Unions and the California Health Benefit Exchange

White Paper

A key component of the Affordable Care Act (ACA), the health care reform law of 2010, is the creation of state health benefit Exchanges. The Exchanges are marketplaces for individuals and small businesses to purchase health plans and to receive federally-funded subsidies to help cover the cost of health care premiums. California was the first state to establish an Exchange through legislation signed into law by Governor Schwarzenegger in 2010.

The Exchange poses a number of challenges and opportunities for California unions invested in the success of the ACA. Federal reform left the responsibility for creation of Exchanges and implementation of key parts of the ACA up to the states. California has forged ahead on establishing an Exchange, but many decisions affecting consumers, employers and unions remain. This brief will provide background on the California Health Benefit Exchange and Labor’s recommendations for next steps for implementation of the ACA.

STATE EXCHANGES AND CONSUMERS

Any individual can purchase a health plan in the Exchange and many will qualify for subsidies to help with premium costs. The availability of federally-funded subsidies means that low-income or unemployed individuals will get help to afford health coverage. When an individual loses employment-based health coverage for any reason, such as job loss, reduction in hours or divorce, they no longer have to remain uninsured but the benefits may be as good as most job-based coverage, depending on income level.

Business with 50 or fewer employees may also purchase coverage through a parallel exchange, the Small Group Option Program (SHOP) Exchange. Limited tax credits are available to small employers.

Legal residents may purchase coverage through the individual Exchange, but undocumented immigrants are barred from purchasing in the Exchange by the federal government. State Exchanges will have to coordinate with federal agencies to verify immigration status.

The Exchange is the only place where individuals can receive subsidies to purchase coverage. The subsidies are provided as tax credits through the IRS for premiums and cost sharing for families between 133 percent and 400 percent of the Federal Poverty Level (FPL). Individuals under 133 percent of the FPL are eligible for Medical coverage. The amount of the premium and cost sharing subsidies will vary using a sliding scale based on family income (Table 1). Over a million Californians may be eligible for subsidies when the Exchange opens in 2014.

Individuals and their families are only eligible for subsidies if they are not offered affordable employer-sponsored coverage. If employer coverage is unaffordable, they can access subsidies and purchase coverage in the Exchange. The federal regulations define affordable as an employee contribution for coverage that is less than 9.5 percent of the employee’s family income. The coverage must have an actuarial value of at least 60 percent. Actuarial value is a measure of the percentage of total health care costs that a plan would be expected to pay across a covered population. For example, Medicaid for children has an actuarial value of 100 percent because it pays for all medical costs across the covered population without any out-of-pocket expenses. The less health care costs a plan covers, the lower the actuarial value (Table 2). Most union-negotiated plans already meet the actuarial value standard.

A current debate at the federal level deals with regulations on employer-sponsored plan affordability. Department of Treasury regulations provide that workers and their families will not be eligible for subsidies in the Exchange if employer-sponsored individual coverage is affordable, even if family coverage is not. This means workers and their families who cannot afford employer-sponsored family coverage are ineligible for subsidized coverage in the Exchange. Working and middle class families would be hard hit by Treasury’s interpretation of the law. A UC Berkeley Labor Center study found that 144,000 Californians would lose subsidies and be forced to buy unaffordable family coverage or be uninsured if Treasury keeps their current regulations. Most of these are children. National groups, including the AFL-CIO, have weighed in strongly against this proposed regulation and we are waiting on final rules.

THE CALIFORNIA HEALTH BENEFIT EXCHANGE

In 2010, Governor Schwarzenegger signed AB 1602 and SB 900 into law, creating the California Health Benefit Exchange. California became the first state to create an Exchange that will serve the largest population in the country. Over a million Californians are estimated to be eligible for subsidies and 2 million more are eligible to purchase coverage through the Exchange as individuals without subsidies. The sheer number of covered lives gives the Exchange significant power to negotiate with insurers over price and quality of plans.

Although subsidies and immigration status is governed at the federal level, states have considerable flexibility in establishing Exchanges. The legislation creating the California Exchange goes above and beyond the federal requirements. It includes the following provisions:

Public agency with a 5-member board appointed by the Governor and Legislature that prohibits Board members from being employed by, consultant to or board member of, a carrier or other insurer, an agent or broker, a health care provider, or a health care facility or health clinic, while they are on the Exchange Board or staff;
Uses “selective contracting” to purchase plans that will “offer the optimal combination of choice, value, quality and service;”
Requires insurers inside the Exchange to offer at least one qualified plan at each of the five standardized “precious metal” levels in every region of the state;
Prohibits insurers not participating in the Exchange from selling catastrophic coverage outside of the Exchange;
Requires insurers not participating in the Exchange to offer the standardized products offered in Exchange.

The Exchange Board meets monthly to prepare for the January 1, 2014 opening of the Exchange to the public. They face decisions regarding everything from selecting an IT contractor to streamlining enrollment to language access issues. Information about upcoming meetings and agendas can be found at: http://www.healthexchange.ca.gov/Pages/Default.aspx.

EMPLOYER RESPONSIBILITY AND THE EXCHANGE

Like the minimum wage, the Affordable Care Act creates a floor for bargaining on health benefits. Employers have a responsibility to provide affordable health coverage or pay a penalty for employees that receive subsidized coverage. Under the ACA, employers are not required to provide health coverage to employees but if an employee receives a subsidy in the Exchange then the employer is on the hook for penalties. The penalties apply to large employers with at least 50 full-time equivalent non-seasonal employees. The penalties are as follows:

Businesses that do not provide coverage to full-time employees and their dependents face a penalty of $2,000 per every full-time worker they employ, if at least one of their employees receives Exchange subsidies. The first 30 employees are exempt from the $2,000 per worker penalty.

Businesses that do provide coverage but have employees that receive subsidies in the Exchange face a penalty of $3,000 per full-time worker receiving subsidies.
The penalty structure is key to employer decisions on health care coverage options for employees. The definition of full-time and non-seasonal is particularly important because penalties are only assessed for full-time workers and only full-time non-seasonal workers count in determining whether the employer is subject to penalties. The ACA defines full-time as an average of 30 hours or more in any week and seasonal as working fewer than 120 days in a year.

Nationally, 9.4 percent of the workforce work between 30-36 hours a week. The highest concentration of part-time and near part-time workers is in low-wage industries such as building services, retail and restaurants. Walmart recently dropped health benefits for part-time workers and will avoid paying any penalty on those workers in 2014, though many will be eligible for federally-funded subsidies.

Employer “dumping” of workers into the Exchange by dropping coverage and reducing hours is a challenge to maintaining job-based coverage, especially in low-wage industries. The availability of subsidized coverage in the Exchange will reduce the incentive for some employers to offer coverage, though the incentives will vary based on the demographics of the workforce. While some employers will drop coverage, some Californians will be newly enrolled in job-based coverage as a result of the individual mandate, automatic enrollment requirements and new offers of coverage from employers responding to the greater demand for coverage and new options in the SHOP Exchange.

At the federal level, big business is working to weaken employer responsibilities and make it harder to penalize businesses that dump workers into Exchanges. The Employers for Flexibility in Health Care (EFHC), a coalition of trade associations and businesses in the retail, restaurant, hospitality, construction, temporary staffing, and other service industries, has submitted a number of comments on regulations on employer responsibility, including the determination of full-time employees. They advocate for a “look-back/stability safe harbor” period rather than a monthly average which would make it easier to claim a part-time workforce and evade employer responsibility. They also advocate for converting 30 hours per week to 130 hours per month, making it easier to classify workers as part-time.

The employer penalties are intended to ensure businesses maintain adequate, affordable job-based coverage or pay their fair share for public coverage. Shifting workers to subsidized coverage in the Exchange drives up the costs for taxpayers and undermines job-based coverage, which is the foundation of the current health care system.

NEXT STEPS FOR THE CALIFORNIA EXCHANGE

California led the way for the rest of the nation in setting up our Exchange first. The Board faces a number of key decisions in the coming months as they prepare to open the Exchange on January 1st, 2014.

One of the early decisions of the Exchange is to contract with a vendor to develop an Information Technology system, called the California Healthcare Eligibility, Enrollment and Retention System (Cal-HEERS). The design of the system will reflect the policies of the Exchange in terms of streamlined enrollment in health plans, eligibility for subsidies, accessibility and the role of public employees versus privatization in Exchange functions. Whether the Exchange uses existing public employees and systems or creates and outsources those services will be an on-going question.

The Board will also determine criteria to establish Qualified Health Plans that are eligible to sell products in the Exchange. The Board has the responsibility to certify plans to sell in the Exchange and can decide how to craft criteria for certification that meets the policy goals of quality, cost control and value.

The state also faces decisions on how to ensure the success of the Exchange and the ACA in California. One challenge is ensuring that some employers and insurers don’t evade their responsibilities. Employer “dumping” of employees into the Exchange not only undermines job-based coverage but drives up costs for taxpayers. Employers should pay their fair share to ensure the functioning of the health care system, just as individuals have skin in the game from the requirement to purchase coverage. Regulation of the market outside the Exchange will also be necessary to prevent adverse selection—insurers skimming young, healthy lives out of the Exchange—which would drive up health coverage costs within the Exchange and undermine its viability.

The state can also explore how to contain skyrocketing health care costs. Rate regulation, selective contracting, controlling chronic disease, reforming provider payment systems and other policies can all help to rein in health care costs and keep health coverage affordable and accessible for all Californians.

POLICY RECOMMENDATIONS

1. Comprehensive and Affordable Coverage: The Affordable Care Act makes it possible for Californians to access affordable coverage that covers the care they need. California can implement the ACA to not only eliminate junk insurance, but to increase the quality and contain the cost of coverage for individuals. We support the adoption of Essential Health Benefits and Qualified Health Plan standards that ensure good, comprehensive coverage and provides maximum quality at an affordable cost.

2. Public Exchange: The Exchange will connect individuals and families with public programs, premium subsidies and coverage options through an integrated enrollment and eligibility system. The Exchange provides vital public services to ensure the health and well-being of Californians and the sustainability of our public health care program. The fundamentally public nature of the Exchange would be compromised by profit-motives introduced by privatization. Existing civil servants have the skills and experience to carry out the Exchange’s functions. We urge the Board not to contract out or privatize any functions of the Exchange but instead to rely on the existing public workforce.

3. Employer Accountability: The Affordable Care Act mandates that employer, individuals and government share responsibility for making health care reform work. The Exchange faces the risk of employers continuing to shift responsibility for health coverage onto public programs, posing a threat to the viability of the new agency. The employer responsibility in the ACA leaves the door open for unscrupulous businesses to evade penalties and dump workers into the Exchange. A flood of workers onto subsidized coverage without employers paying their fair share would undermine both the Exchange and job-based coverage. We recommend that the Exchange and Legislature closely monitor employers’ interactions with the Exchange to determine if there is a shift onto subsidized coverage without penalty. We will pursue policies that discourage employer dumping, decreases in hours and that publishes the names of employers who shift workers onto subsidized coverage.

4. Information Security: The Exchange will collect sensitive personal data from individuals and employers in order to verify eligibility and complete enrollment. We urge the Exchange to institute the highest information security protocols to ensure that sensitive personal data and health history is protected. Personal data collected by the Exchange should only be shared with relevant state and federal agencies for the purposes of enrollment, eligibility and subsidies.

5. Exchange Oversight and Accountability: The Exchange is a public agency that has the responsibility to implement the most important and complex mandates of the Affordable Care Act. It will serve millions of Californians, collect and transmit reams of sensitive data and connect daily with multiple federal agencies. We recommend that the Legislature have appropriate oversight of the Exchange functions and put into place mechanisms to hold the Exchange accountable to the people of California.

6. Navigators Program: On January 1st, 2014, millions of Californians will shop for health coverage and receive premium subsidies in the Exchange. No matter how user-friendly the system, many Californians will need assistance in accessing the Exchange and selecting the right health coverage for them and their families. The ACA establishes a Navigator program to assist individuals and small businesses in accessing the Exchange. Unions and Central Labor Councils are highly qualified to serve as Navigators with experience working with target populations, such as the unemployed, immigrants and the working families. As the California Exchange develops a Navigator program unions and other qualified organizations should be consulted on how to develop a Navigator system that benefits eligible groups and prevents conflicts of interest.

TABLE 1: PREMIUM AND COST-SHARING SUBSIDIES IN THE EXCHANGE

Subsidies are based on the percent of family income spent on the premium for coverage.

Premium Subsidies in the Exchange

	Maximum monthly premium spending
Federal Poverty Level	% of family income	(single)	(family of 4)
100-133%	2.0%	$18-24	$37-50
133-150%	3.0-4.0%	$36-54	$74-112
150-200%	4.0-6.3%	$54-114	$112-235
200-250%	6.3-8.05%	$114-183	$235-375
250-300%	8.05-9.5%	$183-259	$375-531
300-400%	9.5%	$259-345	$531-708

Cost Sharing in the Exchange

Federal Poverty Level	Max-Out of Pocket Individual/Family
100-133%	$1,983 / $3,967
133-150%	$1,983 / $3,967
150-200%	$1,983 / $3,967
200-250%	$2,975 / $5,950
250-300%	$2,975 / $5,950
300-400%	$3,967 / $7,933
400%+ (no cost sharing subsidy)	$5,950 / $11,900

Federal Poverty Level is $10,890 for a single individual and $22,350 for a family of 4.

Source: UC Berkeley Labor Center, The Affordable Care Act and Collective Bargaining Power Point, October 2011.

TABLE 2: ACTUARIAL VALUE

Benefit Package	Summary	Actuarial Value
Traditional Medicaid for children	No cost sharing for “necessary” health services	100%
Typical employer-sponsored HMO	No deductible, $20 copay for office visits, $250 hospital copay, no cost sharing for lab and x-ray	93%
Typical employer-sponsored PPO	$400 deductible, 20% coinsurance, $2,000 out-of-pocket max	84%
Sample “Bronze” plan	$3,000 deductible, 20% coinsurance, $5,950 out-of-pocket max	60%

Sources: Congressional Research Service, “Setting and Valuing Health Insurance Benefits,” April 6, 2009; sample Bronze plan developed and estimated by Towers Watson, excerpted from UC Berkeley Labor Center, The Affordable Care Act and Collective Bargaining Power Point, October 2011

GLOSSARY

The following terms are excerpted from the glossary at Healthcare.gov. A pdf with the full list of terms is available at http://www.healthcare.gov/glossary/04262011a.pdf.

Actuarial Value: The percentage of total average costs for covered benefits that a plan will cover. For example, if a plan has an actuarial value of 70%, on average, you would be responsible for 30% of the costs of all covered benefits. However, you could be responsible for a higher or lower percentage of the total costs of covered services for the year, depending on your actual health care needs and the terms of your insurance policy.

Employer Responsibility: Under the Affordable Care Act starting in 2014, if an employer with at least 50 full-time equivalent employees doesn't provide affordable health insurance and an employee uses a tax credit to help pay for insurance through an Exchange, the employer must pay a fee to help cover the cost of the tax credits.

Essential Health Benefits: A set of health care service categories that must be covered by certain plans, starting in 2014.

The Affordable Care Act defines essential health benefits to “include at least the following general categories and the items and services covered within the categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.''

Insurance policies must cover these benefits in order to be certified and offered in Exchanges, and all Medicaid State plans must cover these services by 2014.

Starting with plan years or policy years that began on or after September 23, 2010, health plans can no longer impose a lifetime dollar limit on spending for these services. All plans, except grandfathered individual health insurance policies, must phase out annual dollar spending limits for these services by 2014.

The Department of Health and Human Services is working with a number of partners to develop the essential health benefits package. In the fall of 2011, HHS will launch an effort to collect public comment and hear directly from all Americans who are interested in sharing their thoughts on this important issue. Learn more about this process.

Exchange: A new transparent and competitive insurance marketplace where individuals and small businesses can buy affordable and qualified health benefit plans. Affordable Insurance Exchanges will offer you a choice of health plans that meet certain benefits and cost standards. Starting in 2014, Members of Congress will be getting their health care insurance through Exchanges and you will be able buy your insurance through Exchanges too. Learn more about Exchanges.

Federal Poverty Level (FPL): A measure of income level issued annually by the Department of Health and Human Services. Federal poverty levels are used to determine your eligibility for certain programs and benefits.

Minimum Essential Coverage: The type of coverage an individual needs to have to meet the individual responsibility requirement under the Affordable Care Act. This includes individual market policies, job-based coverage, Medicare, Medicaid, CHIP, TRICARE and certain other coverage.

Qualified Health Plan: Under the Affordable Care Act, starting in 2014, an insurance plan that is certified by an Exchange, provides essential health benefits, follows established limits on cost-sharing (like deductibles, copayments, and out-of-pocket maximum amounts), and meets other requirements. A qualified health plan will have a certification by each Exchange in which it is sold.

Rate Review: A process that allows state insurance departments to review rate increases before insurance companies can apply them to you.