Health Care Cost Control Strategies under the Affordable Care Act

Chester County
Association of Township Officials
Health Care Cost Control Strategies under
the Affordable Care Act
Avoiding the Cadillac Tax and More
Patrick J. Harvey, Esquire
1735 Market Street, 51st Floor
Philadelphia PA 19103
(215) 864-8240
[email protected]
John P. McLaughlin, Esquire
1735 Market Street, 51st Floor
Philadelphia PA 19103
(215) 864-8241
[email protected]
The Current Approach
•
Prior to 2008, uniformed personnel were successful in focusing
negotiations and interest arbitration on continuous enhancement
of wages and benefits by arguing they were falling behind
“comparable” communities and engaging in a game of “leap
frog” or “keeping up” with respect to those issues.
•
In 2008, as the Great Recession took shape, we embarked on a
new approach to negotiations and Act 111 interest arbitration
which was:
-
Much more aggressive in terms of developing targeted proposals and demanding
arbitration
-
Supporting proposals with detailed and targeted data
-
Focusing on the true costs of police pay and benefits especially pension and postretirement health benefits
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Current Approach
•
As a result of this new approach, many municipalities have
been successful in getting arbitrators to seriously look at
the overall municipal cost of doing business and especially
the ever increasing cost of public safety services.
•
Since the 2008, arbitration awards/trends have included:
-
Elimination of or reduction of post-retirement health benefits for
new hires
-
Health care plan redesign and increased co-pays and
contributions
-
Wage freezes for fiscally distressed municipalities and raises in
other municipalities that are more in line with the economic times
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Act 111 Trends (cont’d)
-
Decrease in pension benefits to mandatorily required minimum
for new hires
-
Elimination of unlawful/unauthorized benefits
-
Defined contribution benefits as opposed to defined benefit
pension benefits for non-police new hires
-
Spousal coordination requiring spouses to take benefits at their
employer if available
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Health Care Reform and Negotiations
•
The aggressive approach to negotiations MUST continue, but health care
reform adds a new issues to negotiations with public sector unions.
•
Some of the most prominent new HCR issues in negotiations are:
-
Mandated health plan changes, taxes and fees
•
-
Which of these, if any, have you bargained for?
Employer mandate update
•
Exemption for mid-size employers
•
Hours of service (including volunteer firefighters)
•
Identifying full-time employees (measurement periods and stability
periods)
-
Transition rules
-
Issues for 2014
HCR and Negotiations: Where to start
•
Continue to focus on plan redesign issues. However,
remember contributions as well..
•
Perform health care benefits audit BEFORE
NEGOTIATIONS to highlight increased costs and to also
insure compliance with law
•
Proper coordination and use of HSA’s and HRA’s and cash
reimbursements
•
Need to eliminate unnecessary or overly restrictive language
regarding health benefits.
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Health Care Reform: Mandated Plan Changes,
Taxes and Fees
Excise Tax on Cadillac Plans
•
Penalty on employer-sponsored health plans that are deemed “too rich”
-
•
Applies to insured and self-insured plans
Excise tax is equal to 40% of the excess benefit per covered employee
-
Excess benefit is the aggregate cost of the benefit in excess of:
•
$10,200 for self-only coverage (as adjusted)
•
$27,500 for other than self-only coverage (as adjusted)
-
-
•
Increased thresholds for qualified retirees and those in high-risk jobs (police
and fire are deemed to be high risk jobs), $11,800 for individual coverage;
$30,950 for family coverage
The thresholds may be adjusted based on age, gender and medical inflation between 2010
and 2018 using a measure that looks to the Federal Employees Health Benefits (FEHB)
program
What is the excess benefit?
-
Aggregate value of employer-sponsored coverage (which includes dental and vision
coverage if they are integrated with medical and prescription coverage)
-
Takes into consideration both employer and employee contributions
Excise Tax on Cadillac Plans
•
Who calculates the Cadillac tax?
-
•
•
•
Employers (except for multiemployer plans)
Who pays the Cadillac tax?
-
Insured Plan: Insurer
-
Self-insured Plan: Plan Administrator (often the employer)
Penalties
-
Failure to correctly impose the Cadillac tax results in a penalty to the party
responsible for calculating the amount of the Cadillac Tax (e.g., the employer)
-
The penalty is equal to 100 percent of the underpayment plus interest.
Effective Date
-
Tax years beginning after December 31, 2017 (i.e., January 1, 2018)
BARGAINING IMPLICATIONS
Projected Cost Summary: Excise Tax on Cadillac Plans
•
A standard HMO and prescription drug plan (using a 9% annual trend
increase), could trigger a $622,000 excise tax for a municipality that has 300
employees
•
Does your CBA account for the Cadillac Tax?
HMO & Rx
2018 Projected
Annual Premium
Excess Premium
(PEPM)
Annual Excise Tax
(40% of Excess)
Single
100
$16,000.00
$5,800.00
$232,000
Adult/Child
25
$20,000.00
‐‐
‐‐
Adult/Children
25
$21,000.00
‐‐
‐‐
Family
150
$34,000.00
$6,500.00
$390,000
TOTAL
$622,000
Bargaining Strategy: Use ACA Cadillac Tax Offensively
•
Carefully analyze impact of any contract that extends beyond
2016.
•
Why?
-
Remember the Status Quo obligation!
-
Cadillac tax does not take effect until 2018, but even if contract
ends at the end of 2016, you must maintain the status quo until a
new agreement/award is reached.
•
Consider other obligations and costs resulting from the ACA
(discussed later)!
•
You must put catch all Cadillac tax avoidance language in your
contract guaranteeing a reopener to avoid tax.
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Sample Cadillac Tax Avoidance Language
•
Patriot Township shall not be responsible for the payment of
any tax or other fee necessitated, caused or related to the
requirements of the Affordable Care Act or other federal, state
or local health care legislation.
•
Any and all payments of any such tax shall be the responsibility
of the bargaining unit.
•
Either party may reopen the contract and go to expedited Act
111 interest arbitration whenever health care costs are projected
to exceed the limits under the law for the imposition of the
excise tax (or “Cadillac tax”). Any such arbitration shall be
designed so that it is the arbitrator’s express duty to award
health care benefits that are below the limits of and not subject
to the Cadillac tax.
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Transitional Reinsurance Program Fee
•
Reinsurance fees to stabilize premiums in the individual market due to the
large number of high risk enrollees who will enroll in coverage
•
Applies to insured and self-insured plans
•
Applies to calendar years 2014-2016
•
•
Year
TRP Component
ERRP Component
2014
$10 billion
$2 billion
2015
$6 billion
$2 billion
2016
$4 billion
$1 billion
Assessment will be levied on a per-covered-life basis, calculated monthly
-
2014 contribution rate of $5.25 per covered life per month ($63/year)
-
2015 contribution rate of $3.67 per covered life per month ($44/year)
Double counting issues
Transitional Reinsurance Program Fee
•
Who calculates?
•
•
HHS, based on data submitted by plan
Who pays?
-
Insured plan: insurer
-
Self-insured plan: plan administrator (may elect to use a TPA to pay fee)
•
Exemption for self-insured, self-administered plans for 2015 and 2016
•
Reinsurance fee schedule
•
Must submit the enrollment count (the number of covered lives) by November 15
of the benefit year. Then there will be two installment payments:
-
1st installment: HHS will notify the contributing entity of the fee amount allocated to
reinsurance payments and administrative expenses for the benefit year. Contributing
entities will be notified by December, and the payment is due within 30 days.
-
2nd installment: In the 4th quarter of the year after the benefit year, HHS will notify the
contributing entity of the contribution amount allocated for payments to the U.S.
Treasury. This installment is due within 30 days after the notification.
PCORI Fee
•
Patient-Centered Outcomes Research Institute (PCORI) Fee
-
The PCORI fee is designed to fund research
-
Fee applies to insured and self-funded plans
•
-
Effective Dates
•
-
-
$2.00 per covered life ($1.00 in first year), as adjusted
Applies to plan years ending on or after 10/1/ 2012 and before 10/1/ 2019
Who pays?
•
Insurer pays fee for insured plan
•
Employer pays fee for self-funded plan
Report on Form 720 and payment due by July 31 of following year
BARGAINING IMPLICATIONS
Projected Cost Summary: Transitional Reinsurance and
PCORI Fees
•
A municipality with 300 employees that covers 1,000 lives under its health plan,
could see Transitional Reinsurance and PCORI fees in the neighborhood of
$145,000 between 2014 and 2019 (using a 9% annual trend increase)
•
When you add in the Cadillac Tax...the costs jump to almost $1.5 million
•
Does your CBA account for these fees?
PCORI Fee
YEAR
Risk Adjustment Fee
Cadillac Tax
TOTAL
Basis
Annual Cost
Basis
Annual Cost
Annual Cost
2012
$1.00
$1,000
‐‐
‐‐
‐‐
$1,000
2013
$2.00
$2,000
‐‐
‐‐
‐‐
$2,000
2014
$2.18
$2,180
$63.00
$63,000
‐‐
$65,180
2015
$2.37
$2,370
$44.00
$44,000
‐‐‐
$46,370
2016
$2.58
$2,580
$26.00
$26,000
‐‐
$28,580
2017
$2.81
$2,810
‐‐
‐‐
‐‐
$2,810
2018
$3.06
$3,060
‐‐
‐‐
$622,000
$625,060
‐‐
‐‐
‐‐
$677,980
$677,980
$1,299,980
$1,448,980
2019
Total
$16,000
$133,000
Waiting Periods
•
Waiting period
-
Period of time that must pass before coverage for an employee or dependent
who is otherwise eligible to enroll in the plan can become effective
•
All plans (regardless of employer size) must limit waiting
periods for eligible employees to a maximum of 90 days
•
Coverage may need to start mid-month (or a month early) to
avoid going past 90 days
•
$100/day penalty per affected individual if this rule is violated
•
Special rules
BARGAINING IMPLICATIONS
Coverage for Dependents to Age 26
• If your health plan provides coverage for children of employees,
those children must be offered coverage under the plan until the
day they turn age 26
• The child:
− Can be married or unmarried
− Does not need to reside with the parent
− Does not need to be enrolled full-time in a learning institution
− Does not need to be included as a dependent on parent’s tax
return
• Estimated cost to plan: $15.88 per employee per month
Preventive Care Coverage
•
The ACA requires plans to provide benefits for certain
preventive services at no cost to participants when services are
obtained from a network provider
-
Services with an “A” or “B” recommendation from U.S. Preventive
Services Task Force
•
-
Vaccines recommended by the CDC
•
-
•
Iron supplements for children
Certain women’s services listed in HRSA guidelines
•
•
Influenza, Hepatitis A, Hepatitis B, HPV, etc.
American Academy of Pediatrics’ Bright Futures guidelines
•
-
Aspirin to prevent cardiovascular disease
Anemia screenings, breast cancer genetic screenings, mammograms,
contraceptives
Before the ACA, many of these preventive care services were
not covered or required some cost-sharing
Estimated cost to plan: $4.01 per employee per month
Projected Cost Summary: Age 26 Coverage and Preventive
Care
•
A municipality with 300 employees that are covered under its health plan
could face approximately $77,000 more in costs between 2011 and 2019 due
to these two ACA requirements (using a 9% annual trend increase)
•
Does your CBA account for these fees?
PEPM
2011
2012
2013
2014
2015
2016
Dependents to Age 26
$ 15.88
$4,764.00
$5,192.76
$5,660.11
$6,169.52
$6,724.77
$7,330.00
Preventive Care
$ 4.01
$1,203.00
$1,311.27
$1,429.28
$1,557.92
$1,698.13
$1,850.96
2017
2018
2019
Total
$7,989.70
$8,708.78
$9,492.57
$62,032.22
$2,017.55
$2,199.13
$2,397.05
$15,664.31
Post Retirement Health
•
The mandate to provide health care does not apply to postretirement medical benefits.
•
However, once post-retirement benefits are provided, HCR
mandates regarding substantive benefits and any cost or fees
associated with health care plans apply to post-retirement
benefits as well.
-
Several significant taxes and fees will apply to retirees (e.g., Cadillac,
transitional reinsurance, PCORI, health insurance providers fee).
-
Remember these additional costs in bargaining
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Sustainability – Post Retirement Health
•
Show real cost of post-retirement health benefits by using your
GASB study effectively
•
Show spreadsheet of actual and projected costs for all retirees
•
If you are going to discuss unfunded OPEB liability as a real
cost that must be considered at the arbitration, you must:
•
-
Seriously consider setting up a post-retirement trust.
-
Highlight cautionary notes by financial advisors or bond rating
companies.
Propose elimination or post-retirement health benefits or that
officers contribute at least 25% of the post-retirement benefit
premium.
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Sustainability – Post Retirement Health
•
Propose spousal coordination
•
Propose officer must take health benefits from any postretirement employment
•
Coordinate with Medicare eligibility
•
Address additional costs
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Employer Mandate
Applicability and Penalties
•
•
•
Large employers must offer minimum essential coverage to its full-time
employees (and their dependents) or pay a financial penalty
-
Large employers have at least 50 full-time employees (FTEs)
-
Employer-sponsored plans, whether insured or self-funded, qualify as MEC
-
“Full-time” means employed, on average, at least 30 hours per week
$2,000 penalty/FTE
-
Employer does not offer coverage to 95% (70% in 2015) FTEs and dependents
-
At least one FTE obtains subsidized coverage through an Exchange (ignore the
first 30 FTEs (80 FTEs in 2015))
$3,000 penalty/FTE who obtains subsidized Exchange coverage
-
-
Employer offers health coverage, but it is unaffordable or inadequate
•
Affordable: EE’s portion of the premium must be < 9.5% of household income
•
Adequate: Plan must cover at least 60% of the employee’s costs
Cannot exceed what the $2,000 penalty would be for all FTEs
Volunteer Fire Companies and HCR
•
•
In 2013, politicians stoked the flames by questioning
whether volunteer fire departments would be covered by
HCR’s employer mandate.
-
The imposition of the mandate would have been crippling for
many municipalities.
-
Concern purportedly was based on the manner in which the IRS
treatment of volunteers as employees for some purposes.
The issue may have been moot from the very beginning
based on the requirements of the Affordable Care Act
itself, but the questions persisted.
Bona fide volunteers are not employees
Volunteers
• Hours worked by “bona fide volunteers” are
On-call Hours
Hours of service include on-call time if EE:
• is paid or entitled to payment for on-call time;
• must remain
on theisemployer's
premises while
Employer
mandate
not applicable
being on-call; or
• is subject
to substantial restrictions on the
January
1, 2016
activities he/she can perform while on-call
Employer
Sizeas “hours of service” for purposes Effective Date
not included
of the employer mandate
<50 full-time employees (FTEs)
50-99 FTEs
100+ FTEs
Januaryis1,
2015
Each hour for which an employee
paid
or entitled to
payment for (i) the performance of duties; and (ii) a period
of time during which no duties are performed due to
vacation,
sickness, incapacity, layoff, jury duty,
order for
an holiday,
•
Employed
on average
at least 50 but fewer than 100
military duty or leave
of absence
In
employer with 50FTEs during 2014;
Student
Employees • Did not reduce the size ofAdjunct
Facultyor hours of
its workforce
99 FTEs
to delay
between
2/9/14 must
and use
12/31/14
to bemethod
able toof
• Service performed by students underservice
federal or
• Employers
a reasonable
applicability of
advantage
of the hours
delay;of and
state-sponsored work-study programstake
are not
crediting
service for these employees.
included
as “hours of service”
for purposes
of
• 2¼ hoursoffered
of service/week
each hour
the
mandate,
it
• Maintained
previously
health for
coverage
forof
the employer mandate
teaching
or and
classroom
time (for calendar
its FTEs between
2/9/14
12/31/15
must certify to the
year plans). • 1 hour of service/week for each additional
hour outside of the classroom the faculty
IRS that it:
member spends performing required duties
IRS Clarification and saga ended
•
In January, the U.S. Treasury Department announced that
the final regulations for implementing the employer
mandate provide that bona fide volunteers for a
government or tax-exempt entity are exempted from being
counted as full-time employees.
•
This is what the ACA stated in the first place, but the
regulations are designed to remove any doubt about the
issues.
2014 HCR Landscape Changes
Health Care Delivery Systems
Is it time for your municipality to rethink how it provides
health care to its employees?
•
Eliminate health coverage and send employees to government
Exchange?
•
Purchase employer-sponsored coverage through a government
Exchange?
•
Purchase employer-sponsored coverage through a private
exchange?
•
Self-insure individually or through a group purchasing coalition?
•
EGWP vs. RDS subsidy for retiree prescription drug coverage?
Next Steps for Employers
Next Steps for Employers
•
Implement bargaining strategies to mitigate impact of taxes, fees
and penalties
-
Have legal counsel review your existing CBAs
•
Determine if you will be subject to the employer mandate (in 2015,
2016 and future years)
•
Analyze your workforce by looking at the hours of service
employees provide to your municipality
•
Keep up-to-date on your ACA guidance
•
Consider partnering with someone to keep you ACA compliant
Bargaining Hurdles in Chesco
•
New strategies are needed to address sustainability of
police salary benefits.
•
Victims of your own success! Arbitrators tend to
indirectly “penalize” municipalities in the Southeast that
have exhibited good fiscal management by awarding
higher wage and benefit packages because you can “afford
it.”
•
Union use the “good” awards or deals from municipalities
in your County or adjoining County to encourage and
energize the game of Act 111 leap frog.
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Chesco Hurdles (cont’d)
•
Uniformed personnel refuse to negotiate unless faced with
serious fear of continued employment or overwhelming
evidence of fiscal distress
•
Failure to educate the public by:
-
Highlighting high cost of uniformed personnel consistently
throughout the year as part of the budget process or any time cost
issues arise
-
Selling the case to the public by making information available
along with other economic data:
•
Posting the collective bargaining agreements of on the municipal
web site
•
Posting pension and benefit funding information on the web site
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Southeast PA Problems (cont’d)
•
Municipal fear of “going to arbitration” due to “cost” concerns
or because it will supposedly negatively impact “morale”.
•
Bad arbitrators go nuclear when combined with experienced
union counsel and inexperienced municipal counsel.
•
Lack of political will. The failure of elected officials to fully
educate themselves on the process, the issues and the real costs
of public safety salary and benefits.
•
Deals cut out of fear or arbitration or without realization of
costs involved.
•
Lack of long term vision or labor/bargaining strategy e.g. lack
of five year plan.
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How Unions “Win”
•
•
Union’s multi-pronged strategy includes:
-
Targeting municipalities that use solicitors or “labor” attorneys
inexperienced in Act 111
-
Picking a union friendly arbitrator to obtain a “run away” award
-
Capitalizing on municipal fears of Act 111 arbitration and the lack of
taxpayer connection between increasing taxes and public safety costs
-
Targeting elected officials who do not fully understand the true costs of
benefit increases even during the height of the economic crisis
Shopping the “runaway” award around and using it in that
County to argue that all other police units have “fallen behind”.
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New Strategies and Solutions
New Enhanced Strategies
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New Enhanced Strategies
•
•
Don’t be afraid to discuss or use the Big Guns – Nuclear
Options
-
Layoffs – Are your police really understaffed and overworked?
-
Going out of the police business
-
Regionalization
Only say it if you mean it...
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New Strategies - Compensation
•
•
Move away from a static snapshot of costs to fluid and
realistic projections and analyze impact on sustainability:
-
Emphasize sustainability by projecting all personnel costs into
the future
-
Contrast those costs with projected revenues and debt service
Effectively highlighting true salary costs by including:
-
The value/cost of pension benefits in a present day cost,
-
current and post-retirement health care, in a present day cost
-
Other accrued benefits in terms of present day costs
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New Strategies – Compensation (cont’d)
•
Show W-2s of all officers
-
•
Consider more aggressive use of highly compensated officers’
W-2 earnings by referring to such earnings directly at strategic
points in the arbitration
Highlight value of overall compensation package:
-
Show present day value of an officer’s current health care
benefits, pension, and post-retirement health care benefits by
adding such costs to current W-2 wages.
-
Consider utility of percentage of payroll figures from GASB and
pension cost studies to calculate cost of pension and post-retirement
health care benefits
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New Improved Compensation Model
•
Show actual pension benefit alongside cost of post retirement health costs for retiree.
Also show ages of officers retire and how long pension benefits last. E.g.
$2,000,000 benefit payable for 30+ years.
-
•
Highlight the time span legacy costs will remain an obligation of the
Township
But what about the “I paid for that benefit” argument!
-
To combat this argument, show actual officer contribution as compared to the
projected lifetime value of pension
-
Example, $50,000 contribution over twenty-five year career for a lifetime
$2,000,000 pension benefit)
-
Also consider showing the amount the municipality paid for the benefit
(Consider utility of using state aid contributions vs. just general fund
contributions.)
-
We must do a better job in presenting the true cost of police salary and benefit.
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Pension Liability
•
Need to address pension liability. Even if your plan is “fully
funded”, pension obligations should be addressed.
-
-
Do not be fooled by the argument that the “stock market has recovered”
or “the pension plan is now 90% or 100% funded.”
•
If the stock market is booming, your plan should be at least 100% funded
or over funded to be able to withstand a down market.
•
Most of your current plan problems now are due to false FOP arguments
during the stock market boom of the 1990’s, that pension enhancements
would not cost anything.
Focus should be on pension liability and potential future cost increases
•
Show MMO projected increases/scenarios based upon various
contingencies and circumstances (e.g., impact of one or more disabilities)
•
Show fallacy of pension return projections.
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Pension Liability
•
Review pension ordinance and pension calculations to
address potential problem areas, such as:
-
Factors that allow or contribute to spiking;
-
Consistent or “base” member contribution, which can be
increased but not lowered depending on municipal contribution;
-
Are superannuation (age/service) criteria too low;
-
Disability benefit percentage;
-
Impact of other optional benefits such as service increment and
COLA
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Pension Liability
•
Develop new “base” pension plan which has no optional
or enhanced pension benefits for new hires
•
Review actuarial assumptions. Discuss possible changes
with plan actuary
-
Determine impact on funding obligation and compare to long
term benefit;
-
This type of decision is typically a management prerogative.
However, you should review possible changes and strategy with
labor counsel in order to deal with potential objections from the
union.
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Make a Plan and Stick to it
•
Change takes time. Necessary changes will not be obtained in
one contract negotiation or Act 111.
-
•
Distinguish proposals from reasonable expectation when
discussing issues with elected officials. Make all of the
necessary proposals, but you should not expect it all to happen at
once, unless you are severely fiscally distressed.
Draft a 5-year fiscal projection or plan and stick to that plan.
-
Use plan in arbitration to highlight your concerns and to show
that the Township takes these fiscal issues seriously.
-
Lack of a plan shows lack of direction and gives the arbitrator an
easy out to reject you proposed changes.
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Touching the Third Rail
•
•
Consider making better use of crime statistics
-
Should we use crime stats to show that police in some of PA’s
safest communities are paid the most?
-
This can be a double edged sword.
-
The police will use them in some way, so be prepared to do so in
a more thorough and analytical manner.
Should communities in southeastern Pennsylvania
compare their crime stats to Philadelphia and other high
crime Cities where officers are paid less?
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Working Together
•
COGS
•
S.E. Groups – BCATO, CCATO, MCATO etc.
•
Educating Elected Officials.
•
-
Your elected officials should be educated about labor issues and
labor costs periodically.
-
Don’t wait until negotiations to educate elected officials.
Intervention with outlier municipalities?
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Act 111 Trends: Don’t go backwards
•
Municipalities must maintain the momentum of the past
few years.
•
Over the past few years, emphasis has not only been on the
need to save money in a down economy, but on changing
the focus of negotiations and Act 111 from comparable
data and wages to affordability/sustainability.
•
Key now is sustainability. Wages and benefits are more
than fair and reasonable for most public employees.
•
Costs continue to increase and revenues are still not what
they used to be pre-great recession. Sustainability remains
the issue.
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Lessons Learned
•
Need to continue to focus on costs, revenues and
sustainability.
•
Move from static snapshot of costs to realistic projections,
present day value/costs of benefits and analyze impact on
sustainability.
•
Learn from the past. There have been too many down
turns with significant financial impacts to ignore
sustainability issues.
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