benefit consultant firms (including those operating their own coalitions) to steer and influence the PBM selection process in their favor.
Lack of transparency and misleading contracts – PBMs have sought to obscure their business practices, which include self-serving contract definitions that favor high-cost/high-rebate drugs on their formularies and recharacterizing rebates as services fees.
Pharma-driven incentives to confound market pressures – At the center of pharma manufacturers’ market access strategy are the large incentives they give PBMs for favorable formulary placement. This strategy creates conflicts through rebates, credits and other incentives that restrict competition on formularies.
With mental health in the forefront as patients demand greater access to psychologists and psychiatrists, the Biden administration in July 2023 proposed new regulations aimed at requiring health insurers to expand their mental health coverage.
The proposal aims to bring insurers into compliance with existing law requiring that they cover mental health benefits in parity with physical health services.
Despite that law, many insured Americans struggle to access mental health care, often because they need a referral or a health plan does not have enough psychologists and psychiatrists in its network, forcing them to go to providers outside of the network and paying significantly more.
It’s hoped that by adding new provisions that would require insurers to regularly assess how well they are complying with the law, it will be easier to receive in-network mental health care. Additionally, the rules aim to eliminate barriers that keep people from accessing such care when they need it.
The Mental Health Parity and Equity Act has been on the books since 2007, but the COVID-19 pandemic provided the spark that ignited a brewing mental health crisis in the country. The sudden demand for counseling services caught insurers off guard with too few providers in their networks.
As well, many people who needed mental health services were unable to get them due to their insurers’ sometimes onerous prior authorization requirements. In announcing the rule, the administration cited an example of insurers approving nutritional counseling for diabetes patients, but not for people with eating disorders.
The regulations — proposed by the Departments of Health and Human Services, Labor and Treasury — would:
Require health plans to measure outcomes to make improvements. The rules require insurers to regularly analyze their coverage requirements to make sure their insureds have equivalent access between their mental health and medical benefits as required by law. The insurer will need to evaluate:
- How much it pays out-of-network providers,
- How often prior authorization is required, and
- The rate of denials for prior authorization requests.
The goal is to help insurers identify areas where they are failing to meet the law’s requirements and require that they take steps to remedy those shortfalls, such as adding more mental health professionals to their networks or reducing red tape to get access to them.
Stipulate what health plans can and cannot do. The proposed rules will provide specific examples that make clear that health plans cannot use more restrictive prior authorization, other medical management techniques, or narrower networks that make it harder for people to access mental health and substance use disorder benefits than physical medical benefits.
The proposal would require health plans to use similar factors in setting out-of-network payment rates for mental health and substance use disorder providers as they do for medical providers.
The proposed rule is good news for any of your staff that have been having a hard time accessing mental health or substance abuse services.
The regulators are hoping that the legislation achieves their goals of:
- Making mental health care accessible to more people,
- Ensuring that mental health professionals’ pay is comparable to that of physical medicine practitioners, and
- By ensuring comparable pay and boosting demand, attracting more individuals to pursue careers in mental health professions to increase the number of mental health providers.
The proposed regulations still need to be put out for public comment and will likely be changed as the agencies get to work writing the final version.