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Health Insurance Reforms: How Will They Affect Employment-Based Coverage in California?

UC Berkeley Center for Labor Research and Education
NORC at the University of Chicago
Towers Watson

Abstract

The objectives of this issue brief are: (1) to examine how insurance reforms required by the Affordable Care Act will affect benefit packages currently offered by California employers and (2) to estimate out-of-pocket expenses and actuarial values for households with employment-based health plans in California in 2010. We use simulated bill paying to estimate the percentage of the bill paid by the health plan (actuarial value) and via households’ out-of-pocket expenses. Data on employment-based health benefits are from the 2010 California Health Benefits Survey. MarketScan medical claims data provide the source of information on use and cost of services. Findings indicate that most 2010 and 2014 insurance reforms will not have major effects on current plans offered by California employers. Two exceptions are a prohibition on lifetime maximum benefits and a limit on the out-of-pocket expenses an employee may incur. The average actuarial value for an employment-based plan in California is 0.87 compared to 0.83 for the nation. Average out-of-pocket medical expenses for households with employment-based insurance are $1,298.

2010 and 2014 Health Insurance Reforms: How Will They Affect Employment-based Coverage in California?

Signed into law by President Obama in a White House ceremony on March 23, 2010, the Patient Protection and Affordable Care Act (ACA) contains many provisions that alter the requirements of employment-based health insurance. Employment-based insurance is the leading source of coverage nationwide for persons under age 65. In California, an estimated 17.7 million persons, or 54.2 percent of the under 65 population, obtain their coverage from an employer.1

The objectives of this issue brief are:

  1. To examine how the insurance reforms required by the ACA will affect the benefit packages currently offered by California employers.
  2. To estimate out-of-pocket expenses and actuarial values for employers in California in 2010.

Our data source is the 2010 California HealthCare Foundation (CHCF) Employer Health Benefits Survey. This survey entails a random sample of 805 private firms with establishments in California in 2010. The survey is conducted through telephone interviews with employee benefit managers. A second database is the 2008 MarketScan medical claims data from Thomson Reuters. We take a sample of people from the MarketScan database and simulate the payment of medical claims under various plans to determine the percentage of payments made by each plan and the beneficiary for each employment-based plan. Our analysis shows the degree of financial protection offered by plans grouped into the various tiers defined in the ACA:

  • Tin–actuarial values less than .60. (Tin is our term.)
  • Bronze–0.60 to 0.69
  • Silver–0.70 to 0.79
  • Gold–0.80 to 0.89
  • Platinum–0.90+

The first set of changes in insurance rules went into effect on the first day of the next plan year after September 23, 2010. Therefore, for most plans these rules became effective in 2011. The 2010 California HealthCare Foundation (CHCF) Employer Health Benefits Survey was conducted April through July of 2010, prior to the implementation of these provisions for any plans. These reforms expanded financial protections to Americans with group or individual health insurance and included:

  1. A requirement that designated preventive services must be provided with no cost sharing.
  2. Extension of coverage for young adults to age 26 under their parents’ policies.
  3. A ban on rescissions.
  4. A phasing out of annual benefit limits of less than $750,000.
  5. A ban on lifetime benefit limits.
  6. A ban on pre-existing condition exclusions for children.

Exchanges begin operations in 2014, and medical underwriting will be banned in the small group and individual markets. At the same time other insurance reforms will:

  1. Consider employment-based plans to be unaffordable if the actuarial value of the plan is less than .60, making employees and their family members potentially eligible for subsidies in the exchange and employers subject to penalties if employees enroll in subsidized coverage.
  2. Limit waiting periods for new hires to no more than 90 days.
  3. Limit deductibles in the small group market to $2,000 for individuals and $4,000 for families.
  4. Restrict out-of-pocket limits for single persons in the small group market to no more than $5,950; for families to no more than $11,900.

2010 Reforms

No data for California are available about the frequency of insurer rescissions, the application of pre-exist ing condition clauses to children, or how many adult children gained coverage on their parents’ plan. The CHCF Employer Benefits Survey does not ask about annual limits since such plans are not considered comprehensive plans by the survey sponsors. Here we present findings on preventive services and lifetime maximum benefits.

No Cost-Sharing for Designated Preventive Services

Ninety percent of insured workers in California in 2010 were members of a plan that provided preventive benefits without cost-sharing (Table 1, page 4). There was little variation in this figure by region of the state or by industry. Small firms–firms with fewer than 50 workers–covered preventive services without cost-sharing at a statistically lower rate (83 percent) than other firm size categories.

Table 1: Percentage of Employees with Preventive Benefits wth No Cost-Sharing, by Firm Size, Industry, and Region

A Ban on Lifetime Benefits

About 40 percent of workers receiving their coverage through a private employer were enrolled in a plan with lifetime maximum benefits in 2010 (Table 2, page 5). The vast majority (83 percent) of plans with maximum lifetime limits in 2010 had limits of $2,000,000 or more. Employees in firms with fewer than 50 workers were more likely to be subject to maximum lifetime benefits (46 percent) than employees in larger sized firms. By industry, workers in the firms outside the Los Angeles and San Francisco metropolitan areas were subject more often to lifetime limits (52 percent).

2014 Reforms

Actuarial Value

Table 3 (page 6) shows the distribution of enrollment in employment-based plans by actuarial value. So-called “Tin plans,” plans where the actuarial value is less than 0.60, account for just 0.05 percent of enrollment in California.2 Platinum plans constitute 48 percent of enrollment followed by Gold plans at 36 percent of enrollment. Large firms have the highest actuarial values, followed by mid-sized firms and small firms. Yet, for small firms, the largest share of enrollment is in Gold plans. A subsequent section will provide further detail about the financial protection California job-based plans offer to employees from high out-of-pocket expenses.

Table 2: Percentage of Employees with Maximum Lifetime Limits, 2010, by Firm Size, Industry, and Region

Waiting Periods

Only 6 percent of employees with employment-based health insurance work for a firm where the waiting period exceeds the maximum of 90 days (Table 4, page 6). Among small firms (3-49 workers), 12 percent of employees work for a firm with waiting periods of more than 90 days. The retail/wholesale sectors have the largest percentage of workers (17 percent) employed by firms exceeding the 90-day requirements. Firms in the San Francisco metropolitan area are more likely than in other areas of the states to have no waiting period.

Longer waiting periods are associated with lower coverage rates (percentage of a firm’s employees enrolled in the firm’s health insurance plan(s)). Firms with a waiting period of more than 90 days have a coverage rate of 53 percent as opposed to firms with no waiting period with a rate of 68 percent (Table 5).

Table 3: For California Employment-Based Plans, Percentage of Enrollment in Benefit Tiers, 2010 (Tin, Bronze, Silver, Gold, and Platinum), by Firm Size
Table 4: Percentage of Covered Workers Employed by Firms with Waiting Periods for Health Plan Eligibiity (each row sums to 100%)
Table 5: Coverage Rate by Waiting Period

Deductibles in the Small Group Market For firms with fewer than 50 workers, only 8 percent of employees are enrolled in a plan where the single deductible exceeds $2,000, and about 7 percent are enrolled in a plan where the family deductible exceeds $4,000 (Table 6, page 8). California remains a state where the majority of employees have coverage in HMO plans and few workers have high-deductible health plans.

Out-of-Pocket Limits

Nineteen percent of insured employees of small firms in California are covered by a plan where the out-of-pocket limit for patient cost-sharing exceeds $5,950 for a single person (Table 7, page 8). Twenty-two percent of Golden State workers at small firms are enrolled in a plan where the out-of-pocket limit exceeds $11,900 for families. In estimating these figures, if a plan did not include the deductible in the out-of-pocket calculation, we added the deductible to the out-of-pocket limit. Plans with no out-of-pocket limits automatically exceeded the designated limits. The exception to this was HMO plans, which we considered to be falling under the limit due to their low patient cost-sharing.

Table 7: Percentage of Employees Whose Out-of-Pocket Limit Exceeds Affordable Care Act Limit

Financial Protection Provided by California Plans

Actuarial Values

The average actuarial value for an employment-based plan in California is 0.87 (Table 8, page 10), a figure that exceeds the national average by about four percentage points.3 The average actuarial for an HMO plan is 0.91 as opposed to 0.73 for a high-deductible health plan. With the majority of Californians enrolled in HMO plans, California plans have historically had higher actuarial values than the national average. Actuarial values varied little for the four industry groups or by geographic area. As employees incur greater overall medical expenses, a higher percentage of expenses are paid by the health plan, as opposed to the employee. Thus, for the lowest 50 percent of families incurring medical expenses, the plan pays for 73 percent of medical expenses. For the top one percent of spenders, the health plan pays for 97 percent of expenses.

The presence and size of the plan deductible greatly determines the actuarial value of the plan (Table 8, page 10). All Tin and Bronze plans have deductibles, whereas only 14 percent of Platinum plans do. Among plans with deductibles, the average deductible in Tin and Bronze plans was $3,000 and $2,713 respectively, whereas the average among Platinum plans with nonzero deductibles was $187.

Out-of-Pocket Expenses

The average out-of-pocket expense for a California household with employment-based insurance was $1,298 (Table 9, page 11). Households include single and multiple-person households. The average expected out-of-pocket expense for Tin plans was $4,261 and for Bronze plans $3,437. In contrast, Platinum plans had an average out-of-pocket expense of $730. For families incurring the highest one percent of expenses, absolute differences in families’ out-of-pocket are substantial. Families with Tin plan coverage would incur $9,216 in expenses and families with Bronze coverage would incur $8,424, as opposed to $2,324 for a Platinum plan.

HMO members sustain lower out-of-pocket expenses than other plans–$958 on average. This contrasts with $1,477 for a PPO plan and $2,778 for a consumer-driven health plan.4 Differences across the four industry groups and three geographic areas are small.

Differences by Firm Size

We calculated actuarial values and employee out-of-pocket expenses for small firms (3-49 workers), mid-size firms (50-999 workers) and large firms (1,000+ workers.) Average actuarial values range from 0.83 in small firms, to 0.87 and 0.89 for mid-size and large firms. Average out-of-pocket expenses for a family are $1,697, $1,302, and $1,085 for small, medium, and large firms respectively.

Deductibles determine much of the differences in financial protection among small, medium, and large firms in California. Fifty-nine percent of employees in small firms face deductibles, as opposed to 47 percent among mid-size and 36 percent among large firms. When deductibles are present, they are larger in small firms. Deductibles average $827 in small firms, $480 in midsize firms, and $309 in large firms.

Table 8: Actuarial Value and Out-of-Pocket Spendingby ACA Benefit Tier, 2010 Caifornia Group Plans
Table 9: Average Out-of-Pocket Spending per Household

Conclusion

For four of the six ACA provisions analyzed in this brief, 90 percent or more of Californians receiving insurance through their employer are already enrolled in plans that satisfy the new standard. These four provisions are:

  • No cost-sharing for designated preventive services (90 percent);
  • Waiting periods for new hires cannot last longer than 90 days (94 percent);
  • Plan actuarial values must exceed 0.60 to be considered affordable (almost 100 percent); and
  • Deductibles for small employers must not exceed $2,000 (92 percent).

The new waiting period limits are important because longer waiting periods are associated with a lower percentage of employees enrolled in the firm’s health insurance plan(s). Firms with a waiting period longer than 90 days have a coverage rate of 53 percent as opposed to firms with no waiting period, which have a coverage rate of 68 percent.

Two requirements will expand benefits for substantial numbers of insured workers. First, about 40 percent of Californians with job-based insurance were subject to lifetime limits in 2010. However, 83 percent of plans with maximum lifetime limits in 2010 had limits of $2,000,000 or more, so the impact of this change will be minimal on most employers but would be quite meaningful for the small number of employees who reach these limits. Second, 19 percent of employees covered in the small group market had out-of-pocket limits greater than $5,950 for single coverage, or $11,900 for a family.

Workforces from small firms are most likely to receive expanded benefits. In a state where the majority of insured workers are enrolled in an HMO plan, California employees have less cost-sharing and richer benefits compared to the rest of the nation.

The average actuarial value of a California plan of 0.87 is higher than the national average of 0.83. Expected family out-of-pocket expenses average $1,298. Hence, the impact on employers and employees will be less profound in the Golden State than in other areas of the country.

Endnotes

  1. Paul Fronstin (September 2011). Sources of Health Insurance and Characteristics of the Uninsured: Analysis of the March 2011 Current Population Survey. EBRI Issue Brief #362. Washington, DC: Employee Benefit Research Institute, http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4896.
  2. Due to the low enrollment, data for tin plans are not shown in most tables in this brief.
  3. National figures are from J. Gabel et. al, “How Do 2010 Group and Individual Market Plans Compare with Exchange Offerings Planned for 2014?” Health Affairs, in Press.
  4. The out-of-pocket expense for consumer-driven health plans does not include account contributions by employers. An individual whose employer contributes to the account can use those funds to defray out-of-pocket expenses..

Acknowledgements

We thank Ken Jacobs and Laurel Lucia for their helpful comments, and Jenifer MacGillvary for her help in the preparation of this brief.