Editor: Please share with us your professional background.
McLafferty: I have over 20 years of health care industry experience. I’ve been with EisnerAmper for 14 years, where I’m the lead partner in the Health Care Services Group.
Most recently, we’ve put a team together to give presentations on the Affordable Care Act (ACA) for Chambers of Commerce and other organizations throughout the region, and I can say with assurance it’s a topic of considerable interest. I’ve discovered there’s a tremendous amount of confusion in the marketplace about the ACA.
Editor: Let’s start with the individual mandate in the Affordable Care Act. Tell us about the potential penalties.
McLafferty: Basically, the government is attempting to get as many people from different demographics into the insurance pool as soon as possible. The more younger and middle-aged people in the pool, the more reasonably priced the premiums will be, because older individuals require more services. Much of the government’s recent marketing effort has been around getting individuals to realize they need to get coverage.
While there have been changes to the deadline many times on the employer side, the individual mandate (IM) started January 1 of this year; the deadline to enroll is March 31, and that hasn’t changed. The IM applies to every U.S. citizen and legal resident currently living in the United States, and there is a potential penalty if you don’t get insurance. Individuals without insurance who fail to enroll in a plan will have to pay a penalty of $95 for the calendar year 2014 or 1 percent of their income, whichever is greater. The penalties are phased in through calendar year 2016, at which time the flat amount will be $695 or 2.5 percent, whichever is greater.
During our presentations, we stress that this payment is a penalty and not a substitute for an insurance premium.
The initial data indicates that people who need medical services the most are typically the first to sign up for any kind of insurance coverage. Most of the literature suggests that as we get into calendar 2015 and coverage starts to become more routine, younger people will realize they might as well get coverage rather than pay a penalty.
For families, the maximum penalty is three times the flat dollar amount for an individual, which continues through 2016. Eventually, the overall limit for a family reaches $3,500 – equivalent to a bronze plan premium.
Editor: Is there a potential tax credit as well?
McLafferty: For individuals whose income ranges from 100 to 400 percent of the federal poverty level ($11,490-$45,960), a schedule has been set up listing the maximum premiums that will be paid at each income level. For example, if your income is between 100 and 133 percent of the federal poverty level, when you enroll on your state exchange you will receive a tax credit on any yearly premium that is equal to 2 percent of your income. The more money you make, the smaller the amount of the credit, which phases out once you go beyond 400 percent of the federal poverty level. The state exchanges are targeting low-income Americans who do not have access to insurance.
Editor: What is the large employer mandate?
McLafferty: There has been a tremendous amount of lobbying going on in this arena, as you know. The large employer mandate (LEM) scheduled to start on January 1, 2014, and now enforceable on January 1, 2016, requires employers with 50 or more full-time equivalent (working an average of 30 hours a week) employees to offer insurance to those employees and pay at least 60 percent of their premiums. Assume you and I have a business together with 70 employees. If we are not offering insurance to anyone, the penalty would be equal to $2,000 per full-time person beyond the first 30, so in this case $2,000 x 40. This amounts to approximately $6,706 a month. At some point, we’d have to make some decisions as employers.
Let’s say we’ve got insurance for everybody at our firm, but we only cover 50 percent of the cost (here, insurance is “underfunded” by employer), or the premiums that the employees pay are greater than 9.5 percent of their income (insurance is “too expensive”). In either case, employees can visit a state exchange to see if they qualify for a premium credit, and we would have to pay a $3,000 penalty for the year for each employee who qualifies.
There was a recent modification to the LEM for the calendar year 2015. For employers with 50 to 99 full-time equivalents (FTEs), the LEM will not apply, assuming the employer did not reduce his/her workforce purposely to below 100 FTEs. An employer with 100 or more FTEs in calendar year 2015 is covered by the LEM. However, if 70 percent of the FTE employees have insurance coverage, the employer can avoid the LEM.
Starting in calendar year 2016, the initial 50 or more FTE rules go back into effect.
I find it interesting that in every Chamber of Commerce meeting where I presented the ACA, at least two employers raised their hands enthusiastically to say they would just cancel insurance for everybody because $2,000 per employee is much less than they paid for insurance. My response is that they should keep their competitors in mind. Do they offer insurance? If so, if you want to keep your people, there will be pressure on you to raise your employees’ salaries so they can enroll on a state exchange. Most people were surprised by my answer – and it surprises me to see that so many in the audience tend to address this issue strictly in terms of dollars and cents, without considering the implications for their workforce.
Many small employers – both those with fewer than 50 employees and those with more – are having issues affording health insurance for their employees. A number of programs are being set up that will enable small business owners to form groups that can purchase insurance as one larger employer, allowing them to get better rates then they could on their own.
Editor: What is ACA’s impact on the health care industry?
McLafferty: The health care industry is going through some significant changes. Insurers are under a lot of pressure to reduce their costs and come up with new payment models because there is a movement towards paying for quality of medical services with reduced costs and away from the current system, which is basically fee for service, pay for volume – i.e., the more visits and the more procedures you bill, the more money you make. Instead, Medicare and many of the large private payers are now saying they need to pay health care providers based on outcomes and quality of services, and this is reverberating throughout the industry. As a result, we are seeing a tremendous amount of consolidation in health care right now. At EisnerAmper, we’re starting our eighth year of M&A advisory services for the sector.
A lot of physician organizations have joined health systems. We’ve been representing health systems and physician organizations in M&A agreements throughout the region, and the activity levels have really picked up. Recently, large specialty physician groups have expressed interest in joining systems, which is an enticing proposition for both sides. The doctors gain security regarding their compensation, while the health systems can potentially capture a lot of surgical procedures, which can be very profitable.
Most of the cost-saving models the large systems are built on are what’s called “shared savings,” which largely accrue from keeping people out of the hospital. To that end, a large health system must have a large number of outpatient physician organizations offering home health, physical therapy, sub-acute care and all the other services along the continuum of care for patients outside the hospital setting. The money is quickly moving away from inpatient care, which is a big concern for hospitals. According to a study by The Advisory Board, the next five to ten years will see a 1 percent or less growth of discharges on the inpatient side. When you consider that the baby boomers will be retiring during this time, this very low growth rate speaks to the fact that people are increasingly using outpatient settings for care.
Editor: What is an Accountable Care Organization (ACO)?
McLafferty: An ACO is a new business model whose goal is to reduce costs and increase the quality of medical services. The first model that extends nationwide at the moment is the Medicare Shared Savings Program (MSSP). As the name implies, the only organization working with ACOs currently is Medicare. Through the MSSP, ACOs agree to handle a minimum of 5,000 Medicare beneficiaries, and they only profit from them if they are able to save money above a cost reduction target they negotiate with the local Medicare regional office. ACOs also must follow the guidelines Medicare requires of them. Most health systems in the Northeast have created Medicare ACOs, but they’re getting off to a very slow start implementing this new business model.
According to a recent survey of CEOs in hospitals around the country, of about 5,000 hospitals that treat Medicare patients nationally, only 17 percent of the CEOs claim to be interested in starting an ACO, largely because they are very expensive to set up in terms of infrastructure, especially with material IT investments. Not only are the profits small, but determining them requires many negotiations with Medicare beyond the initial agreed-upon targets, as Medicare has already suggested it will raise cost reduction targets if an ACO hits its first target. There’s currently a pilot program of 32 Pioneer ACOs, and the good news is that almost all of them have improved quality of care. The bad news is that only about 9 of them have saved costs, and I think the main reason for this is a significant issue that nobody’s talking about, and that’s tort reform. It’s hard to blame physicians who order expensive tests that may not be necessary. Without evidence-based protocols in place and without a cap on damages, they’re probably going to order additional diagnostic tests in case the medical services provided do not meet a patient’s expectations.
Editor: Please give us an overview of the state exchanges (SEs).
McLafferty: Basically, the SEs are insurance shopping centers offering different products from a number of insurance companies. All products on SEs must offer a list of “essential benefits” classifying them as bronze, silver, gold and platinum.
States could set up exchanges in one of three ways. They could have the federal government set up the SE; the states could partner with the federal government; or a state could set up an exchange entirely on its own. New York created its own exchange, and most of the feedback has been positive. The states that seem to have the most problems are those that asked the federal government to create their exchanges. A good example of that in the Northeast is New Jersey.
What are most exciting are large benefit organizations that are setting up private exchanges. These large, for-profit insurance or benefit companies are setting up shopping centers online, and starting in 2015, more companies will be using them to get coverage for employees. Wal-Mart recently joined a private insurance exchange. The state exchanges are there for the people who don’t have access to insurance or can’t afford it, but people who have the funds, are working for large employers or are self-insured will be looking at these private exchanges.