Moving Sick Workers to Public Exchanges Raises Red Flags 

There have been more than a few stories in the media lately about the possibility of employers giving their sickest workers incentives to leave the employer health plan and enroll in a plan through the public exchange. Patients with chronic illnesses, major procedures, and expensive drug therapies drive up the cost of health care for everyone, and certainly so for employers — particularly large, self-insured ones, for which shifting even one high-cost employee could translate into a savings of hundreds of thousands of dollars.

Not surprisingly, there are serious business and legal implications that employers should investigate carefully before considering such a strategy. Here are a few of the options being talked about — and the biggest red flags getting waved in response.

1. Offer less-appealing health plan coverage so that high-utilizers of health care will consider other public or private health plan options.

Employers looking to give high-utilizers reasons to seek coverage elsewhere will need to be sure their actions aren’t deemed discriminatory against a specific individual — by eliminating coverage for a particular high-cost drug on which only one or two employees currently rely, for example.

And less-appealing health plan coverage, whether through a more restrictive drug formulary or narrowing of network providers, potentially impacts an employer’s ability to attract and retain employees.

2. Identify employees with high medical-claim expenses and offer them additional compensation to enroll in a different private or public health plan option.

Foremost, HIPAA prohibits an employer from using medical claims data to identify employees based on health conditions disclosed therein. In addition, actions could run afoul of discrimination laws and/or trigger a separate lawsuit if other employment issues can be linked to the employee’s medical condition and related offer.

The offered compensation may result in “constructive receipt” (even if not taken), creating additional taxable income for the employee. And keep in mind the timing of public exchange open enrollment (barring some other special enrollment event triggering eligibility to elect coverage outside of open enrollment) creating additional administrative considerations.

3. Use opt-out credits as a strategy to draw employees to the public exchanges.

Regulators are still considering how opt-out credits will impact calculations for “affordability” of the medical plan option as defined by ACA standards. Specifically, the jury is out on the extent to which money paid to employees via salary reductions and/or opt-out credits will affect the requirement that they pay no more than 9.5% of household income toward individual coverage. Until we have further guidance, this strategy may be risky.

Medicare secondary payer rules may be a concern if opt-out dollars are targeted to specific populations (i.e., disabled individuals), as employers are prohibited from incenting employees to decline enrollment in an employer plan in favor of Medicare, unless such option is made broadly available to the entire employee population.

4. Offer to buy the targeted worker a high-benefit “platinum” plan in the public marketplace.

An IRS ruling effective for 2014 prohibits arrangements whereby an employer directly pays for individual major medical coverage (in addition to prohibiting pre-tax reimbursement arrangements through a cafeteria plan or HRA). Disregarding these rules may subject employers to a tax penalty of $100 per participant, per day (or $36,500 per year) in addition to other possible penalties under health care reform.

Before making any changes, employers should become very familiar with the most effective and legal ways to leverage the public exchanges to best control costs and provide needed coverage for their employees. Missteps may result in unintended penalties and unwelcome legal battles.