- Uncertainty about federal changes affecting the Affordable Care Act (ACA) has spurred state-level efforts to structure and stabilize their health care markets.
- Last week, New Jersey established its own individual mandate, and is similar to the rules contained in the current federal individual mandate.
- There are similar efforts in many other states, but the process can be long and arduous.
- Employers should pay close attention to labor market demands for health insurance benefits.
The uncertainty about the federal changes affecting the ACA’s future has prompted state-level efforts to address potential detrimental effects on state health markets. States are now focusing on ways to structure, stabilize, and improve their health care markets in their area.
The most recent example occurred last week when New Jersey governor Phil Murphy signed into law a state requirement that individuals maintain adequate health coverage, qualify for an exemption, or pay a penalty (commonly referred to as an individual mandate). The requirement is effective beginning in 2019, which coincides with the penalty under the federal individual mandate contained in the ACA being reduced to $0 and essentially negated.
Generally, the New Jersey mandate directly links to the rules contained in the current federal individual mandate under the Internal Revenue Code 5000A. This includes the penalty amount as the greater of:
- 2.5 percent of modified adjusted gross income, or
- $695 (adjusted for inflation): half the amount per child, capped at three times the threshold regardless of family size or $2,085 (adjusted for inflation).
Note that the penalty amount in the federal law is capped at the annual premium for the national average for bronze-level plans. However, the New Jersey law modifies this to be capped at the state average for bronze-level plans.
Unanswered questions and infrastructure complexities
It appears New Jersey’s general intent was to continue the federal individual mandate after the penalty is negated at the federal level. In fact, the legislation even contained a clause that ensures that the New Jersey penalty factors in if a different federal Congress reinstitutes the federal penalty. In that case, the New Jersey penalty would be reduced by the federal penalty.
However, even if the state simply wanted to maintain the current federal mandate for its health market, the state cannot simply repurpose the federal infrastructure to support its mandate. As a result, the state must rebuild the constructs in its geography. That’s where this mandate can get more costly and complex.
Questions that remain unanswered include, but are not limited to:
- What hardship exemptions qualify?
- How does the individual qualify for the particular exemption?
- What’s the threshold for unaffordable coverage for the purpose of an exemption, and how is that adjusted for inflation each year?
- What will enforcement and reconciliation on New Jersey tax returns look like?
One important item, particularly for self-insured employers, is around filing requirements. New Jersey will require plan sponsors and insurers to file information about the individuals covered by their plans similar to what is currently done on 1095-B or 1095-C (for self-insured applicable large employers). However, the IRS is not necessarily going to continue the filing requirements for the federal individual mandate if there is no value to filing without a federal individual mandate penalty. That means that New Jersey cannot rely in the long-term on repurposing the federal form to support filing. The state will need to determine how to most efficiently get this information and process it. It is unknown at this juncture what specifically this will entail. This is true with any state that wishes to maintain the current federal mandate; they must build significant infrastructure to support these efforts. Filing could look different from state to state, making it more difficult for multi-state self-insured employers and insurers to comply.
Other states’ Individual mandates
New Jersey becomes the second state with an individual mandate, preceded by Massachusetts’ individual mandate formed in 2006, which predated the federal requirement under the ACA. The Massachusetts requirement is generally more stringent and robust than the current ACA requirements to maintain coverage.
Earlier last week Vermont’s government signed an individual mandate requirement that will take effect in 2020. However, many of the constructs of how the mandate will function have been pushed to a later date, including the penalty/enforcement mechanism. The statute requires that the penalty or other enforcement mechanism be enacted in the 2019 legislative session to allow individuals to assess the impact before open enrollment season for 2020. If the legislature is unable to flesh out and enact this mechanism in 2019, the individual mandate may not be functional in 2020. Many of the important details on how the Vermont mandate would function are unknown at this juncture, leaving its fate unresolved.
The structure and economic impact of these mandates can vary widely depending what is actually contained in each policy. As always, the devil’s in the details.
Legislation to stabilize individual markets
Governor Murphy signed into law the New Jersey Health Insurance Premium Security Act, which is meant to establish a reinsurance fund in the state utilizing the state innovation waivers (Section 1332) under the ACA. New Jersey would need to apply to the U.S. Secretary of Health and Human Services (HHS) to access the federal funds to fund the reinsurance program. Other states such as Alaska, Minnesota, and Oregon have already attempted to use these waivers to support their state reinsurance programs. However, the process can be long and arduous, and the result is not guaranteed.
Impact for employers
The Congressional Budget Office (CBO) has estimated that negating the individual mandate penalty would save $338 billion over 10 years, but more than 13 million people would lose health insurance by 2027. Premiums in the individual market would surge an average of 10 percent a year, as it is anticipated that a greater number of healthier individuals will leave the individual market. This is because there is less of an incentive for healthy people to remain in the individual market as they can enter the individual market the following year without consequence should they need medical care. This is due to the fact the individual market reforms went to modified community rating (excluding health factors in underwriting) and guarantee issue. In other words, insurers cannot refuse to cover individuals with a pre-existing condition.
Essentially, states proposing their own individual mandates are meant to ensure healthier people in the insurance pool with the intent on keeping the premiums down in the individual market. This is the same intent as reinsurance programs. In the case of the individual mandate in New Jersey, the state is attempting to help keep down the premiums in the individual market as the federal government removes their policy guardrail. Small employers and entrepreneurs typically are more directly impacted by what happens in the individual market.
While these policies generally do not directly impact an employer’s need to offer health insurance benefits, there will be a distinct indirect impact. A state individual mandate in particular, depending how economically impactful the mandate is, may lead to an increased demand from the workforce to have coverage through the employer. As the labor market tightens in many areas, it may be more important to offer health insurance benefits in these markets where demand for employer coverage has increased to attract and retain top talent.
Employers should stay tuned to the changing requirements in their geographies that they are responsible for, such as filing requirements. They should also pay close attention to the labor market’s demands.