Will employers undermine health care reform by dumping sick employees?

Virginia Law Review

Volumn 97, Issue 1, 2011, Pages 125-197

  Monahan, Amy ^a   Schwarcz, Daniel ^a  

^a UNIVERSITY OF MINNESOTA LAW SCHOOL   (United States)

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EID: 79955736425     PISSN: 00426601     EISSN: None     Source Type: Journal    
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References (282)

1. See Christopher J. Truffer et al., Health Spending Projections Through 2019: The Recession's Impact Continues, 29 Health Aff. 522, 523 (2010).
2. Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010);
3. Health Care and Education Reconciliation Act of 2010 ("HCERA"), Pub. L. No. 111-152, 124 Stat. 1029 (2010). References to these bills initially used the acronym "PPACA." Recent federal publications, however, have switched to the shorter "ACA" and we follow that convention here. Throughout this Article, citations to "ACA" refer to PPACA and HCERA collectively, except for the instances where HCERA amended PPACA; in all instances, the statutes at large citation indicates in which of the two bills the relevant citation is located.
4. In part, this is because much depends on how the states and federal government implement the statutory text. See Alan Weil & Raymond Scheppach, New Roles For States in Health Reform Implementation, 29 Health Aff. 1178, 1178-79 (2010). At the same time, a substantial amount of uncertainty stems from the fact that so many different constituencies helped to produce ACA's highly complicated and interconnected statutory text, resulting in 2800 pages of bills.
5. See, e.g., John K. Iglehart, Nearing Negotiations-Reconciling Key Differences Between House and Senate Reform Measures, 362 New Eng. J. Med. e8(1) (2010) (describing some of the contentious battles that preceded the passage of ACA).
6. See Elise Gould, The Erosion of Employer-Sponsored Health Insurance: Declines Continue for the Seventh Year Running, 39 Int'l J. Health Servs. 669, 669 (2009) ("Employer-sponsored health insurance (ESI) remains the most prominent form of health coverage in the United States, at 62.9 percent of the under-65 population; however, the rate of this coverage has fallen every year since 2000, when 68.3 percent had ESI."). As we make clear in Subsection II.B.2, we mean to include employers' prescription benefit plans within the ambit of ESI.
7. See Kenneth S. Abraham & Daniel Schwarcz, Healthcare Supplement to Abraham's Insurance Law and Regulation 32 (5th ed. 2010) ("[V]arious employers were asked to state their level of agreement with the statement that 'Our organization would be better off if we dropped employee healthcare coverage and simply paid the fine.' 52.5% surveyed strongly disagreed, 15.3% somewhat disagreed, 18% somewhat agreed, and 14.1% strongly agreed.");
8. David A. Hyman, Employment-Based Health Insurance: Is Health Reform a "Game Changer?," 1 N.Y.U. Rev. Emp. Benefits & Executive Compensation 1A-1, 1A-11 (2010) ("Although voters were promised 'if you like your coverage, you can keep it,' PPACA is likely to cause further unraveling of EBC, unless significant modifications are made to its design.").
9. On the issue of early retirees losing their employer-provided health benefits generally, see Richard L. Kaplan et al., Retirees at Risk: The Precarious Promise of Post-Employment Health Benefits, 9 Yale J. Health Pol'y, L. & Ethics 287, 301-32 (2009).
10. The general prospect of insurer dumping of high risks is prominent in the literature. See, e.g., Randall P. Ellis, Creaming, Skimping and Dumping: Provider Competition on the Intensive and Extensive Margins, 17 J. Health Econ. 537 (1998). ACA also clearly contemplates the dumping of high risks in certain limited contexts. See ACA § 1101(e), 124 Stat. at 142-43 (to be codified at 42 U.S.C. § 18001).
11. We use the term "high-risk employee" and "low-risk employee" to refer to the employee's expected future health care costs. "High-risk employees" thus encompasses employees who are already sick and those who possess characteristics suggesting they are particularly likely to become sick in the future. Of course, high-risk employees may not ultimately end up incurring large health care expenses. But from an insurance perspective, the key question is their risk of incurring future expenses.
12. The individual and employer "mandates," contained in ACA, generally require individuals to purchase and employers to offer health insurance or face a monetary penalty. See ACA § 1501(b), 124 Stat. at 244-45 (to be codified at I.R.C. § 5000A); ACA § 1513, 124 Stat. at 253-56 (to be codified at I.R.C. § 4980H).
13. See infra Subsection I.B.1. Contrary to a widely shared misconception, high-risk employees will be free to purchase coverage in the health insurance exchanges that ACA creates to organize individual insurance markets. See infra Subsection II.A.1. Under ACA, individual health insurance premiums are permitted to vary based only on age, geographic area, family size, and tobacco use. See infra note 32 and accompanying text.
14. Employer plans are self-insured where the employer retains the risk of loss associated with claims under the health plan. See, e.g., Thompson v. Talquin Bldg. Prods. Co., 928 F.2d 649, 653 (4th Cir. 1991). For further explanation of self insurance, see infra Subsection I.C.3. Large employers that do not self-insure may also have substantial latitude to design dumping strategies. However, for reasons discussed later, it is almost certain that any large employer that chose to pursue a dumping strategy would self-insure. Id.
15. See infra Subsection I.C.3.a.
16. For an overview of the tax benefits and requirements of health reimbursement arrangements, see I.R.S. Notice 2002-45, 2002-28 I.R.B. 93.
17. Kaiser Family Found. & Health Research & Educ. Trust, Employer Health Benefits: 2009 Annual Survey 68, available at http://ehbs.kff.org/pdf/ 2009/7936.pdf.
18. Several sources mention in passing the possibility that employers may attempt to redesign their plans so as to induce some, but not all, employees to opt for coverage in an exchange. See Abraham & Schwarcz, supra note 5, at 32 (noting that "[a] third potential result [of reform] is that employers will continue to offer coverage, but that such coverage will contain limited benefits");
19. Hyman, supra note 5, at 1A-15 (noting that "some employers will make all-or-nothing coverage decisions for all employees in favor of 'nothing,' while others will experiment with changing the terms of coverage, and the boundaries of the firm and its staffing");
20. Timothy Jost, Health Insurance Exchanges and the Affordable Care Act: Key Policy Issues 3 (2010), available at http://www.commonwealthfund.org/Content/ Publications/FundReports/2010/Jul/Health-Insurance-Exchanges-and-the-Affordable- Care-Act.aspx (noting that "[a] particular concern is the possibility that employer-sponsored groups can 'self-insure' (thus escaping state regulation) as long as their employees are healthy, only to turn to the exchange once group members' health deteriorates");
21. id. at 8 (suggesting that "[s]elfinsured plans are subject to even less rigorous requirements under ACA, and they might offer coverage that is substantially less protective, and less costly, than exchange coverage").
22. See Stephen Finan, Senior Director for Policy at the American Cancer Society Cancer Action Network, Testimony at the Interim Meeting of the National Association of Insurance Commissioners on Health Care Reform Implementation, Exchanges (B) Subgroup Meeting (July 22, 2010), available at http://www.naic.org/documents/committees-conliaison-1008-ntlmtg-materials.pdf.
23. It is for these reasons that commentators have warned that adverse selection is the primary threat to insurance exchanges. See Timothy Jost, Consumer-Friendly Exchanges, Testimony at the Interim Meeting of the National Association of Insurance Commissioners on Health Care Reform Implementation, Exchanges (B) Subgroup Meeting (July 22, 2010), available at http://naic.org/committees-b-exchanges.htm ("The biggest threat to the success of the exchanges will be adverse selection ⋯ .").
24. Of course, ACA does create or recognize various different risk pools, and so it does not mandate that all health risks be shared equally across society. But ACA attempts to require that all risk pools are broad and diverse, so as to ensure the broad social sharing of health care costs by all individuals and employers. It is this general principal of risk sharing that employer dumping undermines, as it permits specific employers and employees to participate in unusually low-risk pools by inducing highrisk employees into other pools
25. See Donald W. Light, The Practice and Ethics of Risk-Rated Health Insurance, 267 JAMA 2503, 2503-04 (1992) (describing various methods of risk classification in health insurance markets).
26. See Mary Crossley, Discrimination Against the Unhealthy in Health Insurance, 54 Kan. L. Rev. 73, 74 (2005) ("Discrimination against unhealthy persons is deeply ingrained in the health insurance industry and traditionally has been generally accepted as a legitimate application of underwriting and risk-classification principles.");
27. see generally Deborah A. Stone, The Struggle for the Soul of Health Insurance, 18 J. Health Pol. Pol'y & L. 287, 287 (1993) (exploring a vision of health insurance premised on social solidarity as contrasted to a vision of health insurance premised on risk classification and "actuarial fairness" more generally). To be sure, insurers operating in some markets, particularly large group health insurance markets, have often focused less on risk classification, as such classification can only occur at the group level. See Crossley, supra, at 84. Other health insurers have been foreclosed from engaging in various forms of risk classification based on state laws. Id. at 85-117.
28. This literature originated with Akerlof's famous article on lemons. See George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q.J. Econ. 488 (1970);
29. see also Michael Rothschild & Joseph Stiglitz, Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information, 90 Q.J. Econ. 629, 634-37 (1976).
30. See, e.g., M.P. McQueen, Health Insurers Target the Individual Market, Wall St. J., Aug. 21, 2007, at D1 (noting that insurers, in an effort to attract young adults, have begun offering benefits such as gym memberships and teeth whitening).
31. Of course, risk classification is different in the health insurance context for a variety of reasons, including the difficulty of predicting expenses and the fact that a large component of health insurance is actually closer to the pre-payment of expected costs than to classic insurance. For an overview of risk classification in health and nonhealth insurance markets, see Bryan Ford, The Uncertain Case for Market Pricing of Health Insurance, 74 B.U. L. Rev. 109, 115-29 (1994).
32. Peter Siegelman, Adverse Selection in Insurance Markets: An Exaggerated Threat, 113 Yale L.J. 1223, 1235-37 (2004).
33. The self-reinforcing tendency of adverse selection stems from the fact that, if the insured population consists disproportionately of high-risk individuals, insurance companies will respond by raising premiums. As premiums rise, only individuals with higher levels of risk will find insurance purchase worthwhile, in response to which insurers will raise premiums even higher. Siegelman, supra note 22, at 1254.
34. Id. at 1224-25;
35. see also Bradley Herring & Mark V. Pauly, The Effect of State Community Rating Regulations on Premiums and Coverage in the Individual Health Insurance Market 20 (NBER Working Paper No. W12504, 2006), available at http://www.nber.org/papers/w12504.
36. See generally Kenneth S. Abraham, Distributing Risk: Insurance, Legal Theory, and Public Policy 64-100 (1986).
37. See Light, supra note 17.
38. See Crossley, supra note 18, at 109-13 (reviewing various state laws addressing discrimination based on health status).
39. Individuals were protected from preexisting condition exclusions only where they had coverage for at least eighteen months, most recently under an employer group plan, and had not had a break in coverage of sixty-three days or longer. 29 U.S.C. § 1181 (2006).
40. See, e.g., Comm. on Energy & Commerce, Case Studies: Examples of Health Insurance Companies Rescinding Individual Policies (July 27, 2009), available at http://energycommerce.house.gov/Press-111/20090727/ 15%20Fact%20Sheet- Examples%20of%20Health%20Insurance%20Companies%20Rescinding%20Individual%20Poli cies.pdf. An investigation and hearing by the House Committee on Energy and Commerce in 2009 found that insurers often abused their authority to rescind policies in order to avoid paying expensive claims, targeting patients with breast cancer, lymphoma, and numerous other serious conditions for rescission and praising employers for terminating the coverage of such policyholders. Id. Additionally, it concluded that insurers frequently rescinded coverage based on trivial omissions in policyholders' applications that were often unrelated to the policyholder's illness. Id.;
41. see also Memorandum from the Comm. on Energy & Commerce Staff to Members and Staff of the Subcomm. on Oversight and Investigations, Supplemental Information Regarding the Individual Health Insurance Market 7-8 (June 16, 2009), available at http://energycommerce.house.gov/Press-111/20090616/ rescission-supplemental.pdf (finding approximately 20,000 rescissions by three large insurance companies over five years, saving those insurers $300 million in claims).
42. Like most insurance markets, individual health insurance markets prior to ACA were regulated almost entirely at the state level. States varied dramatically in how retightly they regulated these markets. See Kaiser Family Found., Individual Market Rate Restrictions (Not Applicable to HIPAA Eligible Individuals), 2010, http://www.statehealthfacts.kff.org/comparetable.jsp?ind= 354&cat=7 (last visited Nov. 5, 2010). Most states, however, allowed insurers in individual insurance markets to engage in some forms of risk classification. See id.
43. ACA § 1001, Pub. L. No. 111-148, 124 Stat. 119, 130-31 (2010) (adding § 2712 to the Public Health Service Act (PHSA)) (rescissions) (to be codified at 42 U.S.C. § 300gg-12);
44. ACA § 1201, 124 Stat. at 154-55 (adding § 2704 to the PHSA) (to be codified at 42 U.S.C. § 300gg-3) (preexisting conditions);
45. ACA § 1201, 124 Stat. at 156 (adding § 2702 to the PHSA) (to be codified at 42 U.S.C. § 300gg-1) (guaranteed availability);
46. ACA § 1201, 124 Stat. at 156 (adding § 2703 to the PHSA) (to be codified at 42 U.S.C. § 300gg-2) (guaranteed renewability);
47. ACA § 1201, 124 Stat. at 156-60 (adding § 2705 to the PHSA) (to be codified at 42 U.S.C. § 300gg-4) (prohibiting discrimination). Limited exceptions apply to insurers' obligations to accept new policyholders that are not relevant to this analysis. These include the prospect that an insurer is financially unstable and thus must stop accepting policyholders. See 42 U.S.C.S. § 300gg-1(d) (LexisNexis 2010) (application of financial capability limits).
48. ACA § 1201, 124 Stat. at 155-56 (adding § 2701 to the PHSA) (to be codified at 42 U.S.C. § 300gg) (fair premiums). Note that premiums will only be allowed to vary by three times for age, id., which is likely to be less than current disparities based on age. See, e.g., Elizabeth Simantov et al., Market Failure? Individual Insurance Markets for Older Americans, 20 Health Aff. 139, 144-46 (2001) (finding that premiums for individuals age sixty were three to four times more expensive than premiums for individuals age twenty-five);
49. Healthreform.gov, Strengthening the Health Insurance System: How Health Insurance Reform will Help America's Older and Senior Women 5, available at http://healthreform.gov/reports/seniorwomen/seniorwomenreport.pdf (stating that premiums for older women in the individual market are roughly four times greater than those in the group market).
50. See Amitabh Chandra, Jonathan Gruber, & Robin McKnight, The Importance of the Individual Mandate-Evidence from Massachusetts, N.E.J.M. (Jan. 12, 2011), available at http://healthpolicyandreform.nejm.org/?p= 13572&query=TOC.
51. ACA § 1501(b), 124 Stat. at 246-47 (to be codified at I.R.C. § 5000A). Individuals without coverage for a period of longer than three months face a penalty equal to the greater of $695 per individual per year (up to a maximum of three times that amount, $2085, per family) or 2.5% of household income. HCERA §1002(a)(2), Pub. L. No. 111-152, 124 Stat. 1029, 1032 (2010) (to be codified at I.R.C. § 5000A) (amending PPACA § 10106(b)(3), Pub. L. No. 111-148, 124 Stat. 119, 909 (2010) (amending PPACA § 1501(b), 124 Stat. at 246-47)).
52. ACA § 1401, 124 Stat. at 213-20 (to be codified at I.R.C. § 36B);
53. ACA § 1402, 124 Stat. at 220-24 (to be codified at 42 U.S.C. § 18071).
54. The effectiveness of these attempts to limit indirect risk classification depends largely on how these measures are implemented. For one analysis of this issue, see Finan, supra note 15.
55. ACA § 1201, 124 Stat. at 161 (adding § 2707 to the PHSA) (to be codified at 42 U.S.C. § 300gg-6) ("A health insurance issuer that offers health insurance coverage in the individual or small group market shall ensure that such coverage includes the essential health benefits package required under section 1302(a) of the Patient Protection and Affordable Care Act.").
56. See ACA § 1302, Pub. L. No. 111-148, 124 Stat. 119, 163-68 (2010) (to be codified at 42 U.S.C. § 18022). Out-of-pocket expenses (the amount that an individual must spend out-of-pocket on covered care, including co-payments, deductibles, etc.) must be limited to approximately $5950 for individual coverage and $11,900 for family coverage (in 2010 numbers). See id. § 1302(c), 124 Stat. at 165;
57. I.R.C. § 223(c) (2006); Rev. Proc. 2009-29, 2009-22 I.R.B.
58. See ACA § 1302(b), 124 Stat. at 163-64 (to be codified at 42 U.S.C. § 18022).
59. For a lengthier discussion of essential health benefits, see Amy B. Monahan, Initial Thoughts on Essential Health Benefits, 1 N.Y.U. Rev. Emp. Benefits & Executive Compensation 1B1, 1B4-1B8 (2010).
60. Starting in 2014, each state must establish such an exchange to facilitate the purchase of health insurance. ACA § 1321(b), 124 Stat. at 186 (to be codified at 42 U.S.C. § 18041). See generally Jost, supra note 15. State insurance exchanges will also organize the small group market in addition to the individual market. See ACA § 1311(b), 124 Stat. at 173.
61. Timothy Jost, Health Insurance Exchanges: Legal Issues 3 (2009), available at http://www.law.georgetown.edu/oneillinstitute/national-health-law/ legal-solutions-inhealth-reform/Papers/Insurance-Exchanges.pdf.
62. ACA § 1311(d)(1), 124 Stat. at 176 (to be codified at 42 U.S.C. § 18031). If a state does not choose to establish an exchange, the federal government is authorized to establish one for that state's residents. See ACA § 1321(c), 124 Stat. at 186-87 (to be codified at 42 U.S.C. § 18041).
63. Memorandum from Richard S. Foster, Chief Actuary, Dep't of Health & Human Servs., Estimated Financial Effects of the "Patient Protection and Affordable Care Act," as amended at 4 (Apr. 22, 2010), available at https://www.cms.gov/ActuarialStudies/Downloads/PPACA-2010-04-22.pdf (estimating that 16 million individuals will be covered through exchanges).
64. ACA § 1401, Pub. L. No. 111-148, 124 Stat. 119 (2010) (to be codified at I.R.C. § 36B);
65. id. § 1402, 124 Stat. at 220-24 (to be codified at 42 U.S.C. § 18071). Exchanges are directed to work with the Department of Treasury to get the amount of the credit advanced and paid directly to the insurer, negating the need for the individual to pay and be reimbursed only when filing her tax return for the year. See ACA §§ 1411-12, 124 Stat. at 224-33 (to be codified at 42 U.S.C. §§ 18081-82).
66. See ACA § 1301, 124 Stat. at 162-63 (to be codified at 42 U.S.C. § 18021).
67. ACA § 1311(c)(1)(B), 124 Stat. at 174 (to be codified at 42 U.S.C. § 18031).
68. See ACA § 1301, 124 Stat. at 162-63 (to be codified at 42 U.S.C. § 18021) (defining a "qualified health plan" as a plan offered by a health insurance issuer that is "licensed and in good standing" and that complies with "such other requirements as an applicable Exchange may establish").
69. See ACA § 1311(c)(1)(A), 124 Stat. at 174 (to be codified at 42 U.S.C. § 18031) (providing that the Secretary shall promulgate regulations to ensure that no qualified health plan will "employ marketing practices or benefit designs that have the effect of discouraging the enrollment in such plan by individuals with significant health needs").
70. See Mark A. Hall, The Three Types of Reinsurance Created by Federal Health Care Reform, 29 Health Aff. 1168, 1170-71 (2010). A third reinsurance program ends prior to 2014 and involves reinsurance for the expenses that employers incur in providing health benefits to early retirees. See id. at 1169.
71. See generally Aviva Abramovsky, Reinsurance: The Silent Regulator?, 15 Conn. Ins. L.J. 345, 350 (2009).
72. ACA § 1341, Pub. L. No. 111-148, 124 Stat. 119, 208-11 (2010) (to be codified at 42 U.S.C. § 18061).
73. ACA § 1342, 124 Stat. at 211-12 (to be codified at 42 U.S.C. § 18062).
74. Hall acknowledges that the primary purpose of § 1341 is to blunt adverse selection, but suggests that the purpose of § 1342 is instead to limit actuarial uncertainty. Hall, supra note 50, at 1170-71. Both programs, however, simultaneously accomplish both goals, and identifying which goal is primary is a difficult exercise.
75. ACA § 1343, 124 Stat. at 212-13 (to be codified at 42 U.S.C. § 18063).
76. See Timothy Jost, How Does the Health Reform Legislation Affect Self-Insured Plans?, O'Neill Institute Legal Solutions in Health Reform Blog (Mar. 31, 2010, 5:24 PM), http://oneillhealthreform.wordpress.com/2010/03/31/ how-does-the-health-reform-legislation-affect-self-insured-plans.
77. Employer plans are also affected by various federal income tax regulations, some of which mirror provisions in ERISA. For example, the requirements of the Health Insurance Portability and Accountability Act ("HIPAA") and the Consolidated Omnibus Budget Reconciliation Act ("COBRA") are contained in both statutes. Compare I.R.C. §§ 4980B(f), 9802 (2006), and 29 U.S.C. §§ 1161-65, 1182 (2006) (ERISA), with Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-272, 100 Stat. 82, 222, 227, §§ 10001, 10002(a) (1986) (amending I.R.C. and ERISA, respectively), and Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191, 110 Stat. 1936, 1939, 2073, §§ 101(a), 401(a) (1996) (amending ERISA and I.R.C., respectively). Because the federal tax treatment does not directly affect use of risk classification, discussion of the tax code provisions that affect group health plans is largely omitted from this Article.
78. It also regulates certain other aspects of plan terms and administration. For instance, the Code also imposes additional requirements on group health plans, such as the requirement to offer continuation coverage in the event that an employee loses her employer-provided health coverage as a result of a qualifying event. I.R.C. § 4980B(f).
79. Id. at § 106. Most states follow the federal tax treatment and exempt such payments from state income tax as well. See Richard W. Genetelli, Tax Management Multistate Tax Portfolios, Personal Income Taxes: Alabama Through Michigan, 3010.01.B.2 (2002).
80. See I.R.C. § 125.
81. See id. § 162(l)(1), (4) (indicating that self-employed individuals are eligible to deduct the cost of health insurance premiums from their taxable income and that the deduction may not be taken for self-employment tax purposes).
82. See 29 U.S.C. §§ 1185, 1185a, 1185b (minimum hospital stays, mental health parity, and reconstructive surgery, respectively) (2006).
83. A plan may exclude coverage for a preexisting condition for a maximum of twelve months. Id. § 1181(a)(2). That maximum exclusion period is reduced by the amount of any prior creditable coverage the individual had. Id. § 1181(a)(3). For example, if an individual had coverage under an employer plan for twelve months and then switched employers and became covered under the new employer's plan without a break in coverage, the new employer's plan could not enforce any preexisting condition limitation for that employee.
84. HIPAA, Pub. L. No. 104-191, 110 Stat. 1936, 1939, § 101 (1996) (codified at 29 U.S.C. § 1182). ERISA also contains a general nondiscrimination provision in § 510, but courts have held that an employer health plan does not violate § 510 merely by amending the terms of the plan in a way that has a disparate impact on employees with a particular condition or disability. See, e.g., McGann v. H & H Music Co., 946 F.2d 401, 404 (5th Cir. 1991).
85. 29 U.S.C. § 1144(b)(2)(A). This is an extension of the McCarran-Ferguson Act, which affirms the primacy of the states in regulating insurance. Jonathan R. Macey & Geoffrey P. Miller, The McCarran-Ferguson Act of 1945: Reconceiving the Federal Role in Insurance Regulation, 68 N.Y.U. L. Rev. 13, 20-26 (1993).
86. See generally Amy B. Monahan, Federalism, Federal Regulation, or Free Market? An Examination of Mandated Health Benefit Reform, 2007 U. Ill. L. Rev. 1361, 1363-64 (2007).
87. 29 U.S.C. § 1144(b)(2)(B);
88. see also Metro. Life Ins. Co. v. Massachusetts, 471 U.S. 724, 746-47 (1985);
89. see generally Russell Korobkin, The Battle Over Self-Insured Health Plans, or "One Good Loophole Deserves Another," 5 Yale J. Health Pol'y L. & Ethics 89 (2005) (describing the evolution of the caselaw on self-insured health plans).
90. See Kaiser Family Found. & Health Res. & Educ. Trust, Employer Health Benefits: 2010 Annual Survey 174, available at http://ehbs.kff.org/pdf/ 2010/8085.pdf (providing the percentage of employers that self-insured, by employer size, from 1999-2010).
91. See Troy Paredes, Stop-Loss Insurance, State Regulation, and ERISA: Defining the Scope of Federal Preemption, 34 Harv. J. Legis. 233, 234-35 (1997). In 2009, among all workers covered by employer plans, fifty-seven percent were covered by self-insured plans. Kaiser Family Found. & Health Res. & Educ. Trust, supra note 13, at 157. The propensity of firms to self-insure varies with size. In firms with 5000 or more employees, eighty-eight percent of covered workers are enrolled in self-insured plans. Id. In firms with 3-199 employees, fifteen percent of covered employees are enrolled in self-insured plans. Id.
92. Paredes, supra note 69, at 249-50.
93. See, e.g., Am. Med. Sec., Inc. v. Bartlett, 111 F.3d 358, 364 (4th Cir. 1997).
94. See ACA § 1001, Pub. L. No. 111-148, 124 Stat. 119, 131 (2010) (to be codified at 42 U.S.C. § 300gg-12) (adding § 2712 to the PHSA);
95. ACA § 1201, Pub. L. No. 111-148, 124 Stat. 119, 155-56 (2010) (to be codified at 42 U.S.C. §§ 300gg-gg-1) (adding §§ 2701 and 2702 to the PHSA).
96. See 29 U.S.C. § 1182 (2006).
97. Compare ACA § 1201, 124 Stat. at 156-60 (to be codified at 42 U.S.C. § 300gg-4) (adding § 2705 to the PHSA), with 29 U.S.C. § 1182 (HIPAA).
98. For a lengthier discussion of essential health benefits, see Monahan, supra note 40, at 3-5.
99. See supra Subsection I.B.2.a;
100. ACA § 1201, 124 Stat. at 161 (to be codified at 42 U.S.C. § 300gg-6) (adding § 2707 to the PHSA).
101. ACA § 1001, 124 Stat. at 131-32 (to be codified at 42 U.S.C. § 300gg-13) (adding § 2713 to the PHSA).
102. ACA § 10103, Pub. L. No. 111-148, 124 Stat. 119, 892-96 (2010) (to be codified at 42 U.S.C. § 300gg-8) (adding § 2709 to the PHSA).
103. ACA § 1201, 124 Stat. at 161 (to be codified at 42 U.S.C. § 300gg-6) (adding § 2707(b) to the PHSA). These limits are the same that are applicable to individual plans. See supra note 37.
104. ACA § 10101, 124 Stat. at 883-84 (to be codified at 42 U.S.C. § 300gg-11) (adding § 2711 to the PHSA).
105. Id.
106. 42 U.S.C. §§ 12101-213 (2006).
107. Id. § 12201(c);
108. EEOC Interim Guidance on Application of Americans with Disabilities Act of 1990 to Employer-Provided Health Insurance, No. 915.002, Subsection III.C.2.b-d (June 8, 1993), available at http://www.eeoc.gov/policy/docs/health. html.
109. EEOC Interim Guidance, supra note 83.
110. Id. at Subsection III.C.2.d.
111. For an overview of how courts have interpreted the ADA coverage requirements as applied to health plans, see Timothy Frey, Your Insurance Does Not Cover That: Disability-Based Discrimination Where It Hurts the Most, 78 Geo. Wash. L. Rev. 636, 642-56 (2010);
112. see also Samuel R. Bagenstos, The Future of Disability Law, 114 Yale L.J. 1, 27-32 (2004) (providing an overview and critique of how private health insurance fits into legal protections for the disabled).
113. ACA § 1201, Pub. L. No. 111-148, 124 Stat. 119, 160 (2010) (to be codified at 42 U.S.C. § 300gg-5) (adding § 2706 to the PHSA).
114. Id.
115. ACA § 1201, 124 Stat. at 156-57 (to be codified at 42 U.S.C. § 300gg-4) (adding § 2705(j)(1)(A) to the PHSA) ("[A] program of health promotion or disease prevention (referred to in this subsection as a 'wellness program') shall be a program offered by an employer that is designed to promote health or prevent disease that meets the applicable requirements of this subsection." (emphasis added)).
116. For a brief overview of wellness programs, see Wendy K. Mariner, Social Solidarity and Personal Responsibility in Health Reform, 14 Conn. Ins. L.J. 199, 214-17 (2008).
117. See Harald Schmidt et al., Carrots, Sticks, and Health Care Reform-Problems with Wellness Incentives, 362 New Eng. J. Med. e3 (2010).
118. ACA § 1201, 124 Stat. at 156-57 (to be codified at 42 U.S.C. § 300gg-4) (adding § 2705(j) to the PHSA).
119. Id.
120. Id.
121. Id.
122. Id.
123. See supra Subsection I.B.2.
124. ACA § 1343, Pub. L. No. 111-148, 124 Stat. 119, 212-13 (2010) (to be codified at 42 U.S.C. § 18063) (providing that "each State shall assess a charge on health plans and health insurance issuers (with respect to health insurance coverage) ⋯ if the actuarial risk of the enrollees of such plans or coverage for a year is less than the average actuarial risk of all enrollees in all plans or coverage in such State for such year that are not self-insured group health plans (which are subject to the provisions of the Employee Retirement Income Security Act of 1974)" (emphasis added)).
125. See supra Subsection I.B.2.c.
126. ACA §§ 1341-42, 124 Stat. at 208-12 (to be codified at 42 U.S.C. §§ 18061-62).
127. ACA § 1341(b), 124 Stat. at 209-10 (to be codified at 42 U.S.C. § 18061).
128. ACA § 1341(b)(3)(A), 124 Stat. at 210 (to be codified at 42 U.S.C. § 18061).
129. ACA § 1101(e), Pub. L. No. 111-148, 124 Stat. 119, 142-43 (2010) (to be codified at 42 U.S.C. § 18001).
130. ACA § 1101(a), (d), 124 Stat. at 141-42 (to be codified at 42 U.S.C. § 18001).
131. ACA § 1101(e)(1), 124 Stat. at 142 (to be codified at 42 U.S.C. § 18001).
132. ACA § 1101(e)(2).
133. ACA § 1101(a), 124 Stat. at 141 (to be codified at 42 U.S.C. § 18001).
134. Id.
135. These summaries suggest or affirmatively proclaim that only individuals who do not have access to affordable employer coverage will be eligible to purchase coverage via an exchange. See, e.g., Foley & Lardner LLP, Will Proposed Health Insurance Exchanges Work and Be Affordable? 1 (Apr. 2010), available at http://www.foley.com/abc.aspx?Publication=7033 ("The Exchanges will initially be open only to individuals who work at companies no more than 100 employees or that do not provide insurance, the self-employed and unemployed, non-Medicare-covered retirees, and small businesses.");
136. Kaiser Family Found., Explaining Health Care Reform: Questions About Health Insurance Exchanges 1 (Apr. 2010), available at http://www.kff.org/ healthreform/upload/7908-02.pdf (stating that ACA "requires most individuals to have health insurance beginning in 2014. It authorizes entities known as American Health Benefit Exchanges, which states will establish by January 1, 2014, to make plans available to qualified individuals and employers. Qualified individuals include U.S. citizens and legal immigrants who are not incarcerated, and who do not have access to affordable employer coverage."). The confusion of commentators appears to stem from several sources. First, under Massachusetts Health Care Reform coverage via the Connector, enrollment is indeed limited to those who do not have the option of affordable employer provided coverage. Mass. Gen. Laws ch. 176Q, § 1 (2006) (excluding from the definition of "eligible individual" anyone who is offered subsidized health insurance by an employer with more than fifty employees). Second, the bill that came out of the Senate Health, Education, Labor and Pensions Committee, which largely became the blueprint for PPACA, did exclude individuals with access to affordable employer coverage from eligibility for exchange-based coverage. Affordable Health Choices Act, S. 1679, 111th Cong. § 3116(a)(4)(A)-(B) (2009).
137. ACA § 1311(d)(2)(A), Pub. L. No. 111-148, 124 Stat. 119, 176 (2010) (to be codified at 42 U.S.C. § 18031) ("An Exchange shall make available qualified health plans to qualified individuals and qualified employers.").
138. ACA § 1312(f)(1), 124 Stat. at 183-84 (to be codified at 42 U.S.C.
139. ACA § 1312(f), 124 Stat. at 183-84 (to be codified at 42 U.S.C. § 18032).
140. On average in 2009, workers paid only seventeen percent of the cost of single coverage, and twenty-seven percent of the cost for family coverage. Kaiser Family Found., supra note 13, at 68. The majority of workers are employed by firms that contribute at least half of the premium cost. Id. at 81.
141. ACA § 1401(a), 124 Stat. at 216-17 (adding § 36B(c)(1)(C) to the I.R.C.).
142. In order to allow pre-tax payment of health insurance premiums, employers must establish a cafeteria plan pursuant to § 125 of the Internal Revenue Code. See Mark A. Hall & Amy B. Monahan, Using Tax Sheltered Cafeteria Plans to Pay for Individual Health Insurance, 43 Inquiry 252, 256 (2010).
143. See infra Subsection III.A.2 (explaining that exchanges will largely reduce this historical benefit for ESI relative to individual markets).
144. See infra Subsection III.A.2 (arguing that high risk employees will be willing to pay for this increased cost of coverage on the exchange).
145. See Siegelman, supra note 22, at 1264-74.
146. ACA § 1311(c)(6), Pub. L. No. 111-148, 124 Stat. 119, 175 (2010) (to be codified at 42 U.S.C. § 18031) (referring to a change in status as a "special enrollment period").
147. Assuming, of course, that their high risk does not stem from tobacco use. See supra note 32 and accompanying text.
148. ACA § 1501(b), 124 Stat. at 244 (to be codified at I.R.C. § 5000A(a)-(b)).
149. ACA § 1501(b), 124 Stat. at 248-49 (to be codified at I.R.C. § 5000A(f)).
150. Id. (to be codified at I.R.C. § 5000A(f)(2)). The provision provides that "[t]he term 'eligible employer-sponsored plan' means, with respect to any employee, a group health plan or group health insurance coverage offered by an employer to an employee which is [either] a governmental plan ⋯ [or] any other plan or coverage offered in the small or large group market within a State." Id. Some commentators have raised the prospect that this definition does not automatically mean that a "group health plan" is an "eligible employer-sponsored plan" because parts (A) and (B) modify the term "group health plan" as well as "group health insurance coverage." See infra note 228. This prospect is discussed more fully infra Section III.B.
151. Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan Under the Patient Protection and Affordable Care Act, 75 Fed. Reg. 34,538, 34,539 (June 17, 2010) ("The term 'group health plan' includes both insured and self-insured group health plans.").
152. ACA § 1401(a), 124 Stat. at 216-17 (to be codified at I.R.C. § 36B(c)(2)(C)).
153. HCERA § 1001(a)(2)(A), Pub. L. No. 111-152, 124 Stat. 1029, 1031 (2010) (amending PPACA § 1401(a), Pub. L. No. 111-148, 124 Stat. 119, 216-17 (to be codified at I.R.C. § 36B(c)(2)(C))). For example, if an employee earns $21,660 per year (currently this is 200% of the federal poverty level, see Delayed Update of the HHS Poverty Guidelines for the Remainder of 2010, 75 Fed. Reg. 45,628, 45,629 (Aug. 3, 2010)), but is eligible for employer-provided coverage, she could receive a premium tax credit only if the required contribution for her employer coverage exceeds $2058 per year (9.5% of her income).
154. ACA § 1401(a), 124 Stat. at 217 (to be codified at I.R.C. § 36B(c)(2)(C)(ii)). To calculate this, one must subtract from the total cost of coverage the employee's "required contribution," which means "the portion of the annual premium which would be paid by the individual (without regard to whether paid through salary reduction or otherwise) for self-only coverage." ACA § 1501(b), 124 Stat. at 247 (to be codified at I.R.C. § 5000A(e)(1)(B)(i)).
155. See supra Subsection II.A.1.
156. See supra Subsection II.A.2.
157. See supra Subsection II.A.3.
158. See supra Subsection I.C.2.
159. See supra note 77 and accompanying text.
160. See supra note 81 and accompanying text.
161. See supra notes 38 and 79 and accompanying text. Additionally, the plan must (i) cover minimum hospital stays following child birth, (ii) breast reconstruction following a mastectomy, (iii) be consistent with mental health parity rules, and (iv) cover routine patient care costs of those participating in clinical trials. The first three requirements stem from ERISA, see supra notes 62-63 and accompanying text, and the fourth from ACA, see supra note 78 and accompanying text. See supra Section I.C.
162. See supra Subsection I.B.3.
163. See supra notes 115-16 and accompanying text (noting that economies of scale and regulation may also contribute to exchange coverage being more expensive than ESI). This issue is addressed infra Subsection III.A.2, which argues that exchanges will largely eliminate the economies of scale benefits of ESI and that the increased costs of regulation will not deter migration by high-risks because the benefits of this regulation will disproportionately benefit high-risk employees.
164. See supra note 113.
165. See I.R.C. §§ 106, 125 (2006). In addition, as noted earlier, employees will not be eligible for federal premium subsidies, even if their income would otherwise qualify them for a subsidy, because of the fact that affordable employer coverage is available to them. See supra note 114 and accompanying text.
166. In addition, employers may be concerned that if high-risk employees remain in the employer-sponsored plan, the employees' work attendance or performance might suffer as the result of inadequately treated medical conditions.
167. ACA § 10108, Pub. L. No. 111-148, 124 Stat. 119, 912 (2010) (to be codified at 42 U.S.C. § 18101). Note that the term "free choice voucher" is used in ACA to refer to a specific requirement that employers provide employees within certain income limits who face certain contribution requirements for an employer's plan with a "free choice voucher" to help fund exchange-based individual insurance purchases. Id. What we propose is not within the statute's provisions for "free choice vouchers," but follows the same general principles.
168. Id.
169. Ideally, employers looking to dump high-risk employees on to exchanges would offer supplemental payments only to high-risk employees for making this switch. Thus, an employer might offer the supplemental payment to any employee who incurred more than $50,000 in medical costs in the past year. However, this type of plan design would almost certainly violate HIPAA, as well as ACA's own nondiscrimination provisions. See supra note 74 and accompanying text.
170. Under § 10108 of ACA, free choice vouchers to qualifying employees do not count as taxable income. ACA § 10108, 124 Stat. at 913 (adding § 139D to the I.R.C.). But the free choice vouchers described here would be paid to non-qualifying employees, and so would count as taxable income. As a result, the use of an HRA would be necessary to provide the amount tax-free to the employee.
171. I.R.S. Notice 2002-45, 2002-28 I.R.B. 93.
172. Id.
173. See Rev. Rul. 2003-43, 2003-1 C.B. 935, 937.
174. For example, if the employee's share of the premium is $1000 per year, and the employee faces a combined federal income, state income, and payroll tax rate of thirty percent, paying the premium on an after-tax basis would cost the employee $300 more per year than paying on a pre-tax basis through an employer's cafeteria plan. While an employer can, in some circumstances, establish a cafeteria plan under § 125 of the I.R.C. that allows employees to set aside pre-tax money to pay for individual health insurance policies, ACA specifically prohibits the pre-tax payment of the employee's portion of individual health insurance premiums in most instances. See ACA § 1515, Pub L. No. 111-148, 124 Stat. 119, 258 (2010) (to be codified at I.R.C. § 125(f)(3)) (excluding payments to exchange- participating health plans from the gross income exemption given to qualified benefits).
175. The gross-up could be accomplished either by paying the employee additional cash compensation, or by increasing the amount of the contribution to the HRA, in an amount equal to the increased tax cost. Increasing the HRA contribution would be a cheaper option for the employer because it would be tax-free, but there might be problems under applicable nondiscrimination rules if the amount of the contributions were greater for higher-income employees.
176. The actual cost to an employer would vary significantly based on the income levels of its employees.
177. As an extreme example, take the statistic that three-quarters of all medical expenditures are incurred by individuals with chronic conditions. Catherine Hoffman et al., Persons with Chronic Conditions: Their Prevalence and Costs, 276 JAMA 1473, 1477 (1996). If an employer could successfully encourage all of its employees with chronic conditions to opt for coverage in the individual market instead of the group plan, the employer's group plan could theoretically reduce its costs by seventy-five percent. See infra Subsection III.A.2.c.
178. ACA § 1001, 124 Stat. at 131-32 (adding § 2713 to the PHSA) (to be codified at 42 U.S.C. § 300gg-13).
179. ACA § 1311(c)(6), 124 Stat. at 175 (to be codified at 42 U.S.C. § 18031). Individuals who participate in their employer's medical plan through a cafeteria plan (i.e., individuals who pay premiums of a pre-tax basis) would not be permitted to drop employer coverage mid-year absent a qualifying change of status. Treas. Reg. § 1.125-4 (2010). Having to pay for the employer plan when it is no longer useful is, however, a less significant issue than potentially not being able to obtain coverage on the exchange.
180. Recall that ACA does cap cost-sharing requirements even for self-insured plans. See supra note 79 and accompanying text.
181. See supra note 134.
182. This is true for many degenerative diseases, such as Huntington's disease. Carolyn Jacobs Chachkin, What Potent Blood: Non-Invasive Prenatal Genetic Diagnosis and the Transformation of Modern Prenatal Care, 33 Am. J.L. & Med. 9, 42-43 (2007).
183. See Gina Kolata, In Spinal Test, Early Warning on Alzheimer's, N.Y. Times, Aug. 10, 2010, at A1.
184. Chachkin, supra note 155. Neither the ADA nor the Genetic Information Nondiscrimination Act ("GINA") would prohibit such an exclusion. Under the ADA, such exclusions are permissible provided they are justified on the basis of cost, see supra notes 83-85 and accompanying text, and GINA imposes no requirements on health plans to cover genetically based diseases or illnesses. See Genetic Information Nondiscrimination Act, Pub. L. No. 110-223, 122 Stat. 881, 883, 888 (codified as amended at 29 U.S.C. § 1182(b) and 42 U.S.C. § 300gg-1(b)) (adding § 1182(b) to ERISA and adding § 300gg-1(b) to the PHSA) (mandating that a health plan may not adjust premiums or contributions on the basis of genetic information but making no coverage requirement for genetically based diseases).
185. Any such requirement would violate GINA. 42 U.S.C. § 2000ff-1(b) (2006).
186. For example, a plan that excluded coverage for cystic fibrosis treatment might result in significant hardship for families that have a child unexpectedly born with cystic fibrosis. Because the cystic fibrosis gene is recessive, it is entirely possible that two individuals are unaware of their status as gene carriers and therefore are unaware of the risk to their children. See Cystic Fibrosis Foundation, Testing for Cystic Fibrosis, http://www.cff.org/AboutCF/ Testing/ (last visited Oct. 26, 2010). A plan could potentially counteract this risk through coverage of genetic testing (in this case for potential parents), but it is an incomplete solution. In any event, the topic of genetics and insurance has produced a substantial literature. See, e.g., Susan Wolf & Jeffrey P. Kahn, Genetic Testing and the Future of Disability Insurance: Ethics, Law & Policy, Supplement, 35 J.L. Med. & Ethics 6 (Summer 2007). Our goal here is simply to raise the possibility that employers might exploit the time gap between diagnosis and medical treatment that accompanies some genetic conditions in designing a dumping strategy.
187. See National Institutes of Health, The Practical Guide: Identification, Evaluation, and Treatment of Overweight and Obesity in Adults 38 (Oct. 2000), available at http://www.nhlbi.nih.gov/guidelines/obesity/prctgd-c.pdf.
188. See supra Subsection I.C.3.b.
189. Cf. Kevin Sack, Despite Recession, Personalized Health Care Remains in Demand, N.Y. Times, May 11, 2009, at A12 (discussing benefits of concierge medicine).
190. Harry A. Sultz & Kristina M. Young, Health Care USA: Understanding Its Organization and Delivery 194 (6th ed. 2009).
191. Supra note 77 and accompanying text.
192. It is conceivable (but unlikely) that such a cap could be characterized as an aggregate or lifetime limit.
193. For a discussion of the role of wellness programs in health care reform, see generally Mariner, supra note 90.
194. See supra Subsection I.C.3.c.
195. ACA § 1201, Pub. L. No. 111-148, 124 Stat. 119, 156-57 (2010) (codified at 42 U.S.C. § 300gg-4) (adding § 2705(j) to the PHSA).
196. ACA § 1201, 124 Stat. at 156-59 (codified at 42 U.S.C. § 300gg-4) (adding § 2705(j) to the PHSA).
197. ACA § 1201, 124 Stat. at 158 (to be codified at 42 U.S.C. § 300gg-4) (adding § 2705 to the PHSA).
198. For general discussions of the problems that individuals may have making health care decisions consistent with their own self-interest, see Carl E. Schneider & Mark A. Hall, The Patient Life: Can Consumers Direct Health Care?, 35 Am. J.L. & Med. 7 (2009).
199. See Daniel Schwarcz, Differential Compensation and the "Race to the Bottom" in Consumer Insurance Markets, 15 Conn. Ins. L.J. 723, 745-48 (2009) (emphasizing the importance of aligning the incentives of agents and the consumers they advise); Samuel Issacharoff, Disclosure, Agents, and Consumer Protection 4 (N.Y.U. Law & Econ. Research Paper Series, Working Paper No. 10-33, July 2010), available at http://ssrn.com/abstract=1640624 (discussing the important role that information intermediaries can play in overcoming market problems).
200. See generally Mariner, supra note 90.
201. See, e.g., Dan M. Kahan, What Do Alternative Sanctions Mean?, 63 U. Chi. L. Rev. 591, 604 (1996) ("Empirical studies show that the willingness of persons to obey various laws is endogenous to their beliefs about whether others view the law as worthy of obedience: if compliance is perceived to be widespread, persons generally desire to obey; but if they believe that disobedience is rampant, their commitment to following the law diminishes. Even a strong propensity to obey the law, in other words, can be undercut by a person's 'desire not to be suckered.'" (internal citations omitted)) (Pubitemid 126408719)
202. Lawrence Lessig, Social Meaning and Social Norms, 144 U. Pa. L. Rev. 2181, 2185 (1996) ("At some point, when everyone else is violating a norm ⋯ obeying the norm makes one a 'chump.'"). (Pubitemid 126408777)
203. See supra Subsection I.B.2.b.
204. ACA does not subject individuals to any penalties for failing to secure health insurance coverage if the individual's "required contribution ⋯ for coverage ⋯ exceeds 8 percent of such individual's household income." ACA § 1501, Pub. L. No. 111-148, 124 Stat. 119, 246-47 (2010) (to be codified at I.R.C. § 5000A).
205. ACA §§ 1401-02, 124 Stat. at 213-24 (to be codified at I.R.C. § 36 and 42 U.S.C. §18071).
206. The costs associated with dumping are also indirectly reallocated to the federal government, which must pay a greater amount in premium tax credits as premiums rise.
207. See supra Subsection II.A.3.
208. Estimates suggest that group plans spend less than ten percent of premiums on administrative costs, while such costs are equal to thirty to forty percent of premiums in the individual market. Mark Pauly et al., Individual Versus Job-Based Health Insurance: Weighing the Pros and Cons, 18 Health Aff. 28, 33-34 (1999);
209. Mark V. Pauly & Len M. Nichols, The Nongroup Health Insurance Market: Short on Facts, Long on Opinions and Policy Disputes, Health Aff. - Web Exclusive W325, W326 (Oct. 23, 2002), http://content.healthaffairs.org/cgi/ reprint/hlthaff.w2.325v1.
210. See David A. Hyman & Mark Hall, Two Cheers for Employment-Based Health Insurance, 2 Yale J. Health Pol'y L. & Ethics 23, 30 (2001).
211. See supra Subsection I.C.1.
212. See Amy B. Monahan, The Promise and Peril of Ownership Society Health Care Policy, 80 Tul. L. Rev. 777, 785 (2006).
213. Only self-employed individuals may deduct the cost of individual health insurance purchases. See I.R.C. § 162(l) (2006).
214. On average, workers pay only seventeen percent of the cost of single coverage, and twenty-seven percent of the cost for family coverage. Kaiser Family Found., supra note 13, at 68. The majority of workers are employed by firms that contribute at least half of the premium cost. Id. at 81.
215. See Abraham & Schwarcz, supra note 5, at 10-26.
216. Of course, policyholders often have difficulty assessing the quality of their coverage. See generally Daniel Schwarcz, Regulating Insurance Sales or Selling Insurance Regulation?: Against Regulatory Competition in Insurance, 94 Minn. L. Rev. 1707, 1733-38 (2010);
217. Daniel Schwarcz, A Products Liability Theory for the Judicial Regulation of Insurance Policies, 48 Wm. & Mary L. Rev. 1389, 1412-21 (2007).
218. But employees may enjoy various comparative advantages in assessing the quality of their employer-provided coverage over policyholders in individual markets. In particular, they interact with other policyholders (i.e., co-workers) on a consistent basis and therefore may often be quite familiar with those policyholders' insurance experiences. However, such advantages may be undercut somewhat by frequent carrier and plan design changes made by employers. Moreover, there are potentially significant market problems even with respect to employer provided insurance. See generally Russell Korobkin, The Efficiency of Managed Care "Patient Protection" Laws: Incomplete Contracts, Bounded Rationality, and Market Failure, 85 Cornell L. Rev. 1, 27-62 (1999).
219. Most evidence indicates that employers do sometimes adopt plan designs that force high-risk employees to pay more for health care on an out-of-pocket basis, but we were unable to locate any studies indicating that plans were designed to discourage enrollment by high-risk employees. See, e.g., Elizabeth Pendo, Working Sick: Lessons of Chronic Illness for Health Care Reform, 9 Yale J. Health Pol'y L. & Ethics 453, 456-59 (2009) (describing the research on employer plans and the increased costs that enrollees with chronic conditions in such plans face). The lack of evidence of the discouragement of enrollment of high-risk employees is unsurprising, given the traditional unavailability of individual health insurance for high-risk individuals.
220. See supra Subsection II.A.1. It is also possible that the risk pool within an exchange will be worse than a typical employer's risk pool, which would also contribute to increased cost for exchange-based coverage.
221. Indeed, this is the central goal of insurance exchanges. See Jost, supra note 14, at 1.
222. With ESI, employers can establish a cafeteria plan under § 125 of the I.R.C. to allow employees to pay for coverage on a pre-tax basis. See supra note 60 and accompanying text. ACA specifically disallows the use of cafeteria plans to pay for exchange- based coverage, unless the individual's employer offers a group plan through the exchange. ACA § 1515, Pub. L. No. 111-148, 124 Stat. 119, 158 (2010) (to be codified at I.R.C. § 125).
223. See supra Subsection II.B.1.
224. See supra Subsection I.B.2.
225. ACA § 1302(d)(1)(D), 124 Stat. at 167 (to be codified at 42 U.S.C. § 18022). While platinum level coverage is permitted to be offered within the exchange, an insurer is not required to offer such coverage in order to participate in the exchange. See ACA § 1301(a)(1)(C), 124 Stat. at 162-63 (to be codified at 42 U.S.C. § 18021) (providing that in order for a plan to be a "qualified health plan" the insurer issuing the plan must agree to offer at least one silver level plan and one gold level plan; there is no requirement that insurers offer platinum level coverage in order to participate in the exchange). ACA § 1302(d), 124 Stat. at 167 (to be codified at 42 U.S.C. § 18022) defines gold coverage.
226. ACA § 1301(a)(1)(C), 124 Stat. at 162-63 (to be codified at 42 U.S.C. § 18021).
227. See ACA § 1311(c), 124 Stat. at 174-75 (to be codified at 42 U.S.C. § 18031).
228. The I.R.C. is concerned only with discrimination in favor of highly compensated employees. See I.R.C. § 105(h) (2006). There is no prohibition on discrimination in favor of non-highly compensated employees.
229. See Reed Abelson, Shifting Health Costs, N.Y. Times, Nov. 10, 2010, at B1.
230. Thomas Rice, The Economics of Health Reconsidered 127 (2d ed. 2003).
231. Karen Davis, Consumer-Directed Health Care: Will It Improve Health System Performance?, 39 Health Servs. Res. 1219, 1223 (2004) ("At the other end of the spectrum, ⋯ 50 percent of individuals account for only three percent of health care outlays, all with expenditures under $350 in 1997.");
232. see also Korobkin, supra note 187, at 41-42.
233. Alain C. Enthoven, Employment-Based Health Insurance Is Failing: Now What?, Health Aff. - Web Exclusive W3-237, W3-328 (May 28, 2003), http://content.healthaffairs.org/cgi/reprint/hlthaff.w3.237v1 (the figures cited include expenditures of those covered by both public and private insurance; as a result, those who are employed and have chronic conditions may have lower levels of health expenditures than those who are unable to work);
234. see also Gerard Anderson & Jane Horvath, The Growing Burden of Chronic Disease in America, 119 Pub. Health Rep. 263, 264 (2004) ("Analysis of the 1998 [medical expenditure] data shows that almost four in five health care dollars (78%) are spent on behalf of people with chronic conditions. People with chronic conditions are the heaviest utilizers of medical care: 96% of home health, 88% of prescriptions, 72% of physician visits, and 76% of inpatient hospital stays are attributed to people with chronic conditions ⋯ . Most of the utilization is by people with two or more chronic conditions: 80% of home health, 67% of prescriptions, 48% of physician visits, and 56% of inpatient stays.");
235. Catherine Hoffman et al., Persons with Chronic Conditions: Their Prevalence and Costs, 276 JAMA 1473, 1477 (1996) (finding that individuals with chronic conditions accounted for three-quarters of all medical expenditures in 1987).
236. See supra Subsection II.B.2.
237. See supra Part II.
238. See Lawrence Summers, Some Simple Economics of Mandated Health Benefits, Am. Econ. Rev., May 1989, at 177, 181-82.
239. Cf. Hyman, supra note 5, at 1A11-1A17 (discussing why ACA may cause some employers to consider dropping group coverage entirely).
240. See ACA § 1513, Pub. L. No. 111-148, 124 Stat. 119, 253-56 (2010) (to be codified at I.R.C. § 4980H). Employers who offer a group health plan and have at least one full-time employee who receives a premium tax credit would pay the lesser of $3000 for each employee receiving a premium credit or $2000 for each full-time employee, excluding the first thirty employees from the assessment. HCERA § 1003, Pub. L. No. 111-152, 124 Stat. 1029, 1033 (2010) (amending PPACA § 10106(e), Pub. L. No. 111-148 124 Stat. 119, 910 (2010) (amending PPACA § 1513, 124 Stat. at 253-56 (to be codified at I.R.C. § 4980H))). For example, if an employer with sixty employees offers coverage, but five employees are eligible for and receive a premium tax credit through the exchange, the employer would face a fee of $15,000 (the lesser of (1) the number of employees receiving the credit multiplied by $3000 and (2) the number of employees minus thirty, multiplied by $2000). A separate formula applies when an employer does not offer coverage and has at least one full-time employee who receives a premium tax credit. In that case, the employer faces a fee of $2000 per fulltime employee, excluding the first thirty employees from the assessment. Id. For example, if the employer has seventy full-time employees, its penalty would be calculated by subtracting thirty from seventy, and multiplying the resulting forty by $2000, for a total of $80,000 per year.
241. See supra Subsection II.A.3.
242. This gain results from the fact that employers that engage in targeted dumping are able to shift most of the costs associated with high-risk employees' health care onto the individuals who purchase coverage on an exchange
243. Assume, for example, that a high-risk individual has projected annual medical expenditures of $20,000. As long as the premiums in the individual market are below $20,000 (which they should be with decent participation levels by non-high-risk individuals), the employer stands to gain by dumping even if the employer pays the full cost associated with exchange coverage.
244. See supra note 35 and accompanying text.
245. See, e.g., Michael Barbaro, Wal-Mart's Detractors Come in from the Cold, N.Y. Times, June 5, 2008, at C1.
246. There is evidence that many employers provide health care coverage because "[i]t is the right thing to do." See, e.g, Paul Fronstin & Ruth Helman, Small Employers and Health Benefits: Findings from the 2002 Small Employer Health Benefits Survey 7 (Employee Benefit Research Inst., EBRI Issue Brief No. 253 (Jan. 2003), (finding that seventy-seven percent of small employers surveyed in 2002 reported "it is the right thing to do" as a major reason for offering a health plan). At the same time, employers routinely make changes that negatively impact employee health care coverage. See, e.g., Kaiser Family Found., supra note 13, at 186 (listing various changes surveyed employers would consider making to their health plan in the next year; for example, forty percent of respondents indicated that they were somewhat likely or very likely to increase the amount employees pay for copays or coinsurance).
247. See supra Subsection II.B.5.
248. Kaiser Family Found., supra note 13, at 157 (compiling data by firm size for the percentage of covered workers in partially or completely self-funded plans).
249. The penalty is $2000 per employee, except that the first thirty employees do not incur a penalty. See supra note 206. Therefore, while an employee with one hundred employees would only face a penalty of $140,000, an employer with 100,000 employees would face a penalty of $199.9 million.
250. See supra Subsection II.B.1.
251. See I.R.C. § 105(h) (2006). This previously applied only to self-insured plans, but was extended to all employer plans by ACA. ACA § 10101(d), Pub. L. No. 111-148, 124 Stat. 119, 884-85 (2010) (amending ACA § 1001, 124 Stat. 119, 130-38 (2010) (adding § 2716 to the PHSA) (to be codified at 42 U.S.C. § 300gg-16)). If a selfinsured plan discriminates in favor of such employees, the highly compensated employee must include the value of coverage in her taxable income. I.R.C. § 105(h).
252. Treas. Reg. 1.105-11(c)(2)(ii) (2010) provides that a plan satisfies the nondiscrimination requirements with respect to eligibility where eligibility is based on a classification that the Service determines, based upon the facts and circumstances of each case, are nondiscriminatory. Assuming that a company's highly and non-highly compensated employees are distributed reasonably equally across geographic locations, setting different eligibility provisions based on employee location seems permissible under I.R.C. § 105(h).
253. The Internal Revenue Service will not issue rulings regarding whether specific eligibility criteria are nondiscriminatory, and therefore there is very little information regarding which criteria are permissible and which are not. See Rev. Proc. 2010-3, 2010-1 I.R.B. 111.
254. See, e.g., Cass R. Sunstein, Deliberative Trouble? Why Groups Go to Extremes, 110 Yale L.J. 71, 77-78 (2000) ("People frequently think and do what they think and do because of what they think relevant others think and do.").
255. See id. at 82.
256. See supra Section III.A.
257. In the event that the dumping strategy were foreclosed, then the question of how employers would respond would simply implicate the familiar debate about whether employers will dump coverage. See supra notes 4-5 and accompanying text (noting this debate).
258. Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984). The next Subsection describes various statutory fixes that would clearly prohibit employer dumping. But each of these appear to be beyond the authority of regulators. For example, one possible way to prevent dumping would be to subject selfinsured plans to the requirement to provide essential health benefits. Yet the statute is clear that the term "health plan" will not, except as specifically provided, include self-insured plans, ACA § 1301(b)(1)(B), Pub. L. No. 111-148, 124 Stat. 119, 163 (2010) (to be codified at 42 U.S.C. § 18021), and is similarly clear that "health insurance issuer" does not apply to such plans. ACA § 1001, 124 Stat. at 130-38 (adding § 2715(d)(3)(A) to the PHSA) (to be codified at 42 U.S.C. § 300gg-15) (defining a health insurance issuer to include "a group health plan that is not a self-insured plan"). The statute is similarly clear with respect to each of the other statutory solutions discussed below.
259. See supra Subsection II.A.3 (explaining ACA § 1501(b), 124 Stat. at 244-49 (to be codified at I.R.C. § 5000A)).
260. See ACA § 1301(b)(3), 124 Stat. at 163 (to be codified at 42 U.S.C. § 18021) (stating that "group health plan" has the meaning given to it under § 2791(a) of the PHSA, 42 U.S.C. § 300gg-91(a)(1) (2006), which in turn uses the definition of group health plan used in ERISA § 3(1), 29 U.S.C. § 1002(1) (2006), which clearly contemplates both insured and self-insured plans);
261. Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan Under the Patient Protection and Affordable Care Act, 75 Fed. Reg. 34,538, 34,539 (June 17, 2010).
262. ACA § 1501(b), 124 Stat. at 248-49 (to be codified at I.R.C. § 5000A(f)(2)).
263. See Shearman & Sterling LLP, Self-Insured Medical Plans After Health Reform, Client Publication (Apr. 29, 2010);
264. Church Alliance, Comments on Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan Under the PPACA 4 (Aug. 10, 2010).
265. See ACA § 1301(b)(2), 124 Stat. at 163 (to be codified at 42 U.S.C. § 18021) (stating that a "health insurance issuer" has the meaning given to it in § 2791(b) of the PHSA). The PHSA defines a "health insurance issuer" as follows: "[A]n insurance company, insurance service, or insurance organization ⋯ which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance (within the meaning of section 514(b)(2) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. § 1144(b)(2))). Such term does not include a group health plan." 42 U.S.C. § 300gg-91(b)(2) (2006).
266. Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984).
267. The scope of what reviewing courts consider to be permissible under Chevron Step II (that is, whether the agency's interpretation of a statute is reasonable) is a subject of much scholarly debate. See, e.g., Michael Herz, Deference Running Riot: Separating Interpretation and Lawmaking Under Chevron, 6 Admin. L.J. Am. U. 187 (1992);
268. Thomas W. Merrill, Textualism and the Future of the Chevron Doctrine, 72 Wash. U. L.Q. 351 (1994);
269. Mark Seidenfeld, A Syncopated Chevron: Emphasizing Reasoned Decisionmaking in Reviewing Agency Interpretations of Statutes, 73 Tex. L. Rev. 83 (1994).
270. The Internal Revenue Code provides an exclusion from gross income for "employer- provided coverage under an accident or health plan." I.R.C. § 106(a) (2006). The statute does not, however, define the relevant term. Id. Regulations simply specify that the reimbursement can be made through "insurance or otherwise" and that the employer can fund the arrangement either by paying premiums or by contributing to a separate trust or fund. Treas. Reg. 1.106-1 (2010).
271. See supra Subsection II.B.1.
272. See supra Subsection I.C.3.a.
273. Discussion of whether an employer's ability to make disability-based distinctions within its health plan should be further restricted is beyond the scope of this article, but Bagenstos, supra note 86, at 27-32, discusses some of the issues involved.
274. See supra Subsection I.C.3.d.
275. Id.
276. See supra note 125 and accompanying text.
277. See supra note 109.
278. See An Act Providing Access to Affordable, Quality, Accountable Health Care, 2006 Mass. Acts 77 § 45 (codified as amended in scattered sections of the Massachusetts General Laws).
279. See supra Subsection I.C.3.e.
280. Supra note 103 and accompanying text
281. See ACA § 1101(e)(1), Pub. L. No. 111-148, 124 Stat. 119, 142 (2010) (to be codified at 42 U.S.C. § 18001).
282. Doing so would have additional benefits as well. For a detailed discussion of the arguments in favor of removing the disparate treatment of self-insured plans, see Monahan, supra note 66.