Affordable Care Act: IRS Should Mitigate Limitations of Data to Be Used for the Age and Gender Adjustment for the Tax on High-cost Health Plans
Released: 2017-09-06T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Some stakeholder groups have questioned the use of the BCBS FEHBP Standard plan premium costs as the basis of the age and gender adjustment, as stipulated by PPACA. The Consolidated Appropriations Act, 2016 includes a provision for GAO to report on the suitability of using these data for this purpose.

This report examines: 1) the benefits and limitations of using FEHBP BCBS Standard plan data as the basis of the age and gender adjustment, and what alternatives to these data could be considered; and 2) how any limitations to BCBS Standard plan data could be mitigated. GAO reviewed IRS documentation; interviewed industry experts and officials from IRS, the Office of Personnel Management (OPM), the Department of Treasury, and other agencies; reviewed comment letters submitted in response to IRS notices; and analyzed 2010 and 2015 cost and enrollment data from OPM.

section_title: What GAO Found
paragraphs: The Patient Protection and Affordable Care Act (PPACA) included a revenue provision for a 40 percent excise tax on high-cost employer-sponsored health coverage to be administered by the Internal Revenue Service (IRS). The tax would be imposed when an employee's annual cost of coverage exceeds an established dollar limit. This limit could be adjusted upward if an employer's workforce—based on its age and gender characteristics—was likely to have higher health costs than the national workforce, on average. This adjustment, known as the age and gender adjustment, is based on the premise that older individuals and younger females tend to have higher health care costs than other individuals. It is designed to lower the tax burden so that taxes are owed based on the plan design and not based on the health care costs of its members. PPACA stated that this adjustment would be made based on the premium costs of the Blue Cross and Blue Shield (BCBS) Standard plan under the Federal Employees Health Benefits Program (FEHBP).

The BCBS Standard plan has benefits and limitations for use as the basis of the adjustment. The benefits include that it is a large, national, decades-old, convenient data source, in that it is already known by, and available to, the federal government. However, there are some specific limitations to its use.

The BCBS Standard plan has selection bias within FEHBP because members have a choice among many plans, and, compared to other options available to federal employees, it is a relatively expensive plan that covers members with higher health care costs. GAO's analysis of OPM data found that these higher costs are particularly true for younger members.

The plan's enrollment has declined in recent years. Furthermore, officials noted that any one plan offering could be discontinued.

The selection bias in the BCBS Standard plan may result in an age and gender adjustment that is not adequate. For example, because the BCBS Standard plan covers young members with higher health care costs, the ratio between the average claims costs of the younger and older members in that plan is smaller than it would be in a plan that did not have that particular selection bias issue. Therefore, the age and gender adjustment could be too small. While experts GAO spoke with identified several potential alternative sources of cost data for use as the basis of the adjustment, those alternatives also had limitations, such as not being convenient sources of data and potentially not being representative of the national workforce.

To mitigate limitations of the BCBS Standard plan, these data could be supplemented with data from other FEHBP plans, such as the BCBS Basic plan, which is known to have younger members with lower health care costs and increasing enrollment. GAO found that using combined data from these two sources could result in a different adjustment for some employers—in particular, for those with older employees. Standards for internal control suggest that effective information is vital for an entity to achieve its objectives. Relying on BCBS Standard plan data alone does not provide IRS with the comprehensive information it may need to determine an adequate age and gender adjustment.

section_title: What GAO Recommends
paragraphs: GAO recommends that, in implementing the age and gender adjustment, IRS consider taking steps to mitigate the limitations of the BCBS Standard premium cost data, such as by combining data from multiple FEHBP plans. IRS neither agreed nor disagreed with GAO's recommendation, but stated that it would consider the recommendation as it works to implement the age and gender adjustment.

section_title: Letter
paragraphs: The Patient Protection and Affordable Care Act (PPACA), enacted in  2010, included a provision for a 40 percent excise tax on high-cost  employer-sponsored health coverage (hereafter referred to as the tax)  intended, in part, to raise funds to offset costs associated with the law.  The tax would be imposed when the annual cost of coverage for an  employee exceeds an established applicable dollar limit, set originally at  $10,200 for self-only coverage and $27,500 for coverage other than self- only. However, this limit could be adjusted upward if an employer’s  workforce—based on its age and gender characteristics—was likely to  have higher health costs than the national workforce, on average. This is  known as the age and gender adjustment.

Based on the premise that older individuals tend to have higher health  care costs than younger individuals and that younger females tend to  have higher health care costs than younger males due to the potential for  maternity costs, the age and gender adjustment is designed to lower the  tax burden, compared to what it would have been without the adjustment,  for employers that have costlier employees so that taxes are owed based  on the plan design and not based on member costs. PPACA stipulates  that the age and gender adjustment would be made based on the  premium cost of the Blue Cross and Blue Shield (BCBS) Standard plan  under the Federal Employees Health Benefits Program (FEHBP). Some  industry experts have raised questions about the use of the BCBS  Standard plan premium cost data as the basis of this calculation,  including BCBS Association (BCBSA) representatives who contend that  the age and gender makeup, as well as the costs of the BCBS Standard  plan members, differ from those of the national workforce.

The Consolidated Appropriations Act, 2016 includes a provision for us to  study the suitability of using the BCBS Standard plan premium cost data  as the basis of the calculation for the age and gender adjustment. This  report examines  1.  the benefits and limitations of using FEHBP BCBS Standard plan data  as the basis of the age and gender adjustment and alternatives to  these data that could be considered; and  2.  how any limitations of the BCBS Standard plan data could be  mitigated.

To assess the benefits and limitations of using the BCBS Standard plan  data, as well as to identify alternatives, we reviewed relevant statutory  provisions and the Internal Revenue Service’s (IRS) 2015 notices related  to the age and gender adjustment, as well as other agency  documentation and federal internal control standards. We also reviewed  comment letters submitted by stakeholder groups to IRS in response to  its notices related to the age and gender adjustment. In addition, we  interviewed knowledgeable officials from IRS, the Office of Personnel  Management (OPM), the Department of the Treasury, and two agencies  within the Department of Health and Human Services (HHS)—the Agency  for Healthcare Research and Quality and the Centers for Medicare &  Medicaid Services. We also interviewed industry and actuarial experts  from the American Academy of Actuaries, BCBSA, the Employee Benefit  Research Institute, the Health Care Cost Institute, the Kaiser Family  Foundation, the National Association of Insurance Commissioners, and  the Society of Actuaries to obtain their perspectives on the BCBS  Standard plan data and alternative options.

To assess how limitations of the BCBS Standard plan data might be  mitigated, we analyzed 2010 and 2015 FEHBP cost and enrollment data  provided by OPM, as well as Current Population Survey (CPS) data  available through the U.S. Census Bureau and the Bureau of Labor  Statistics. We compared BCBS Standard plan contract holder  demographics, by age and gender, with those of the national workforce  according to CPS data, as well as to those of the BCBS Basic plan—the  other national FEHBP plan offered by BCBS. We also modeled the  impact of using various approaches for constructing the age and gender  adjustment. Specifically, we identified a hypothetical employer scenario  that should plausibly receive the age and gender adjustment. We then  constructed the age and gender adjustment for this hypothetical  workforce using an approach outlined in IRS’s notice. We assessed the  reliability of these data by interviewing knowledgeable officials, reviewing  related documentation, and performing data checks. On the basis of  these steps, we concluded that the OPM and CPS data were sufficiently  reliable for the purposes of this report.

We conducted this performance audit from July 2016 to September 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Excise Tax on High-cost Employer-sponsored Health Insurance
paragraphs: PPACA’s excise tax on high-cost employer-sponsored health insurance is  imposed when the value of employees’ health coverage exceeds a  threshold, referred to as the tax’s applicable dollar limit. The applicable  dollar limit was established in statute for 2018, the year the tax was  originally to be implemented. PPACA stipulated that for 2019, the  applicable dollar limit would increase by the amount of the Consumer  Price Index for All Urban Consumers (CPI-U), plus an additional 1  percent. Starting in 2020, the applicable dollar limit would then increase  in step with the CPI-U each year thereafter. The Consolidated  Appropriations Act, 2016 delayed the tax’s implementation until 2020.  Some economists have noted that because health care premiums have  historically outpaced the CPI-U, it can be expected that the share of  employers impacted by the tax should grow over time.

The basis for determining the value of employees’ health coverage that is  measured against the applicable dollar limit of the tax—referred to as  applicable coverage—is defined in statute. Applicable coverage includes  both the employer’s and the employee’s pre-tax contributions to the  premium for a group health plan and to a flexible spending arrangement,  Archer Medical Savings Account, health savings account, or health  reimbursement arrangement. The amount of an employee’s applicable  coverage that exceeds their applicable dollar limit—known as the excess  benefit—is subject to the tax. Because applicable coverage can vary by  employee, for example, depending on whether or not they chose to  contribute to a flexible spending arrangement or health savings account,  the tax is determined separately for each employee. As a result, the tax  could be owed for some employees and not others.

section_title: Age and Gender Adjustment
paragraphs: The age and gender adjustment is designed to make the applicable dollar  limit—the threshold for the tax—higher for employers with workforce  demographics that are typically costlier than average. Specifically, the  law stipulates that the age and gender adjustment would increase the  applicable dollar limit by an amount equal to the excess of a) the premium  cost of the BCBS Standard plan, if priced for the age and gender  characteristics of all employees of an employer, over b) the premium cost  of the BCBS Standard plan, if priced for the age and gender  characteristics of the national workforce. In 2015, the IRS released a  notice outlining a draft proposal for how the age and gender adjustment  might be implemented. The notice proposed using BCBS Standard plan  premium and claims cost data (including claims costs classified into 5- year age and gender groups), as well as CPS national workforce data, to  produce published tables that an employer could use to calculate its age  and gender adjustment based on its specific workforce data. In its notice,  IRS asked for comments on whether the calculation of group costs should  rely on actual claims data from the BCBS Standard plan or, as an  alternative, on “national claims data reflecting plans with a design similar  to that of the .”

FEHBP provides health care coverage to federal employees, retirees, and  their dependents through health insurance carriers that contract with  OPM. In 2015, FEHBP provided an estimated $47.9 billion in health care  benefits to roughly 8.2 million individuals, according to agency officials.  Carriers offer plans in which eligible individuals may enroll to receive  health care coverage. For the 2015 plan year, FEHBP options included  fee-for-service plans that were available nationwide, plans available only  to certain types of federal employees (e.g., postal workers), and plans  offered by health maintenance organizations that were available only in  certain regions. Of these plans, some were high-deductible plans and consumer-driven plans. Generally, individuals are able to choose from  several plans, but most FEHBP contract holders were in plans offered by  the BCBSA. In addition to offering the Standard plan, BCBSA also offers  the Basic plan, and combined, these two plans are among the most  popular of FEHBP plans.

section_title: Experts Cited Benefits and Limitations of the FEHBP BCBS Standard Plan Data and Identified Alternative Data Sources, Which Also Have Limitations
paragraphs: The BCBS Standard plan has many characteristics that experts cited as  important when considered for use as the basis of the age and gender  adjustment. However, they also noted that it has limitations because it is  not fully representative of the national workforce, has selection bias, and  has experienced declining enrollment in recent years. Experts identified  alternative cost data sources, but these data sources also have  limitations. Some experts also expressed concern with the use of a  premium value as the basis for the adjustment and suggested alternative  approaches.
subsections: section_title: Experts Noted That the BCBS Standard Plan Is a Large and Convenient Source of Cost Data, but Underlying and Changing Member Demographics Limit Its Strengths
paragraphs: According to industry and actuarial experts we interviewed and  stakeholders that commented on IRS’s notices for the age and gender  adjustment, BCBS Standard plan data have several benefits when  considered for use as the basis of an age and gender adjustment, as  stipulated in the law. Specifically, it is a large dataset that includes several  years of data and is readily available (convenient). Experts we spoke with  identified these as important characteristics for cost data that is to be  used as the basis of an age and gender adjustment. Specifically, experts  noted that the data source should have the following characteristics:

Be representative. Several experts noted that the data source should  reflect the demographics of the broader U.S. population, the national  workforce, or the population eligible for employer-sponsored  insurance, to the extent possible. Differences in the demographics  between the broader population and the data source used for an  adjustment could have an impact on health care costs and utilization  and, thus, have an impact on the adjustment.

Be large. Several experts pointed out that an ideal data source would  be large, in terms of the number of individuals covered, in part due to  the fact that there needs to be sufficient data within each of the age  and gender groups.

Contain several years of data. Some experts pointed out the benefit  of using a data source that has been in existence for some time and  that has several years of data so that one would have confidence that  the data for a given year are not unusual.

Be convenient. For the purposes of the government’s use, several  experts also noted that convenience of the data source could be  important to consider—such as the ease with which the government  can access and use the data and the costs for obtaining them.

Notably, the data from the BCBS Standard plan meet several of these  characteristics because the plan is large, relatively popular, and covered  just over 3 million members across the United States in 2015, making it  the FEHBP plan with the highest enrollment. It is also a mature plan that  has been in existence since 1959. Finally, it is convenient in that it is  already available and familiar to the federal government, and BCBSA  already provides summary cost and enrollment data to OPM on an annual  basis.

However, experts and stakeholders identified two important limitations to  using BCBS Standard plan cost data as the basis of an age and gender  adjustment: 1) not being representative of the national workforce due to  selection bias and 2) declining enrollment.

Selection bias. Enrollment in the BCBS Standard plan is affected by  selection bias among the FEHBP options that may result in it not being  representative of the national workforce. Within the FEHBP, federal  employees can choose among many different health plan options. The  BCBS Standard plan is a relatively expensive plan within the FEHBP and  covers older and sicker members compared to other, less expensive  plans, such as the other nationwide BCBS FEHBP option, BCBS Basic.  Actuarial experts also noted that the BCBS Standard plan may be less  attractive to healthier individuals and younger families who may be more  attracted to the FEHBP health maintenance organization options,  including high-deductible and consumer-driven plans, or the BCBS Basic  plan. Officials from OPM noted, and our review of two years of cost data  confirm, that members in the BCBS Standard plan generally have higher  health care costs than their counterparts in BCBS Basic and that this is  particularly true for younger members. While other employers may offer  more than one plan, most employers do not provide the number of  options that the federal government provides, so selection bias among  plans offered by other employers may be less extreme.

Experts and stakeholders noted that the selection bias within the FEHBP  of more young members with higher health care costs in the BCBS  Standard plan may result in an age and gender adjustment that is not  adequate. For example, in part because the BCBS Standard plan  disproportionately covers young members with higher health care costs,  the ratio of the average claims costs of the older age groups to the  average claims costs of the younger age groups is smaller than it would  be in a plan that did not have that particular selection bias issue. As such,  the ratios of costs for older age groups to costs for younger age groups  would be understated compared to the ratios calculated based on data of  a more representative population. If the claims cost data used for the  adjustment had ratios that were understated in this way, then the  adjustment based on these data might also be too small, for example, for  employers with older demographics.

Some experts and stakeholders also noted selection bias in the FEHBP  more broadly, in that its members, who include employees as well as  retired former employees and their dependents, are not representative of  the national workforce. For example, they noted that the federal workforce  is skewed to a higher proportion of older workers than the national  workforce. However, some experts we spoke with asserted that this may  not be a limitation that would generally affect the use of FEHBP data for  the age and gender adjustment because relative costs between older and  younger employees in the federal workforce are likely similar to those of  the national workforce.

Declining enrollment. In addition, while the BCBS Standard plan is  large, it has experienced declining enrollment in recent years.  Specifically, from 2010 through 2015, enrollment in the BCBS Standard  plan decreased by over 10 percent. In contrast, enrollment in the BCBS  Basic plan increased significantly from 2010 through 2015—a 46 percent  increase in contract holders. (See table 1.) Notably, the cumulative  enrollment for the two BCBS FEHBP plans has been relatively stable over  time. OPM officials noted that over time, this shift in enrollment from the  Standard to the Basic plan may further exaggerate the demographic  differences between Standard plan members and other populations,  including the Basic plan and the general employed population. They also  noted that it was possible that the BCBS Standard plan could continue to  experience an enrollment decline, becoming more disproportionately  skewed to older and higher-cost members. Finally, OPM, IRS, and  Treasury officials all noted that any one plan offering could be  discontinued. For example, in 2002, BCBSA merged its High Option plan  in FEHBP with the Standard plan and added the Basic Option plan.

section_title: Experts Identified Potential Alternative Data Sources; However, Those Data Sources Also Have Limitations
paragraphs: Experts cited other potential cost data sources, but each of these sources  also has limitations. These sources and their limitations include the  following:

The Agency for Healthcare Research and Quality—a research agency  within the HHS—maintains Medical Expenditure Panel Survey data  collected through its annual survey, which contains cost information  based on respondent recollection and provider reported data.  According to agency officials, its 2014 dataset includes information on  over 7,500 employer-sponsored insurance contract holders. While  these data are grounded in a nationally representative probability  sample and include the years 1996 to present, the survey’s relatively  smaller size may prove to be a limitation when classified into the  necessary age and gender groups. Agency officials noted that several  years of data could be pooled to ameliorate this issue.

Blue Health Intelligence—an independent licensee of BCBSA— maintains data from many, but not all, BCBS plans across markets. Its  dataset is large; however, because the members covered in the data  only include BCBS members, it is not known whether the data are  representative of national demographics. In addition, using these data  would likely require contracting with Blue Health Intelligence for  proprietary data, making this option potentially inconvenient.

The Health Care Cost Institute (HCCI)—a research institute— maintains claims data from plans offered by Aetna, Humana, Kaiser  Permanente, and UnitedHealthcare. According to HCCI  representatives, its most recent year of data covers over 40 million  employer-sponsored members. HCCI’s dataset is large and includes  the years 2007 to 2015, but it is not known whether the data are  representative of the national workforce. HCCI representatives told us  that the data contain members in all 50 states and the District of  Columbia, but some states have lower counts of members. They also  noted that the data can be adjusted through weighting to make them  more representative. However, as of June 2017, HCCI data did not  contain information from BCBS plans, which represent the majority of  enrollment in the insurance market in many states. In addition, it is not  possible to identify costs by coverage type, such as self-only, which is  needed to calculate the age and gender adjustment.

Truven Health Analytics, an IBM company (Truven) is a healthcare  data and consulting company that maintains the MarketScan claims  database. According to Truven representatives, its 2015 dataset  covers claims from 28.5 million members across its various clients  and includes data mostly from large employers with self-funded health  plans. Truven’s MarketScan dataset is large and goes back to 1995,  but Truven’s data are comprised of a convenience sample—data  collected from organizations that happen to be clients of Truven—and  it is not known whether the data are representative of the national  workforce. Truven representatives told us that the data contain  members in all 50 states, but some states have lower counts of  members. They also noted that the data can be adjusted through  weighting to make them more representative. In addition, using  Truven data would likely require contracting with Truven for  proprietary data, making this option potentially inconvenient.

Because these alternative data sources also have limitations, coupled  with benefits identified related to the BCBS Standard plan, some experts  stated that, while imperfect, the BCBS Standard plan is a fairly  reasonable option for the basis of the age and gender adjustment.  However, because of its noted limitations, its use could result in  adjustments to the tax threshold that are not as effective as they could be  for certain employers—in particular, for employers with older employees.

section_title: Some Experts Cited Concerns about how Premiums Might Be Used in Determining the Adjustment Amount
paragraphs: Some experts we interviewed and stakeholders that commented on IRS’s  notices for the age and gender adjustment raised concerns about tying an  adjustment to a premium value. As stipulated by PPACA, the age and  gender adjustment would increase the applicable dollar limit by  “…an amount equal to the excess of aa) the premium cost of the [BCBS  Standard plan], if priced for the age and gender characteristics of all  employees of the individual’s employer, over bb) the premium cost of the  , if priced for the age and gender characteristics of  the national workforce.”

This could be achieved by establishing a dollar value for the adjustment  by taking an employer-specific premium cost and subtracting a national  premium cost, both priced using the BCBS Standard plan costs applied to  the national and employer-specific workforces, respectively. This would  create a specific dollar difference that would represent the adjustment for  that employer. It could also be achieved by creating an adjustment factor  by taking the percentage difference of these employer-specific and  national premium costs.

Two actuarial experts and one industry expert we spoke with suggested  that a percentage difference approach would be more appropriate than a  dollar difference approach. Specifically, one actuarial expert contended  that the value of the adjustment could be distorted if the value of the  BCBS premium cost in any given year was unusually high or low. In either  year, the percentage difference between costs priced for the national  workforce compared to the employer’s workforce should be the same  (assuming no changes to the workforce makeup), but the dollar difference  would not be the same. (See table 2.)

If a percentage difference approach were used, the adjustment factor  created through this approach would need to be converted to a dollar  value to determine a specific adjustment amount. All three experts who  suggested this approach noted that the adjustment factor could simply be  applied to the tax’s applicable dollar limit, which will increase over time in  line with the CPI-U. A similar approach could be to apply the adjustment  factor to a portion of the tax’s applicable dollar limit, for example, a portion  estimated to represent health premium costs, excluding estimated costs  associated with other health benefits such as flexible spending  arrangements or health savings accounts. Another approach could be to  apply the adjustment factor to a value that represents actual health care  costs, such as an estimated average employer-sponsored premium,  which would increase over time in line with health care inflation.

We note that the decision on what to apply the adjustment factor to when  using a percentage difference approach would be dependent on the  policy goal:

Limit the rate of growth of the adjustment value to general  inflation. If the adjustment factor were applied to the applicable dollar  limit for the tax year or a portion of that limit, then the adjustment  dollar amount would be expected to increase somewhat more slowly  over time than it would if it were tied to an amount representing actual  health care costs, which would rise at the steeper rate of health care  inflation. This could be preferable if the policy goal were to limit the  rate of growth of the adjustment dollar amount to a rate lower than the  typical health care inflation rate.

Keep the rate of growth of the adjustment value in line with  health care inflation. If the policy goal were to allow the adjustment  dollar amount to increase in step with health care inflation, then it  would be preferable to tie the adjustment to an amount representing  employer-sponsored health plan costs.

The number of employers who received the age and gender adjustment  that became subject to the tax would increase more quickly over time if  the adjustment were tied to the applicable dollar limit that increases with  the CPI-U than it would if tied to an amount representing health care  costs.

section_title: Combining Premium Cost Data from Multiple FEHBP Plans Could Mitigate Standard Plan Data Limitations
paragraphs: Combining data from multiple FEHBP plans could mitigate some of the  limitations of sole reliance on the BCBS Standard plan data as the basis  for the age and gender adjustment, including concerns regarding  selection bias. Several experts and stakeholders who commented on  IRS’s notices suggested this approach. They noted that combining data  from multiple FEHBP plans, such as data from the BCBS Standard and  Basic plans, could mitigate concerns. They specifically said that an  adjustment based on data from the BCBS Standard plan alone may not  be adequate due to the plan’s selection bias within the FEHBP, as  previously discussed. The BCBS Standard plan is a relatively expensive  plan within the FEHBP and covers members with higher health care costs  compared to other less expensive plans, including the BCBS Basic plan.  We found that combining the data from these two plans could mitigate  this selection bias. Specifically, we found that the adjustment may be  particularly affected by selection bias among young Standard plan  contract holders with higher health care costs. In particular, combining  2015 data from these two plans increased the percentage of young  contract holders, and also increased the ratio of the average claims costs  of older contract holders to the average claims costs of younger contract  holders. (See fig. 1.)

In addition to mitigating certain selection bias concerns, combining data  from multiple FEHBP plans could address concerns regarding the BCBS  Standard plan’s declining enrollment. Combining data from multiple  FEHBP plans—such as the BCBS Standard and BCBS Basic plans— would result in a more stable underlying enrollment population, based on  current enrollment trends. Our analysis of OPM data shows that  increases in BCBS Basic plan enrollment exceeded declines in BCBS  Standard plan enrollment, resulting in a net increase in combined  enrollment. Specifically, the number of contract holders enrolled in BCBS  Standard and BCBS Basic plans combined increased 3.2 percent from  2010 through 2015. (See table 3.) In addition, combined contract  holders accounted for 65 percent of all FEHBP contract holders. Some  experts and stakeholders also suggested that combining data from more  FEHBP plans could further improve the data, by capturing individuals who  select other types of plans, such as health maintenance organizations or  high-deductible health plans. However, we note that combining data from  different plans would require appropriate actuarial adjustments to account  for cost differences that result from benefit design and other differences  among the plans.

Using combined FEHBP data as the basis for the age and gender  adjustment to include a broader selection of younger members could  result in a different adjustment that could increase the adjustment amount  for some employers. For example, we calculated a hypothetical,  illustrative adjustment amount using the BCBS Standard plan only, as  well as using BCBS Standard plan data combined with BCBS Basic plan  data. We did this for a hypothetical employer with a workforce that is, on  average, older than the national workforce—an employer that would likely  receive an age and gender adjustment—without making any actuarial  adjustments to the data. We found that combining 2015 cost data for  active federal government workers enrolled in the BCBS Standard and  BCBS Basic self-only coverage plans resulted in a higher adjustment  amount for the hypothetical employer than did an adjustment based on  BCBS Standard data alone. This also resulted in a higher percentage  difference adjustment factor for the hypothetical employer. (See table 4.)  According to our analysis, combining the BCBS Standard and BCBS  Basic data resulted in an increase in the ratio between the average claims  costs of the oldest and youngest groups, yielding higher age and gender  adjustment amounts for our hypothetical employer.

We found that different adjustment amounts could have an impact on the  total amount of taxes owed for an employer’s workforce depending on the  number of employees to which the tax was applied. For example, the  adjustment amounts could determine whether or not an employee’s  coverage is subject to the tax and, if the employee’s coverage is subject  to the tax, how much tax is owed. Using the previously presented  hypothetical example of an employer with a workforce that is older, on  average, than the national workforce can illustrate the potential impact. In  this example, we compare the hypothetical tax owed for 100 similar  workers employed by that employer to illustrate the difference in the total  taxes owed depending on whether the data used as the basis for the age  and gender adjustment are the BCBS Standard data alone or the  combined BCBS Standard and Basic data. (See table 5.)

Standards for internal control suggest that effective information is vital for  an entity to achieve its objectives. Although the current law specifies the  use of premium cost data from the BCBS Standard plan, relying on BCBS  Standard plan data alone does not provide IRS with the comprehensive  information it may need to determine an appropriate and adequate age  and gender adjustment. Because the Consolidated Appropriations Act,  2016 delayed the implementation of the age and gender adjustment until  2020, an opportunity exists for IRS to consider options for mitigating the  limitations of the BCBS Standard plan premium cost data. IRS and  Treasury officials told us they are considering what flexibility they have  under the statute to do so.

section_title: Conclusion
paragraphs: The age and gender adjustment was designed to increase the applicable  dollar limit of the tax for employers with employees that are expected to  be costlier than average so that taxes are owed based on the plan design  and not based on member costs. Use of the BCBS Standard plan  premium costs as the basis of the age and gender adjustment, as  stipulated in the law, has certain limitations, primarily because of selection  bias. Further, data limitations may become more pronounced over time  because the plan has been experiencing declining enrollment. Other  potential data source options exist, but these options also have  limitations. Combining data from multiple FEHBP plans could mitigate  selection bias concerns, as well as any concerns about the future of the  BCBS Standard plan alone. However, if data were pooled from plans with  different benefit structures, the data may need to be actuarially adjusted.  Nonetheless, because of its limitations, using the BCBS Standard plan  data alone as the basis of the age and gender adjustment could result in  an adjustment that is not as effective as it could be at increasing the  applicable dollar limit for employers with costlier than average employees.

section_title: Recommendation for Executive Action
paragraphs: We recommend that, in implementing the age and gender adjustment, the  Commissioner of Internal Revenue consider taking steps to mitigate the  limitations of the BCBS Standard plan premium cost data—such as by  combining data from multiple FEHBP plans. If combining the costs of  plans with different benefit structures, the Commissioner should consider  whether an appropriate actuarial adjustment should be used. If the  Commissioner interprets that the statute does not provide the flexibility to  mitigate the limitations of the BCBS Standard plan premium cost data by  combining data from multiple sources or by other means, we recommend  seeking that authority from Congress.

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to IRS and OPM for review and  comment. The draft report was also reviewed by Treasury. Subsequent to  reviewing the draft, IRS and Treasury officials contacted us to share  some of their concerns with the wording of the recommendation related to  combining claims costs of multiple health plans with varying designs. As a  result of these discussions, we clarified our recommendation language so  that it more explicitly focused on the need to mitigate the limitations of the  BCBS Standard plan data. We continue to believe that it is worthwhile to  consider using cost data from multiple FEHBP plans, but, as we note in  the report, if this is done, an actuarial adjustment should be considered.  We then shared the clarified recommendation language with the  agencies.

We later received written comments from IRS, which are reproduced in  appendix I. We also received technical comments on the draft from both  IRS and OPM, which we incorporated as appropriate. We did not receive  additional comments from Treasury. In its written comments, IRS neither  agreed nor disagreed with our recommendation, but stated that it would  consider the recommendation as it continues to review comments  received in response to an agency notice and work with the Department  of the Treasury to issue guidance on the age and gender adjustment.

We are sending copies of this report to the Commissioner of Internal  Revenue and the Acting Director of the Office of Personnel Management.  In addition, the report is available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-7114 or dickenj@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix II.

section_title: Appendix I: Comments from the Internal Revenue Service

section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Gerardine Brennan (Assistant  Director), Kate Nast Jones (Analyst-in-Charge), Barbara Hansen, and  Laurie Pachter made key contributions to this report. Also contributing  were Sandra George, Emei Li, Vikki Porter, Jennifer Rudisill, and Jennifer  Stratton.

Fast facts: Starting in 2020, the Affordable Care Act is scheduled to impose a 40% tax on high-cost health plans when an employee's annual cost of coverage exceeds a certain dollar limit. The limit may be adjusted if an employer's workforce—based on age and gender—is likely to have higher than average health costs.

The adjustment is to be made based on the costs of the federal employee BlueCross BlueShield Standard plan, but we found that an adjustment based on this plan's costs alone may not be effective due to the relatively high costs incurred by its young members.

We recommended that IRS take steps to ensure an effective age and gender adjustment.

Question-summary annotations: questions: question: What were the provisions of PPACA?
answer: The Patient Protection and Affordable Care Act (PPACA) included a revenue provision for a 40 percent excise tax on high-cost employer-sponsored health coverage to be administered by the Internal Revenue Service (IRS).
child_questions: question: How would the tax be imposed?
answer: The tax would be imposed when an employee's annual cost of coverage exceeds an established dollar limit. This limit could be adjusted upward if an employer's workforce—based on its age and gender characteristics—was likely to have higher health costs than the national workforce, on average.
child_questions: question: Why is this adjustment included?
answer: This adjustment, known as the age and gender adjustment, is based on the premise that older individuals and younger females tend to have higher health care costs than other individuals.

question: What is the adjustment designed to do?
answer: It is designed to lower the tax burden so that taxes are owed based on the plan design and not based on the health care costs of its members.

question: What would this adjustment be based on?
answer: PPACA stated that this adjustment would be made based on the premium costs of the Blue Cross and Blue Shield (BCBS) Standard plan under the Federal Employees Health Benefits Program (FEHBP).

questions: question: How might selection bias make the BCBS Standard plan adjustment inadequate?
answer: The selection bias in the BCBS Standard plan may result in an age and gender adjustment that is not adequate. For example, because the BCBS Standard plan covers young members with higher health care costs, the ratio between the average claims costs of the younger and older members in that plan is smaller than it would be in a plan that did not have that particular selection bias issue. Therefore, the age and gender adjustment could be too small.
child_questions: question: Why might the age and gender adjustment be too small?
answer: For example, because the BCBS Standard plan covers young members with higher health care costs, the ratio between the average claims costs of the younger and older members in that plan is smaller than it would be in a plan that did not have that particular selection bias issue. Therefore, the age and gender adjustment could be too small.

question: Why would alternative sources not improve the adjustment?
answer: While experts GAO spoke with identified several potential alternative sources of cost data for use as the basis of the adjustment, those alternatives also had limitations, such as not being convenient sources of data and potentially not being representative of the national workforce.

questions: question: How could the limitations of the BCBS Standard plan be mitigated?
answer: To mitigate limitations of the BCBS Standard plan, these data could be supplemented with data from other FEHBP plans, such as the BCBS Basic plan, which is known to have younger members with lower health care costs and increasing enrollment.
child_questions: question: How does using combined data result in different adjustments?
answer: GAO found that using combined data from these two sources could result in a different adjustment for some employers—in particular, for those with older employees.

question: Why is it important to use more than just  BCBS Standard plan data?
answer: Standards for internal control suggest that effective information is vital for an entity to achieve its objectives. Relying on BCBS Standard plan data alone does not provide IRS with the comprehensive information it may need to determine an adequate age and gender adjustment.