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Think Tank

Should California Prohibit ‘Skinny’ Health Insurance Plans From Large Employers?

California lawmakers are considering a proposal to prohibit large employers from offering workers “skinny” health plans in California.

AB 248 by Assembly member Roger Hernández (D-West Covina) would prevent companies with 50 or more workers from offering insurance plans that cover less than 60% of the cost of essential care.

Under federal and state law, limited benefit — or “skinny” — plans are not allowed in the individual and small group markets. This bill aims to close the large employer loophole in California.

Similar legislation by Hernandez was approved by the Legislature last year but vetoed by Gov. Jerry Brown (D).

We asked legislators, consumer advocates, employers and insurers to weigh in on the proposal. We received responses from:

Important Consumer Protection

The Affordable Care Act was intended to ensure that consumers could enroll in quality and affordable health insurance that offers a standard set of essential health benefits. Unfortunately, some large employers have skirted the requirement to provide adequate health insurance by offering subpar plans that fail to cover some of the most basic services.

Even worse, when workers accept the substandard coverage — for example, coverage that excludes hospital care or prescription drugs — they become ineligible for premium assistance through Covered California. Offering these so-called “skinny” plans leaves workers vulnerable to the possibility of being unable to pay for needed care and ineligible for the alternatives.

While both federal and state laws already prohibit small group and individual insurance plans from offering “skinny” benefits, it is common knowledge that insurance companies are promoting these plans to large-group purchasers. The federal government has recently indicated that it will soon propose regulations governing large group insurance that fails to provide substantial coverage for in-patient hospitalization, physician services, or both, stating that such insurance does not meet the minimum value requirements of the ACA. Here in California, lawmakers in the Assembly are considering AB 248, legislation that would prohibit larger employers from offering “skinny” plans. [Gov. Jerry Brown (D) vetoed similar legislation last year.] 

Since the ACA’s passage, California has been one of the leading states to decrease its uninsured population. Permitting “skinny” plans, however, perpetuates and likely increases the number of people underinsured — those with substandard coverage who are unable to access care because it is unaffordable. Small and individual market plans cannot offer substandard insurance. People getting their health insurance through large employers deserve the same protections. All Californians should be able to feel secure in the knowledge that the insurance offered by their employers will actually cover the care that they need. 

Loophole Could Undermine California Reforms

Some of the success that California has had in implementing the Affordable Care Act could be undone if the state doesn’t close a loophole that — if exploited by some employers and insurers — could deny workers access to care and subsidies for coverage.

Health Access is proud to sponsor AB 248, by Assembly member Roger Hernandez, to close this loophole and ensure workers get the care and coverage they need, rather than subminimum “junk” coverage.

The ACA set minimum standards for health plans, so patients who need care won’t get stunned with huge bills because of exclusions in their coverage. But for employer-based coverage, there’s a loophole. If a worker takes this plan, it gets the employer off the hook for the employer responsibility penalty.

Your employer, and the insurance broker, tell you this coverage gets you out of the individual mandate. They do not tell you that if you take this, you cannot go to Covered California and get tax subsidies. They do not tell you that you might be eligible for no-cost Medi-Cal if your income is low enough.

Right now, an employer who offers such coverage faces no penalty for offering subminimum coverage. What kinds of businesses is this coverage marketed to? Those with low-income workers like agriculture corporations, staffing companies, janitorial services, resorts, golf courses, call centers, landscaping companies and security firms.

Most health plans do not offer such subminimum coverage in California: not Anthem, not Blue Shield, not Kaiser, not HealthNet, not any of the plans that contract with Medi-Cal managed care or Covered California or that dominate the employer market in California. But we should address this practice before it becomes widespread to the detriment of workers and our whole health system.

IRS could close this loophole nationally, but until they do, California needs AB 248 to put a stop to such subminimum coverage.

Why 'Skinny' Plans Hurt Employees, Employers

AB 248 would close a loophole in the Affordable Care Act that allows employers in the large-group market to offer “minimum essential coverage” health insurance with substantially fewer benefits than the “essential health benefits” required in the individual and small-group markets.

This loophole exists largely because of the politics surrounding the enactment of the ACA; because the law was intended to fill-in coverage gaps, it imposed fewer new requirements on the large group market, which was viewed as functioning relatively well and having less need for fundamental reform. As such, the emergence of skinny plans is best viewed as one of the more significant unintended consequences of the ACA.

So, why is AB 248 necessary? Without this law, employers will be able to avoid the “failure to offer” penalty because the skinny plans are considered minimum essential coverage, even though they fail to meet the 60% minimum value requirement of the ACA. So, employers offering a skinny plan may still be subject to penalties, but only for those employees who turn down the skinny plan and who qualify for a subsidy in Covered California.

These skinny plans hurt employees because they open the door to an erosion of benefits among large employers who currently offer health insurance — clearly not an intention of the ACA. And for employers who previously did not offer health insurance benefits, skinny plans provide a mechanism for avoiding or reducing tax penalties, while shifting most of the real costs of health insurance onto employees and taxpayers. Skinny plans may also offset some or all of the benefits of recent successful efforts to raise the minimum wage in cities throughout California, including Los Angeles. These plans may increase the likelihood that employers in low-wage industries simply pay for these recent hard-fought wage gains by dramatically reducing health benefits.

Skinny plans hurt California employees by rewarding employers for doing less for their workers, and allowing those costs to continue to be borne (mostly) by others. These plans also create an incentive for employers to pressure their employees not to seek more comprehensive insurance in Covered California, because every employee who receives a subsidy triggers an additional cost to the employer. It’s not difficult to imagine how this “choice” might create hostility in the workplace, and place employees in an untenable situation where they are viewed as directly responsible for fining their employer.

The ACA was intended to stabilize health insurance benefits in the large group market and extend similar benefits to those in the small group and individual markets. Congress is gridlocked and, thus unable to fix the unintended consequences caused by skinny plans, but California can and should close this loophole.

Opponents Prefer More Flexible Language

Also known as Minimum Essential Coverage (MEC) plans, “skinny plans” meet specific requirements outlined under the Affordable Care Act and ERISA (federal Employee Retirement Income Security Act of 1974) and serve as an affordable alternative to traditional health insurance for many Californians.

These plans have been around for many years, and interest has been steady, even after many speculated the ACA would eliminate such plans. Recent surveys of large employers show an increased demand for MEC plans and estimates one in six employers will offer a MEC plan option in 2015-2016.

But it’s not comprehensive coverage. Workers should be informed of the gaps in these MEC plans. For example, these plans often offer no inpatient or outpatient hospital coverage. Some employers will supplement or wrap MEC coverage with a plan that includes limited hospital and doctor visits. Again, this is not traditional coverage and should be clearly disclosed to workers upon enrollment. While the ACA says coverage is affordable if the employee premium contributions are 9.5% or below of household income, many low-wage workers believe the bronze plans are still too expensive and want something more affordable. 

For employers with many part-time and hourly workers, whose hours hover close to the 30 hours-a-week threshold; a MEC plan could be a viable solution. Critics of MEC plans say the skinny plans encourage employers to shift lower-wage workers to enroll in Medi-Cal instead of offering more comprehensive benefits. If that is true, this may be in the best interest of both employers and workers. While AB 248 helps close one loophole in the federal law, it still does not address the “family glitch,” whereby an employer offers affordable comprehensive coverage to their employees yet precludes access to affordable coverage for the spouse and children. Meaning, the employee may be covered but the family members are now ineligible for premium assistance or subsidies in Covered California. The family remains uninsured or pays more for coverage outside the employer-sponsored plan.

Opponents of AB 248 would prefer more flexible language permitting employers to build a plan which meets the 60% minimum value. This could mean a well-constructed and compliant plan built on a lower-than-bronze base with component or supplemental coverage, which, in aggregate, meets the 60% bronze level benefit standard and is completely ACA compliant.