What the Healthcare Ruling really Means to Employers

Thanks to SCOTUS (Supreme Court of the United States), the country now has a new law pledging national health care reform. 

Widely praised or condemned depending on party lines, there is no doubt that the Patient Protection and Affordable Care Act  means big changes for health care providers, insurers, drug manufacturers, the uninsured, employees, small businesses and large employers. In other words — everyone.
Trying to make sense of all 2,400 pages of the bill can be daunting. This is particularly true for employers, who will likely need to begin to respond by auditing their workplace and revising their policy changes.
So, what does an employer need to know about complying with the law?
The health care bill requires nearly all Americans to obtain health insurance. The law expects that most workers will get that coverage through their employers and has created a system of subsidies and penalties to make this possible.
If you’re an employer, the size of your workforce is significant, as the law has different requirements depending on the number of employees that your business employs.
The major aspects of the health care bill as it relates to business are described below:
What is a “small business”?
Under the Act, a small business is not specifically defined, but a number of sections of the law apply only to entities with fewer than 25 employees (for more detail see below.)  However, under some sections of the law, the effective company size is 50 or 100 employees.
What are “insurance exchanges”?
Beginning in 2014, health insurance will be available to individuals and small businesses through state-run “exchanges.” These will require insurance companies to compete for business in the marketplace. The objective is to make it it easier for individuals and small businesses to obtain health insurance at a lower price.
The exchange program for small businesses, known as the Small Business Health Options Program (SHOP), will allow small businesses to pool together to increase their purchasing power. This will allow these businesses to offer health insurance to their employees at rates similar to those available to large corporations.
SHOP is available to small businesses with up to 100 employees, although states have the option to limit participation to businesses with 50 employees or less until 2016. If a business participating in SHOP grows to over 100 employees, it may continue to take advantage of the program. Beginning in 2017, states may opt to allow businesses with more than 100 employees to participate in SHOP as well.
The exchange program is also important because larger employers may be penalized if some of their employees opt to obtain insurance through an exchange and not through the company’s insurance plan (for more detail see below.)
Are employers required to provide health insurance to their employees?
All businesses, regardless of industry, with fewer than 50 employees are exempt from having to provide health insurance. However, as explained above, such smaller employers may opt to offer health insurance at a reasonable cost by participating in a SHOP exchange.
Larger businesses are subject to a number of requirements and potential penalties, depending on the number of employees they have and the type of coverage they provide:
  • Automatic enrollment: Employers with more than 200 employees are required to enroll new employees in their health care plan, subject to any waiting period. Employers must provide notice of employees’ right to opt out of automatic enrollment.
  • Notice of coverage options: Employers must give employees notice about the availability of an insurance exchange.
  • Penalty for not providing insurance: Employers with over 50 employees that do not provide insurance must pay a penalty of $2,000 for every employee in the company if even one employee opts to obtain insurance through an exchange. However, the first 30 employees are not counted in calculation of the penalty. Example: an employer with 75 employees would pay the penalty for 45 workers, or $90,000 (45 x $2.000).
  • Penalty for providing insurance that is “too expensive”:  Employers with more than 50 employees that do provide insurance must pay a penalty if any of their employees obtain a subsidy to help pay for insurance. The penalty equals $3,000 per worker who uses the subsidy OR $750 for every employee at the company, whichever is less.
Is there help for small businesses to provide insurance for their workers?
From 2010 through 2013, businesses with fewer than 25 employees and average annual wages of $40,000 or less may be eligible for a tax credit of up to 35% if they pay for at least 50% of their employees’ health insurance costs.
Beginning in 2014, small businesses that purchase health insurance for their employees through SHOP can receive a two-year small business tax credit of up to 50% of the cost of the premiums.
While small businesses are not required to obtain insurance for their employees through the exchanges, the available tax credits will likely spur many smaller employers to purchase coverage for their workforce.
What special rules cover employers with fewer than ten employees?
Tax credits are available for small businesses on a sliding scale depending on the number of employees and average annual wages.
Businesses with 10 or fewer employees and average annual wages of $20,000 or less are eligible for the full 35% credit between 2010 and 2013 and then a 50% tax credit beginning in 2014.
What is the “reconciliation bill”?
As if the law itself weren’t complicated enough, the Act could not become fully effective until the Senate also passed a second bill which reconciled its version of the law with the version passed by the House. The Health Care and Education Reconciliation Act, H.R. 4872, makes various technical changes to the law as originally passed by the Senate. For example, it amends the size of certain employer penalties for failing to provide affordable health insurance.
The complexity of the Act will likely lead to the need for additional answers about how various sections of the law will be implemented over the coming weeks and months.
I will continue to report on changes or clarifications to the law as they become available.
None of the information provided herein constitutes legal advice on behalf of TransparentRx, LLC.

Defragmentation: The Net Effect of Healthcare Reform

It’s finally become painfully clear to me the primary goal of healthcare reform. No, it’s not to reign in rising healthcare cost and it’s certainly not to improve patient outcomes. The primary goal of healthcare reform is defragmentation or to reorganize in order to prevent fragmentation. If I’m correct there are more losers than winners.

I’ve discussed, at length, in previous posts the inability of Walgreens and Express Scripts to come to a mutual agreement. Now Walgreens, the largest chain drugstore in the USA by almost 2/1, has agreed to purchase a 45% stake in Alliance Boots for $6.4 billion. Boots is a leading international, pharmacy-led health and beauty group delivering a range of products and services to 21 countries primarily in Europe. This investment makes Walgreens the largest single purchaser of prescription drugs in the world.

Why would Walgreens make such a large investment even before the Supreme’s Court ruling on PPACA? In cities all across America small healthcare entities are being gobbled up by behemoth healthcare organizations. Small physician practices are closing their doors only to become salaried employees at hospitals. Not independent contractors as is customary, but salaried employees taking a steep pay cut.

Small hospitals are being acquired by larger hospital corporations and these hospitals are purchasing specialty physician groups. Take the Kansas University Hospital acquisition of a 42,000-square-foot inpatient surgical hospital building to add to its system of services. The hospital plans to hire the facility’s more than 130 non-physician employees. KU Hospital intends to use the building for surgery by a variety of specialties. A new name for the building will be announced later, along with the specialties using the new space.

KU Hospital did not disclose the cost of the transaction, which is expected to close in the early summer. The Heartland Surgical Specialty Hospital plans to relocate its operations to a new location, according to the KU Hospital release. This is the purchase of a business disguised as a “building” purchase.

Heartland is going to relocate without its 130 non-physician employees, really? Many of Heartlands physicians will join KU hospital as salaried employees.

The purpose of defragmentation is control. The federal government wants to have more say about how healthcare is distributed in this country. Small self-insured (grandfathered) businesses have largely been unaffected by healthcare reform. In fact, my opinion is that PPACA has offered small and medium size businesses more choices at least until now.

The Obama administration is investigating the possibility of imposing limits on stop-loss coverage that could severely undermine the ability of small and midsize businesses to offer self-insured plans. It stems from a formal request for information about federal rules relating to stop-loss insurance, which is seen as a precursor to a regulation.

Critics contend that such a move would force these employers to adopt less flexible, fully insured plans and funnel millions of Americans into health insurance exchange that are slated to take effect in 2014 under PPACA. They also are crying foul about big business having an unfair advantage and raising questions about what may be motivating regulators to pursue this action.

Several leading Republican senators have sought an explanation from the Departments of Treasury, Labor, and Health and Human Services as to why they submitted an RFI. Olympia Snowe (R-Maine), Michael Enzi (R-Wyo.) and Tom Coburn, M.D. (R-Okla.) recently wrote in a letter that stop-loss insurance “is critical for operating a predictable, affordable self-insured health plan. Any possible disruption of these services is of paramount concern to lawmakers, employers, and tens of millions of plan participants.”

Lobbyists for small businesses and self-insured plans are sounding their own alarms over the prospect of stop-loss restrictions on self-insurance.  “The preamble of the RFI clearly demonstrates that the regulators have received significant disinformation about how the self-insurance marketplace actually operates and the role of stop-loss insurance,” explains Mike Ferguson, COO of the Self-Insurance Institute of America, Inc. in Simpsonville, S.C.

Amanda Austin, director of federal public policy for the National Federation of Independent Business in Washington, D.C., believes that the proposal is partly driven by a desire to ramp up PPACA insurance exchanges, calling it “one of many examples of PPACA-inspired micromanagement of health care.” NFIB fears that requiring its members to shuffle more paper will interfere with business growth.

The writing is on the wall. With help from the federal government, large healthcare firms are in acquiring mode. From pharmacy chains to hospitals to PBMs each is looking for a way to account for lower margins. The federal government will foot more of the bill thus profit margins will come down. But, any loss in profit margin will be made up for through volume.

The lower the number of players in the market the more control and power the government exerts. This ultimately will lead to higher prices and lower quality services. Consider the airline industry. There are fewer players and prices have drastically increased while the quality of service has suffered. In fact, airline industries have become down right arrogant. In the case of healthcare reform, history will undoubtedly repeat itself.

Rent-Seeking: A Traditional PBM’s Pathway to Riches

Rent-seeking is a term economists use to describe an organization’s ability to generate above average economic returns without providing any relative incremental value. Wikipedia may explain it a bit better.

Wikipedia Definition

The simplest definition of rent-seeking is to expend resources in order to gain wealth by increasing one’s share of currently existing wealth instead of trying to create wealth. Since resources are expended but no new wealth is created, the net effect of rent-seeking is to reduce total social wealth. It is important to distinguish between profit-seeking and rent-seeking.

Profit-seeking is the creation of wealth, while rent-seeking is the use of social institutions such as the power of government to redistribute wealth among different groups without creating new wealth. Rent-seeking generally implies extraction of uncompensated value from others without making any contribution to productivity.

The origin of the term refers to gaining control of land or other pre-existing natural resources. In a modern economy, a more common example of rent-seeking would be political lobbying to obtain government benefits/subsidies or to impose burdensome regulations on competitors in order to increase market share.

Studies of rent-seeking focus on efforts to capture special monopoly privileges such as manipulating government regulation of free enterprise competition. The term monopoly privilege rent-seeking is an often-used label for this particular type of rent-seeking. Often-cited examples include a lobby that seeks tariff protection, quotas, subsidies, or extension of copyright law.

How does a traditional PBM employ a rent-seeking methodology?

Most recently, the FTC approved the acquisition of Medco by Express Scripts. The net effect of this purchase is not a creation of new wealth, but instead a reduction in social wealth. The FTC approval of this acquisition will ultimately benefit only the government, Express Script and Medco stockholders.

Patients won’t pay lower prices or see a real difference in their health care outcomes. Retail pharmacies and PBM competitors certainly won’t benefit from this acquisition. History tells us that greed will supersede social responsibility almost 100% of the time. Express Scripts has used the government, with powerful lobbying, to attain near monopolistic privileges.

Some state governments, Texas for example, require PBMs to take on the role of a fiduciary. The problem is that this requirement doesn’t extend to private enterprise. I say it’s a problem not because the government hasn’t interfered, but the opposite. Private enterprise hasn’t exercised its right to require a fiduciary role from their PBM. A transparent PBM, acting as a fiduciary, shares the risk and essentially agrees to be 100% transparent in all of its related business dealings.

This transparency includes sharing third party pricing contracts with pharmacies and rebates from manufacturers. It also includes offering real-time access to MAC price lists for retail and captive mail-order pharmacies. As specialty drugs become a larger part of the dispensing mix, it’s imperative to be fully aware of pricing arrangements between biotechnology companies as well. Here is an example of a typical fiduciary disclosure in a transparent PBM contract.

“No Name PBM” owes a fiduciary duty to Client and shall discharge that duty in accordance with the provisions set forth herein.
(a) “No Name PBM” shall perform its duties with care, skill, prudence and diligence and in accordance with the standards of conduct applicable to a fiduciary in an enterprise of a like character and with like aims.
(b) “No Name PBM” shall notify Client in writing of any activity, policy or practice of “No Name PBM” that directly or indirectly presents any conflict of interest with the duties imposed by this subsection.
(c) “Covered individual” means a member, participant, enrollee, contract holder or policy holder or beneficiary of a covered entity who is provided health coverage by the covered entity. “Covered individual” includes a dependent or other person provided health coverage through a policy, contract or plan for a covered individual. With regard to the dispensation of a substitute prescription drug for a prescribed drug to a covered individual the following provisions apply.  
Do you have such language in your contract? If you are dealing with a traditional PBM chances are you won’t get it! Traditional PBMs make money by rent-seeking and not by being fully transparent. And if you think health care reform will fix this I urge you to think twice. The solution is to deal only with PBMs willing to sign on as a fiduciary. This begs the question, “how many checks are you willing to cut for traditional PBM services without knowing exactly what you’re getting in return?”