The IRS has significantly increased the group health plan affordability threshold — which is used to determine if an employer’s lowest-premium health plan complies with the Affordable Care Act rules — for plan years starting in 2025.

The threshold for next year has been set at 9.02% of an employee’s household income, up from 8.39% this year. The higher threshold will give employers a little more wiggle room when setting their workers’ premium cost-sharing level for their lowest-cost plans in 2025, to avoid running afoul of the ACA.

Under the ACA, “applicable large employers” — that is, those with 50 or more full-time or full-time equivalent employees (FTEs)— are required to offer at least one health plan to their workers that is considered “affordable” based on a percentage of the lowest-paid employee’s household income.

If an employer’s plan fails this test, it will be deemed as non-compliant with the law, resulting in hefty penalties for the employer.

The new threshold will apply to all health plans whenever they incept in 2025. The affordability test applies only to the portion of premiums for self-only coverage, and not for family coverage.

Also, if an employer offers multiple health plans, the affordability test applies only to the lowest-cost option that provides also minimum value (another ACA plan metric).

Calculating

Employers can rely on one or more safe harbors when determining if coverage is affordable:

• The employee’s most recent W-2 wages, as reported in Box 1.
• The employee’s rate of pay, which is the hourly wage rate multiplied by 130 hours per month (at the start of 2022).
• The federal poverty level.

Employers with a large low-wage workforce might decide to utilize the federal poverty level ($15,060 for 2024) safe harbor to automatically meet the ACA affordability standard, which requires offering a medical plan option in 2025 that costs your full-time employees no more than $113.20 per month.

If an employee’s coverage is not affordable under at least one of the safe harbors and at least one FTE receives a premium tax credit for coverage they purchase on an ACA exchange, the employer may have to pay a penalty, known as the “employer shared responsibility payment.”

The shared responsibility payment for 2025 will be $4,350 per employee that receives a premium subsidy on an exchange, down from $4,460 this year.

The takeaway

As 2025 nears, you should review your health plan costs and premium-sharing to ensure that your lowest-cost plan complies with the affordability requirement.

We can help you assess affordability to ensure you don’t run afoul of the law. It will be particularly crucial in 2025, considering the significant change in the threshold.

New Centers for Medicare and Medicaid Services rules that take effect Jan. 1, 2025 will significantly affect employees’ decisions on whether to continue staying with your group health plan while eligible for Medicare.

Under changes in Medicare Part D drug plan rules for 2025, once a beneficiary pays more than $2,000 out of pocket for prescription medications, Medicare will fully cover their prescription costs for the rest of the year.

Due to the rule changes, if your drug plan’s maximum out-of-pocket employee cost-sharing surpasses that amount it will not be deemed “credible” under CMS rules, and that would have long-term repercussions for your senior employees.

Why? If someone doesn’t purchase a Part D plan when they are first eligible for Medicare, they will face a 10% penalty on their annual premiums in perpetuity. That penalty increases for each year they fail to enroll in a Part D plan. 

There is a provision in the law for Medicare-eligible workers to stay on their employer’s group health plan if that plan provides at least as thorough a level of coverage as Medicare does. Those that do are considered “credible” coverage.

However, if an employee’s plan does not meet the new Part D rules, it may be considered “non-credible” and they would be subject to Part D penalties for failing to enroll in a credible plan.

What you should do

Employers are required to inform affected employees if their plan is credible or non-credible before Medicare Annual Open Enrollment starts on Oct. 15. This way, the worker is given time to elect or decline Medicare Part D coverage based on their employer’s group benefit plan’s prescription benefits and avoid possible penalties. You can find templates of those notices here.

If your current plan doesn’t meet their needs, please contact us to discuss strategies for designing one that caters to affected workers and fits with your company needs and budget. The second option is not to make a change, and to inform your Medicare-eligible staff that your plan is non-credible.

Finally, you should hold a meeting with affected staff to inform them of the changes and if any of the plans you offer comply with the new rules.

Call us so that we can gauge if your health plan, or plans, offer credible or non-credible drug coverage for your Medicare-eligible staff.

Inflation, an aging workforce and people catching up on care they skipped during the COVID-19 pandemic are some of the main ingredients that will drive the cost of group health benefits over the coming years.

The key for employers grappling with these higher costs is how they can reduce their impact by switching up plan offerings and choosing plans that do a good job of managing specialty drug costs, which have been spiraling over the last decade.

Health spending dropped considerably in 2020 and 2021 as people stayed away from health care environments, but now people are back seeking care that was delayed. That’s caused a sudden spike in claims for health plans across the board.

Also, more health plans have boosted their mental health offerings, which patients have been taking advantage of, leading to further outlays, according to a recent report by Marsh McLennan Agency.

While there is not much employers can do about rising premiums, a combination of measures could help businesses defray cost increases in the near term.

Compare insurance plans and providers

If you’ve been offering the same plans every year, we can work with you to compare providers to see if there are better deals for you among their competitors.

Also, plans can vary greatly among insurance plans and each insurer will have different deals to offer. Even your current slate of insurers may have plans that you are not offering.

We can help you cut through the noise and find plans that may be a better fit for your organization.

It is important to keep in mind that a lower premium does not mean it’s the best deal. Some lower-cost plans may have narrower networks, which could result in some employees losing access to their regular doctors.

That said, there’s been a trend towards so-called “high-performance,” narrow provider networks that aim to reduce costs while maintaining efficiencies and quality of care.

Other cost-saving measures

Insurance carriers have been trying out new approaches to controlling costs, while improving health outcomes for their plan enrollees. Money spent up front on quality health services can yield future savings if the patient needs less treatment.

Some insurers and self-insured employers have been able to generate savings of 5 to 15% by employing:

Tiered networks — These health plans sort providers into tiers based on their cost and, often, quality relative to other similar providers who treat comparable patients. Providers with higher quality and lower cost are typically given the most-preferred tier rankings.

Centers of excellence — Many self-insured employers and more health plans are also contracting with “centers of excellence.” While there is no specific definition of a COE, these providers deliver positive patient outcomes, lower costs, raise member engagement and have high rates of patient satisfaction.

Often, an OEC may have a specialty, like a chronic disease or a specific service such as radiology. Working in tandem with a clinical analytics vendor, payers will connect members with health systems that demonstrate high performance in these areas.

Referral management — More health plans are also starting to use referral management software to improve efficiency and trust in care coordination.

These systems synchronize patient data transmission from one physician to another, and also to the patient. A referral management system aims to facilitate good communication between the consultant, specialist, health care provider and the patient.

The system increases trustworthiness and transparency of treatment and diagnosis, and decreases inefficiency in care coordination and operational arrangements.

The above measures can be applied across the care continuum — hospitals, primary care, specialty groups, post-acute providers and ancillary care — while maintaining access and quality of care.

The takeaway

Getting the cost equation right will be a challenge in the coming years as premiums are expected to rise at a faster clip than they have been in the last five years.

Talk to us about finding health plans that are offering different structures for addressing costs while also improving care for your workers.

The health care sector is not immune to the effects of spiking inflation, and the increasing cost of care is likely to spill over into health insurance — but it’s uncertain by how much.

Mid-year is the time that health insurers start setting their pricing for the upcoming year, and they are currently locked in what one trade publication calls “bloody” contract negotiations with doctors and medical networks to secure the highest prices they can for their services.

Hospitals and medical services facilities such as labs and imaging centers, like other employers, have to contend with the volatile job market and the spiking cost of supplies and machinery.

But the effects on health plans are still unclear as insurers can reduce the impact of higher costs by paring down networks, scaling back some benefits. This may be the case for smaller insurers that have less clout than their larger counterparts, but experts say that inflation will have a greater effect on rates than in recent years.

Add to the equation recent interest rate hikes by the Federal Reserve, which will increase health systems’ borrowing costs and even impede funding for new capital projects.

When they negotiate network rates with insurers, providers take into account all of their own costs when tabulating their offers.

Using spiking inflation as leverage

The trade publication Modern Healthcare noted in a recent report that escalating costs have already influenced contract negotiations between medical providers and insurers.

According to Modern Healthcare, providers that are currently in negotiations “can use inflation as leverage, given that physician groups’ and hospitals’ daily operations are tied to the rising cost of gas, food and other goods.”

It predicts also that providers will argue that more people will forgo or delay care as inflation eats into their expendable income, which in turn will increase the cost of care in the long run as those untreated issues develop into serious ailments.

Medical providers and insurers usually negotiate new contracts every three years, so those hospitals and doctors that renegotiated last year or in 2020 will have to absorb their higher costs. Inflation is already built into these contracts, which didn’t anticipate the higher levels we’ve witnessed in 2021 and 2022.

That leaves them in a bind since insurers won’t be willing to renegotiate contracts that include provisions offsetting higher-than-expected inflation.

It’s due to these pre-negotiated contracts that employers didn’t see a surge in their premiums coming into 2022. But that may change as new contracts come into effect.

While the industry was not terribly affected by inflation in 2021, recent data suggests it’s starting to hit health care providers.

Hospitals’ average labor expense per adjusted discharge in March 2022 rose 15% from the same month in 2021 and 32% from 2020, according to the Kaufman Hall “National Hospital Flash Report.”

Meanwhile, providers are paying more for supplies and equipment, as well. Non-labor expense per adjusted discharge rose nearly 26% compared with February 2020.

How will my premiums be affected?

The big question of how much of these increased costs hospitals and other providers will be able to pass along to health insurers and patients remains. For certain, inflationary pressures will be a topic of discussion during contract negotiations for 2023.

While rates for group health plans are still being set, many carriers have already filed 2023 rates for plans they sell on Affordable Care Act marketplaces. Average rate hike filings for 2023 have been hovering around 7.5% in mid-2022.