The Patient Protection and Affordable Care Act (ACA) is up and running, but its effects remain to be seen. One unanswered question is how the ACA will affect health care reimbursement claims in tort cases.
Many working Americans receive health coverage through their employers, and the vast majority of nongovernment employer plans are governed by the Employee Retirement Income Security Act (ERISA). It is possible that the ACA will change the system so that a much larger percentage of working Americans will not be covered by group plans tied to their employer—and therefore will not be covered by ERISA. Instead, employees will have individual coverage tied to them personally. That should mean that plaintiffs in health care tort cases will be able to retain more of their settlements.
What does the ACA do to health care subrogation and reimbursement claims? Nothing and everything. The act does not have a subrogation or reimbursement provision, and it does not address the legal issues in any substantive way. But if it fundamentally shifts the manner in which most Americans receive their health care in the way that I believe it will, it could virtually eliminate the draconian impact of the last decade of pro-employer ERISA jurisprudence. Decisions such as Sereboff v. MAMSI1 and U.S. Airways v. McCutchen2 have given employers carte blanche to write reimbursement provisions that allow an employer’s plan to take every penny of a tort recovery under any and all circumstances.
Public and private health plans
Many lawyers mistakenly assume that unless a plan is publicly funded and administered (through Medicare, Medicaid, or Tri-Care, for example), it is probably subject to ERISA. This assumption is incorrect, and the changes the ACA is bringing about will exacerbate the dangers of that assumption. Now more than ever, lawyers cannot assume that just because a plan is administered by a private company like Aetna or Cigna, the plan is subject to ERISA. Why? Because ERISA governs only group plans sponsored by private employers; it does not govern individual plans. Even though these companies undoubtedly will cover more Americans as a result of the ACA, fewer of those covered will actually be participating in group plans.
A prudent lawyer must scrutinize his or her client’s coverage to determine not only whether the plan is public or private, but also whether the coverage is group or individual. Because individual coverage is not subject to ERISA, such plans cannot use federal preemption to their benefit. Further, subrogation and reimbursement recovery vendors probably will not provide this information unless they are specifically asked to, because they have an incentive to maximize recoveries.
As participation in individual health insurance plans increases and participation in group plans decreases, the percentage of people subjected to ERISA’s draconian reimbursement jurisprudence will decrease. This shift also means that state law, which has traditionally been much friendlier to tort victims in this context, will apply in more cases. At some point, the vast majority of Americans may secure their coverage through the individual market. Health coverage would be tied not to the employer but to the individual employee, similar to the way the traditional defined benefit system of decades ago was replaced with the more modern 401(k) system.
Recent data shows that 220 million Americans under the age of 65 have some form of health benefit coverage and that 156 million (58.5 percent) of that number receive this coverage through an employment-based group plan. About 47 million (17.7 percent) are uninsured, and less than 20 million (7.3 percent) purchase individual coverage. Sixty million (22.6 percent) participate in publicly funded health benefit programs.3
Simply put, the ACA is designed to move individuals from the uninsured category into the insured, and it does so in three major ways. First, the ACA allows insurers to sell policies across state lines.4 This leads to greater competition among plans, which should lower premiums in the individual market.
Second, the exchanges arm the consumer with the knowledge needed to comparison shop. The exchanges serve as a consolidated source of information that allows consumers to make educated purchases.5 Finally, the ACA provides subsidies to help poorer Americans offset the costs of health care and imposes tax penalties on those who refuse to purchase coverage.6
Predicting employer reactions
The more interesting analysis may be how the ACA affects employers. As an initial matter, the ACA requires employers with 50 or more full-time employees to provide basic health coverage for those workers or face a tax penalty. The penalty is somewhat complicated, but essentially, if at least one of the employer’s 50 or more full-time employees would qualify for a premium tax credit (a subsidy based on lower income), then the penalty is the lesser of $3,000 per employee who qualifies for the tax credit or $2,000 per employee, with the caveat that the first 30 employees are excluded from the assessment. If no employees would qualify for the tax credit, the fine is $2,000 per employee, with the first 30 employees excluded from the calculation.7
To put this in context, there were roughly 121 million paid employees in the United States in 2008. Of that number, about half (61.2 million) worked for firms that employed more than 500 workers, and 32 percent (38.2 million) worked for firms that employed between 20 and 500 employees.8
Now, employers will face a complicated cost-benefit analysis for employee health care. Employers will evaluate the extent to which tasks currently performed by full-time employees can be undertaken by part-time employees, and what savings can be generated by eliminating health coverage for those part-time employees. To soften the blow, many employers plan to offer a stipend to help employees purchase coverage in the individual market through a health care exchange. This may seem to be a cold business calculation to increase profits at the employees’ expense, but eliminating benefits for part-time employees may work to their benefit, especially if they are eligible for ACA tax credits because of their lower income.
One company, Trader Joe’s, decided to eliminate coverage for part-time employees, which constituted about 13 percent of its workforce.9 A part-time employee making $18 an hour for 25 hours a week paid $166.50 per month to participate in Trader Joe’s health benefit plan. Because the employee’s income was low enough to qualify for a subsidy, she was able to secure almost identical coverage for less than $70 per month.10 That employee will save $1,175 per year in out-of-pocket premium payments, and, to sweeten the deal, Trader Joe’s reportedly planned to pay her an extra $500 each year to help offset her health insurance costs.
Intended or not, the ACA creates an economic incentive for employers to prefer part-time employees to full-time employees and demonstrates how eliminating coverage for part-time employees may actually lower costs for both the employer and the individual. A larger percentage of Americans will be funneled away from the group market and into the individual market.
The ACA is also likely to affect businesses that are too small to be subject to the act’s requirement to provide basic health coverage. Some have concluded that their employees will be better off if the company discontinues health coverage. A small contractor in Pennsylvania, for example, concluded that most of his employees would benefit from not having coverage through their employer, because then they would qualify for the health care subsidies. The contractor transferred the money he was paying for health insurance into his employees’ paychecks.11
Few companies may wish to be the pioneer in terminating coverage to save employees money because the trend seems counterintuitive. But once the word gets out, the practice will likely spread across the nation.
Another little-known wrinkle of the ACA is its requirement that every state establish a Small Business Health Options Program (SHOP) exchange. If a state refuses to establish a SHOP exchange by the deadline, the federal government will set the exchange up for that state.12
Originally scheduled to begin in 2014 for employers with less than 50 employees and expand in 2016 for employers with less than 100 full-time employees, this program has been delayed until 2015 and 2017, respectively.13 SHOP is an alternative for small businesses, that do not want to eliminate coverage, to have access to the same type of savings found on the individual exchanges. The program should provide increased competition and centralized data similar to the individual exchanges, and there are tax incentives for employers who provide this type of coverage.
States will have a great deal of flexibility in how they establish SHOP exchanges, including the option to not only merge the individual exchange with a SHOP exchange but also merge the risk pools.14 Smaller states might find this merging advantageous because it will allow them to create a larger risk pool, and that should lead to lower costs. Also, if the SHOP exchanges are successful in producing lower premiums, perhaps the program will be expanded to larger employers.
Much is uncertain at this early stage, but the SHOP exchanges may ultimately operate as the mechanism by which employers have access to the lower premiums available on the individual exchange market. If the ACA is successful, the current model of health care delivery—in which nearly 60 percent of all American workers participate in a group plan—is likely to be replaced, and group plans will become virtually extinct.
These fundamental shifts in employee retirement benefits may occur quickly. The first 401(k) plan was established in 1981; by 1990, nearly 100,000 plans offered the 401(k) option, 19.5 million workers participated, and the plans had assets of $385 billion.15 By 2003, 438,000 plans featured 401(k)s, with 42.4 million active participants and assets of $1.9 trillion.16 As of Sept. 30, 2013, 401(k) plan assets were $4 trillion.17 Another change that 401(k) plans brought is portability: Workers maintain their retirement benefits as they move from job to job.
It is possible that in the near future, health insurance will be delivered in a manner that resembles the current 401(k) retirement arrangement. It will become a system in which most employers do not operate health benefit plans but rather contribute to employees’ individual health insurance policies, which employees acquire on the individual market through health care exchanges.
This change would virtually nullify the last 12 years of ERISA reimbursement jurisprudence and allow traditional rules of equity found in most states to govern this area of tort law. Nearly all individual insurance policies have a “conformity with state law” provision to the effect that if the policy terms conflict with the law of the state in which the policy was issued, the policy terms will be reformed to meet the state’s requirements. Draconian terms that contradict well-established state rules of equity could be nullified. That should yield better results for tort victims, but only if the plaintiff lawyer has identified the issue and addressed it sufficiently.
The future is uncertain, but it appears likely that the ACA may allow more tort victims to retain a larger part of their settlements. It also means that plaintiff lawyers will have to apply greater scrutiny to their clients’ health plan—and shake off antiquated assumptions about how health coverage is provided.
- Sereboff v. Mid. Atl. Med. Svcs., Inc., 126 S. Ct. 1869 (2006).
- U.S. Airways v. McCutchen, 133 S. Ct. 1537 (2013).
- Paul Fronstin, Sources of Health Insurance and Characteristics of the Uninsured: Analysis of the March 2013 Current Population Survey 4 (Issue Br. No. 390, Employee Benefit Research Inst. Sept. 2013), www.ebri.org/pdf/briefspdf/EBRI_IB_09-13.No390.Sources1.pdf.
- Patient Protection and Affordable Care Act, Pub. L No. 111-148, §1333, 124 Stat. 129, 206–208 (Mar. 23, 2013) (to be codified at 42 U.S.C. §18053).
- Id. at §§1103(a), 1311, 1312.
- Id. at §1401.
- Henry J. Kaiser Fam. Found., Summary of the Affordable Care Act 1 (Henry J. Kaiser Fam. Found. 2011), http://kaiserfamilyfoundation.files.wordpress.com/2011/04/ 8061-021.pdf.
- See U.S. Census Bureau, Statistics About Business Size (Including Small Business) from the U.S. Census Bureau (2008), www.census.gov/econ/smallbus.html.
- Sarah Kliff, Wash. Post, Wonkblog, Trader Joe’s Cut Health Benefits Last Week. Here’s Its Side of the Story (Sept. 16, 2013), www.washingtonpost.com/blogs/wonkblog/wp/2013/09/16/trader-joes-cut-health-benefits-last-week-heres-its-side-of-the-story.
- Stacy Cowley, Dropping Health Plans, to Pick Better Coverage, N.Y. Times (Dec. 11, 2013), www.nytimes.com/2013/12/12/business/smallbusiness/changing-the-health-insurance-equation-for-small-employers.html?r=0.
- Ctr. for Consumer Info. & Ins. Oversight, Ctrs. for Medicare & Medicaid Servs., General Guidance on Federally-Facilitated Exchanges 3-4 (May 16, 2012), www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/ffe-guidance-05-16-2012.pdf.
- Patient Protection and Affordable Care Act, §§1304(a)(1)-1304(b)(4); see also Natl. Conf. St. Legislatures, Small and Large Business Health Insurance: State & Federal Roles (Feb. 10, 2014), www.ncsl.org/research/health/small-business-health-insurance.aspx.
- Id. at §§1101(g)(3)(B), 1311(b).
- Employee Benefit Research Inst., History of 401(k) Plans: An Update 2 (Feb. 2005), www.ebri.org/pdf/publications/facts/0205fact.a.pdf.
- Id. at 3.
- Sarah Holden et al., Defined Contribution Plan Participants’ Activities, First Three Quarters of 2013 2 (Investment Co. Inst. Feb. 2014), www.ici.org/pdf/ppr_13_ rec_survey_q3.pdf.