March 7, 2014
By Larry Cary
Last week I spoke at Labor Press’s healthcare conference about the challenges posed by the Affordable Care Act (Obamacare) to union health and welfare funds. They are significant, in part, because in writing the law almost no thought was given to the unique character and needs of multi-employer union health plans. Indeed, one of the chief criticisms of the new law is that it was drafted with the heavy involvement of the private insurance industry.
Multi-employer health and welfare plans have been around since the 1940s. Created by collective bargaining, these funds cover employees from many participating employers, hence the name “multi-employer.” Today, about 20,000,000 people get their medical care needs met through a union benefit plan. Since ERISA was passed in the 1970’s many of these plans became partially or completely self-insured, which probably means the insurance industry does not make as much profit as it otherwise would if they did not exist.
Multi-employer union plans exist for three main reasons: (1) To do more with less, that is to say, they squeeze the profit out of insurance and provide more benefits at less cost, (2) to promote continuity of coverage, by requiring each employer to pay into the same fund as the workers move from job to job in the industry, which also has the effect of equalizing employers’ labor costs and preventing unfair competition, and (3) to promote loyalty to the union because the members see it as the institution that makes sure they are getting insurance coverage. Unfortunately, the ACA has created big challenges to union plans.
Most union plans took advantage of their ability to self-insure and do not offer the same one-size-fits-all mix of benefits that state regulators may require. Unfortunately, under the ACA certain essential benefits are now required for all insurance including self-insured union plans. A union plan is permitted to keep its particular plan of benefits, that is to say, it is grandfathered, but only for so long as it does not raise deductibles, copayments and other costs to the members. As time goes by these limitations will make the plan more expensive than it otherwise would be and that may negatively affect the quality of available benefits. Also increasing costs, the law requires that lifetime or annual caps be eliminated and that children under age 26 be covered. While that may be a good thing for some members, because the collective bargaining agreement may limit increases in employer contributions for the life of the contract, often five years, these increased costs cannot be recouped by increasing contributions and benefits in other areas may have to be cut.
One of the biggest problems faced by union health plans is that they are prohibited from participating in the health exchanges created under the ACA, which means they cannot get federal subsidies when covered participants are paid a low wage. This means that in low wage industries for some companies it will be cheaper for the employer and its workers to get their federally subsidized coverage through an exchange rather than through the union’s health insurance plan. It is ironic that a law which most unions supported will have the effect of promoting federally funded union busting.
The ACA also requires that union plans pay taxes and fees to the federal government. This also increases costs for union plans which in many cases cannot pass on these new expenses to the employer. For example, this year union plans must pay a “reinsurance fee” of about $60 for every covered life ($240 for a family of 4, for example) which will be used to subsidize the profits of private health insurance companies. Over $1 billion dollars of what is, after all, workers’ money, will be sent this year to private insurance companies to make sure that when they enroll higher-risk individuals the companies will remain profitable. Recently, the Obama Administration issued a regulation that will eliminate this “reinsurance fee” for fully self-insured union plans, but because very few union plans are 100% self-insured very few will get any relief.
Another big challenge facing union funds is the so-called “Cadillac Tax” that union funds will be paying, beginning in 2018, if the average annual cost of providing benefits exceeds about $10,000 for an individual and $27,500 for a family. An excise tax equal to 40% of the amount above these limits will be imposed on union plans. In many industries, where workers have decided through collective bargaining to take less wages and put more into their benefit packages, these excise taxes will be significant. For example, New York City expects that it will have to pay about a half a billion dollars in excise taxes in 2022. Good union plans will either have to reduce benefits or pay the tax. Because contracts are being negotiation now that will include 2018, when the tax first takes effect, unions need to examine this issue now or be faced with very difficult choices during the last year of a new five year agreement.
The ACA also creates an entirely different challenge for union plans as well as for our society as a whole. Under the ACA, covered employers are only required to provide insurance to employees and dependent children – and not to the employee’s spouse. Some employers are now starting to no longer offer insurance coverage for spouses, leaving them to get it from their employer or to buy it on the exchange if they are not working. I fear that in the not too distant future it will become the norm to not cover or even offer the ability to pay to cover the employee’s spouse. For union plans this may pose special difficulties because most union plans charge an employer the same contribution rate, either per hour or per week, regardless of whether the employee has a spouse or dependent children. This is done to equalize the labor costs of all employers in the industry and prevent unfair competition among employers because one employer’s labor costs is lower than another’s simply because of having a younger work force with fewer married employees with children. How this will be handled may be very difficult.
The Affordable Care Act is intended to give more people access to health insurance, but it shouldn’t come at the cost of destroying or eroding the quality of coverage provided by multi-employer union health plans. The law needs to be changed.
Larry Cary is a partner is the law firm of Cary Kane LLP. He has represented multi-employer union benefit plans for 30 years.