Two Strategies for Controlling Health Care Costs Could Lead to ACA Penalties

Author: Gloria Ju

November 14, 2014

New FAQs issued by the US Department of Labor (DOL) clarify that utilizing either of the following strategies to save on health care costs could result in Affordable Care Act (ACA) penalties:

  • Reimbursing employees who purchase individual health insurance coverage; and
  • Providing cash incentives to employees to drop employer health coverage for individual coverage.

Under the first strategy, an employer drops group health coverage and instead makes arrangements to reimburse employees for the cost of individual coverage. The DOL said such payment arrangements are "part of a plan, fund or other arrangement established or maintained for the purpose of providing medical care to employees," which must conform to the ACA's market reform provisions (e.g., free preventive care, no annual or lifetime limits). According to the DOL, these arrangements cannot be integrated with individual market policies to satisfy the market reforms, triggering penalties under the ACA's employer shared responsibility (or pay or play) mandate. It does not make a difference whether the employer treats the payments as pre-tax or post-tax to the employee.

Under the second strategy, an employer offers employees with high claims risk the choice between enrolling in the employer's group health plan and taking cash. This strategy, said the DOL, violates various statutory prohibitions against discrimination based on one or more health factors, regardless of whether:

  • The employer treats the cash payment as pre-tax or post-tax to the employee;
  • The employer is involved in the selection or purchase of any individual market coverage; or
  • The employee obtains any individual health insurance.

While the government allows more favorable rules for eligibility or reduced premiums or contributions based on an adverse health factor (referred to as benign discrimination), offering only employees with high claims risk a choice between coverage and cash fails to qualify as benign discrimination for two reasons, according to the DOL.

First, the opt-out offer does not reduce the amount charged to the employee with the adverse health factor. Rather, a high-claims-risk employee must effectively contribute more to participate in the group health plan than others because the employee must accept the cost of declining the cash in order to elect plan coverage.

Second, the cash incentive discourages participation in the group health plan. Therefore, this is not benign discrimination that helps individuals with adverse health factors to participate in the health coverage being offered to others.

The DOL said it intends to initiate rulemaking in the near future to clarify the scope of the benign discrimination provisions.