Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Paying for Contraceptive Coverage: The Case of Self-Funded Employers

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Most Catholic institutions affected by the recent contraceptive ruling fund their own health benefit plans. This means that there is no “insurer” available to pass the cost of that coverage on to, even in a shell-game sort of way (see prior posts on large and small employers that purchase insurance).  When the Administration announced its compromise for the relatively insignificant fully-insured market, it didn’t offer any compromise for the much larger set of religious self-funded plans.  Instead, they announced an intention to figure out how to compromise:

The Departments intend to develop policies to achieve the same goals for self-insured group health plans sponsored by non-exempted, non-profit religious organizations with religious objections to contraceptive coverage.

In this past week’s Advanced Notice of Proposed Rule-Making (ANPRM), Health and Human Services (HHS) began the brainstorming process:

For such religious organizations that sponsor self-insured plans, the Departments intend to propose that a third-party administrator of the group health plan or some other independent entity assume this responsibility. The Departments  suggest multiple options for how contraceptive coverage in this circumstance could be arranged and financed in recognition of the variation in how such self-insured plans are structured and different religious organizations’ perspectives on what constitutes objectionable cooperation with the provision of contraceptive coverage.

These options (beginning on page 16,507) can be summarized as follows:

1) Use drug rebates;
2) Use fees paid by the religious organization nominally designated for another purpose, such as disease management fees;
3) Use funds from a private, non-profit entity to be specified later;
4) Receive a “reinsurance contribution” fund rebate or tax credit (this only “works” for 2014-2016);
5) Use the federal Office of Personnel Management designate a national, private insurer that would offer this stand-alone coverage;
6) Give the national plan a “credit” so they wouldn’t have to pay their entire Exchange fee bill;

This is an incredibly weak set of ideas.  These boil down into the following “pass the hot potato” funding sources:

a) The religious institution itself (ideas 1 and 2)
b) The third-party administrator itself out of profits (ideas 1 and 2)
c) The individual market via reduced reinsurance payments and/or the general US Treasury (idea 4)
d) An unspecified, wealthy benefactor (idea 3)
e) A benevolent, national, private insurer (idea 5)
f) Each of the individual Exchanges through reduced user fees (idea 6)

The administration is between a rock and a hard place here.  It is worth working through the mechanics of each of the above ideas, however, to illustrate the full breadth of the problem.

 Idea 1: Use Drug Rebates

Currently, almost all self-insured contracts do one of two things with drug rebates: pass them to employers or keep them to fund operations.  Some employer groups want transparency in pricing.  They want to receive all drug rebates directly and are willing to pay a Pharmacy Benefit Manager (PBM) a fee to process their drug claims and negotiate rebates on their behalf.  The other extreme is that sometimes the employer will let the PBM keep all the drug rebates, with the understanding that the PBM will use those monies to process the claims (and generate their profit).  In other words, drug rebates are already full-accounted for, one way or the other, in contracts with self-insured groups.

In cases where the PBM exclusively keeps drug rebates to pay for the cost of processing the drug claims, requiring the PBM to pay for contraceptives out of these rebates is equivalent to having them pay for contraceptives out of their profits.  Alternatively, they will have to change their negotiating stance with the employer, passing the cost to the employer.

In cases where the PBM is transparently passing drug rebates to the employer, siphoning off that payment stream to pay for contraceptives would clearly result in the religious institution effectively paying for the coverage.

It is true that many brand contraceptives offer rebates.  However, rebates are just a discount off the full price, say 20% off for illustration.  Clearly you can’t pay for the full cost of the additional contraceptives with the 20% savings rebate piece, despite a suggestion to the contrary in the HHS ANPRM.

Lastly, this also illustrates another fundamental difficulty that HHS is ignoring: many employers contract for drug benefits separately from medical.  Contraceptive coverage will require both medical and pharmaceutical funding sources, and the ANPRM doesn’t acknowledge this problem nor offer any solutions.

Idea 2: Divert other fees

Although there can be cost-shifting in any contractual arrangement, the idea of billing the group for disease management fees and using those fees to pay for contraceptives is rather brazen.  I trust the problems here are self-explanatory.

Many may not be familiar with the basics of a Third-Party Administrator’s (TPA’s) business model, however.  Nate Ogden cited here by Insureblog lays out the problem nicely:

I charge $10-$25 Per Employee Per Month (PEPM) which works out to $120-$300 per year. My profit margins currently run around 10%, meaning I have $12-$30 per year per member after paying expenses like rent, salaries, paper, postage, etc. Obama and his HHS now wants me to cover up to $3000+ per year in contraceptive benefits per female employee/student. Obviously I can’t pay a $3000 bill with $30 of revenue so I would need to terminate clients.

That example was for student coverage, but those numbers strike me as plausible revenue amounts for a relatively bare-bones employer plan, as well.  In the future, these low-cost TPA’s are going to be facing serious business and regulatory pressures from the ACA.  Even aside from this contraceptive coverage problem, I’d predict that the days of $20 PEPM rates are numbered.

Idea 3: Anyone volunteering?

Wouldn’t it be wonderful if the Administration could just get someone to come forward and volunteer to pay for all this?  In reality, this isn’t so far-fetched.  Drug companies may be willing to give free contraceptives to a limited population of women, both because they will likely roll out of coverage under their employer plans, and also because the government has enough price levers buried in other places in government to make this work.  Think Part D benefit structures.  Crony capitalism could come to the rescue here.

Idea 4: Lower TPA reinsurance program taxes (2014-2016).

There are a large number of problems with this idea.  Firstly, the US government is required to collect $12 billion total, $10 billion to support the individual market via reinsured claims and $2 billion to support the US Treasury.  This means there are a few possibilities for how this could unfold:

a) The TPA’s simply get a pass on their taxes, meaning that the individual market reinsurance program is underfunded and/or the Treasury is underfunded.  In the first case, the cost of coverage has been passed to the individual market; in the latter case it has been borne by the US taxpayer.  I’m not sure either is legal.

b) The  reduced taxation is made up for by increasing the tax rate on everyone else.  These taxes form part of everyone else’s premium rates, so this will result in everyone’s premiums going up (although the cost is spread to the *entire* non-religious-exempt health insurance/benefit market, so the amount per person is likely negligible).  Estimating this accurately will be problematic, on top of their current problems calibrating this tax amount accurately.

Idea 5: Use the National Plan(s) to provide stand-alone coverage

This will make issuing the national plans less attractive.  Worse, in 2014, the national plans only have to be in 60% of states, and not in every county in each of those states.  To ensure access to stand-alone contraceptive coverage, the national plan would have to have a truly national presence.

There may also be administrative costs associated with this, beyond the direct costs of the contraceptives themselves.  What hidden back-door cost offset would the national plans get?  How large could that offset be?

Idea 6: Use Exchange funds

This is a sign of how desperate they are for funding ideas.  They are willing to throw under the bus the sole funding mechanism for one of the critical engines of insurance reform.  Remember that if Exchanges aren’t self-sufficient by January, 2015, they can’t exist.  Further, some states have set up their Exchanges under state law.  It’s not clear to me at all that the federal government has the right to these fees, especially in instances where Exchanges are a quasi-governmental state body.

Obviously, if a particular area of the country was disproportionately employed by Catholic institutions who don’t have contraceptive coverage, and if employees of those institutions would sign up for that coverage at a relatively rapid rate, this funding mechanism could collapse the revenue stream of an Exchange in a particular area.  User fees on everyone else would have to be raised, etc., to compensate.


This has been a long and dense post, but it’s only when you really break into the weeds for what the Administration is proposing here that you realize what a mess they are in.  In reality, they haven’t proposed any workable “compromise” to date.  They only have agreement on a “principle” that someone else should pay.  So far, there are no volunteers stepping up to pay.  Will you?


Written by Victor

March 24, 2012 at 3:47 pm

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