Questions abound for employers after the enactment of health care reform as they struggle to predict what it all means for their businesses: Will employers continue to offer coverage? If so, will they maintain group health plans or subsidize individually purchased coverage via the new state-run exchanges? What effect will all this have on employee compensation?
What seems inescapable, experts say, is that the American health care marketplace likely will look vastly different in the next few years.
“I think [health care] benefits are going to be reinvented, but I don’t know what they’re going to be reinvented to,” said Paul Fronstin, Ph.D., senior research associate at the Washington, D.C.-based Employee Benefit Research Institute (EBRI), speaking at a May 2010 forum in Washington, D.C.
‘Play or Pay’
The rising cost of health coverage, relatively small penalties tied to an employer mandate and subsidies for low-income workers could prompt some employers to drop employee health coverage once insurance exchanges and federal subsidies are in place, Fronstin said.
Nothing in the health care reform law says an employer must offer health coverage to employees. Nonetheless, the law imposes penalties under certain circumstances on employers that do not offer coverage.
Beginning in 2014, an organization with more than 50 employees and with no health coverage will be fined $2,000 per full-time employee per year if any full-time employee receives a premium tax credit from the federal government for use in a state exchange. An employer that has more than 50 employees, offers health benefits and has at least one full-time employee receiving a premium tax credit from the federal government will be fined either $3,000 for each employee receiving a credit, or $2,000 for each full-time employee, whichever fine is smaller. For employers with 50 or fewer employees, there is no penalty for not offering health coverage.
Employers with more than 50 employees are already asking whether they should continue to offer health coverage after 2013 or pay the penalty. After all, with the average U.S. employer now paying approximately $10,000 per employee per year in health care costs, why not just pay the $2,000-per-employee penalty, instead?
“The penalty starts to look very attractive to employers, especially in today’s economy,” said Fronstin.
Instead of paying $10,000 per employee
per year, why not just pay the $2,000
per employee penalty, instead?
Individual Policies via Exchanges
Beginning in 2014, small group policies and individual policies should be available for purchase through state-run exchanges, but it's the latter that could be the game changer. “Offering individual coverage through an exchange will be an easy sell for employers,” Fronstin said. Exchanges offer more choice, portability, guaranteed access to coverage and subsidies for low-income workers. Because the government would pick up much of the cost for low-income workers were they to go to the public exchanges, the incentives for retaining a company plan might erode. Shareholders might reasonably ask why a company continued to offer such a plan when it could cut costs by sending employees to an exchange.
But employers should consider a number of factors, especially entrenched employee opinion, before deciding whether to drop or alter coverage, Fronstin said. Recent survey data highlight some of these considerations:
• More than seven in 10 workers prefer employer-sponsored health care coverage, according to EBRI.
• 90 percent of employees believe that employers should offer benefits even if workers pay most or all of the cost, according to a MetLife study. “That doesn’t mean workers will have the same opinion in 2014, once the health insurance exchanges are up and running,” Fronstin said.
• According to EBRI health confidence surveys, only around 10 percent of workers are confident that they could afford to purchase insurance on their own, while 60 percent say that health insurance ranks as the most important employer-sponsored benefit they receive.
Another consideration for employers to mull over might be what to offer a workforce instead of health coverage. There might be significant pressure on employers not providing health benefits to increase employees’ direct compensation to pay for individually purchased coverage. Those increases in direct compensation, of course, would be subject to payroll taxes and workers’ compensation costs.
In addition, any other benefit predicated on compensation, such as retirement plan contributions, life insurance and disability coverage, would increase proportionately. And after all that, the employer still has to pay the $2,000 penalty.
“I could see a scenario where employers may not drop health benefits but they redefine them,” Fronstin said. Similar to the move away from defined benefit retirement plans, employers could shift more risk and responsibility to workers, for example, by linking premium discounts to goal achievements within wellness promotion plans (see Wellness Programs Get a Boost in Health Reform Law).
‘All It Takes Is One’
Is all this hand-wringing over the future of employer-sponsored health benefits premature? There might be some comfort to be had based on data from a nationwide survey of business executives conducted by Crain Communications Inc. published April 2010, finding that a majority of U.S. employers are unlikely to cease offering health care benefits to their workers. The nationwide survey, to which nearly 3,700 executives responded, was conducted among HR and employee benefits professionals.
Among employers of all sizes:
• 52.5 percent disagreed strongly with the statement that it would be better for their organizations to stop offering health care benefits and pay a fine under the new law.
• More than 15 percent disagreed somewhat with the notion of dropping coverage and paying the fine.
• 18 percent agreed somewhat with the idea of dropping coverage.
• Only 14.1 percent believe strongly that their organizations would be better off in dropping benefits.
It’s this 14 percent, including 8.4 percent of jumbo employers (those with 25,000 or more workers) that Fronstin sees as the most significant—and ominous—finding.
“It only takes one jumbo to drop and the herd will follow,” he cautioned. “If Wal-Mart does it, Target will be right behind. If one airline does it, the rest will follow. It won’t happen overnight, but it just takes one in each industry to trigger the event for the whole industry.”
Roy Maurer is a staff writer for SHRM.
Health Care Reform Might Lead to Decline in Self-Insured Plans, SHRM Online Legal Issues, May 2010
Viewpoint: Group Policies vs. Subsidized Individual Coverage—The Impact of Exchanges, SHRM Online Benefits Discipline, April 2010
Exchanges Will Alter Competition and Choice, HR News, March 2010
Wellness Programs Get a Boast in Health Reform Law, SHRM Online Benefits Discipline, March 2010
Forecast: Employee Plus One Health Coverage Over $10K, SHRM Online Benefits Discipline, October 2009
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page