Preparing for healthcare reform

Preparing for provisions of the Patient Protection and Affordable Care Act that go into effect on January 1, 2014 presents several elements of risk that corporate boards need to seriously address. How boards decide to handle the escalating costs associated with providing health insurance for all their employees carries consequences that can affect the corporate bottom line and hamper a company’s ability to compete within its industry. For retailers, grocery store chains, the hospitality industry – in fact, any industry that employs a lot of part-time and hourly workers and has a lot of turnover in its workforce – this legislation is a big deal.

‘If I were on the board of a company, I would first want to know whether the company has quantified or evaluated the impact of all the 2014 requirements on the company,’ says Tracy Watts, Mercer’s national leader for healthcare reform. ‘The firm should know what additional costs the law will be causing it to incur and it should have a plan for how to pay for them, or how to generate savings in its current medical plan so that it can cover the additional people who will be joining the plan.’

While experts believe most companies have already had these discussions, there is still time to fine-tune their approaches to providing health insurance to make sure the financial impact is as minimal as possible. What most companies find they are faced with is leaving themselves open to significant fines for non-compliance or saddling the company with a benefits plan that has higher healthcare costs over the long term. Companies need to come up with solutions that both comply with the law and limit the cost of healthcare to their company.

Complying with the law in 2013

Starting in 2013, several aspects of the healthcare legislation require companies to take action: 

• Employers must inform employees of a $2,500 cap on flexible spending account (FSA) contributions.
• Comparative effectiveness group health fees begin. These require employers to pay a small fee per participant in their health plan to fund research that will determine the effectiveness of various medical treatments. The fees begin at $1 per participant, increase to $2, and by 2014 will be an amount indexed to national health expenditures until the fee is phased out in 2019.
• At some point in 2013, employers will have to give employees notification that the new public health insurance exchanges are going to arrive in 2014. The government has yet to provide guidance on the language that should be used in the notice.
• A new Medicare payroll tax of .09 percent on wages for people whose income exceeds $200,000 will now be deducted from individual paychecks.
• The initial enrollment period for healthcare exchanges will begin in October 2013.

Changes for 2014

In 2014 the individual and employer mandate provisions of the new healthcare legislation go into effect. The individual mandate says that every person in the country must have coverage or he/she will be taxed on his/her individual income taxes. The employer mandate says companies with more than 50 employees must provide minimum benefits to anyone who works 30 or more hours per week, and the employee’s contribution to that insurance coverage must be ‘affordable’. If the employee’s contribution is not deemed affordable, the company will be taxed a ‘shared responsibility surcharge’ of $3,000 for each employee in that situation. Furthermore, if any company fails to provide insurance for any employee who works 30 hours per week, the company will be fined $2,000 for each employee in the company’s worker population (although fees for the first 30 employees are waived).

Watts explains that the government has a ‘minimum plan design requirement’ that says a company’s health benefit plan must have an actuarial value of at least 60 percent. Many of the preferred provider organization plans today are set at an 80 percent actuarial value, so a 60 percent plan is not generous at all. It is estimated that most employees in such plans may have a $2,000 deductible and 50 percent co-insurance, meaning that if a medical bill is $3,000, employees could use their $2,000 deductible, but would still be responsible for paying half of the remaining $1,000 out of their own pocket. By using the minimum plan design, many companies may legally be able to offer less insurance coverage (although they would be offering insurance to a higher number of employees, which would likely increase their costs).

The law also has an ‘affordable contribution requirement’ for individual coverage, which means the amount an employee pays for employer-offered insurance can’t exceed 9.5 percent of his or her household income. An employer is allowed to use W-2 earnings [income earned and taxes paid through employment over the year] as a proxy for household income when determining the affordable contribution requirement.

Doing the calculations

In the time leading up to the big shift, some companies have been toying around with ways to decrease their number of full-time employees or those who work 30 hours per week. They’ve also tried several calculations to see whether they could save money by simply deciding to bite the bullet and pay the fines. 

Last year, Darden Restaurants, owners of the Red Lobster and Olive Garden chains, experimented with moving more of the workers in its 180,000-employee workforce to part-time status – working fewer than 30 hours per week. At the time, the company said about 75 percent of its workforce was part-time anyway. The experiment didn’t work, however, because the perception that the company was trying to curtail worker hours to avoid supplying health insurance produced a wave of negative news coverage. 

Ultimately, the Associated Press reported that instead of cutting worker hours, the company decided to give workers a financial contribution toward buying health insurance coverage and provide them with a choice of five medical, four dental and three optical plans to choose from. In other words, the company decided to improve its health insurance options rather than get out of the business entirely.

While it didn’t work for Darden, ‘there is a compelling case to be made for an employer to say, at least on a dollars-and-cents basis, that it may make a lot of sense for it not to be in the healthcare game anymore,’ says Eric Paley, a partner at Nixon Peabody who specializes in employee benefits. Paley says some companies feel they may be able to let the healthcare exchanges that are expected to be up and running later this year handle the challenge of keeping health insurance costs down. 

In fact, some companies are betting that paying the fines may be cheaper for them. ‘Then they can take some of the money they save getting out of the healthcare business and either raise employee salaries or provide some sort of additional amount of money that is less than the full amount for coverage, and the employees will still be able to have healthcare [from a healthcare exchange],’ Paley says.

Just as Darden Restaurants learned, however, there are other consequences to consider when a company decides to drop its healthcare coverage. ‘Most people who go to work rely on health coverage from their employer,’ Paley notes. ‘They consider it as a benefit or a perk, so if you take that away, suddenly your job doesn’t look as good as the next person’s.’ If employees perceive your company as one that is reducing benefits, it will make it more difficult to compete for the best workers in your industry. Worse, your existing workers may flee.

There may be yet another downside to deciding not to provide health insurance. ‘The clients I’ve worked with who try to do the math and figure out how much additional salary they would have to give employees to [comply with the legislation] find it would cost more than they are spending on health insurance today,’ says Watts. She points out that, typically, 18 percent of an employer’s workforce opts out of the health plan. When companies decide to stop supplying health coverage and send everyone to the exchanges, they have to then increase employee salaries for everyone, including the 18 percent of opt-outs. The higher the salaries of each employee, the more companies must gross-up employee salaries in order to make the contributions to the plan they are offering as ‘affordable’ for everyone.

There are also tax implications that may be overlooked by companies that want to stop providing health insurance. ‘Employers currently pay for healthcare insurance and it’s a deductible expense, whereas the $2,000 per employee they would pay as a penalty is not deductible,’ explains Watts.  

Motivation to avoid fines

According to a recent survey by Mercer, most employers anticipated an additional 3 percent increase or more to the cost of their medical benefit programs as a result of having to provide insurance coverage for more people. Ironically, wanting to avoid spending that additional 3 percent has motivated many companies to think harder about implementing strategies that can help their healthcare dollars go further.

‘There are a lot of strategies employers could take advantage of,’ Watts notes. ‘They may not have been strategies that were attractive to employers before healthcare reform, but now that they are facing pretty significant increases due to the possibility of more people being enrolled, they might be interested in some of these strategies now.

‘In 2012, employers saw the lowest rate of increase in healthcare costs they’ve seen in 15 years, and we think that’s because once employers started to figure out how much in additional costs they were going to incur because of healthcare reform, it caused them to get a whole lot bolder with their strategies about how to manage their plans. What we’ve seen in 2012 is that those strategies are actually working.’

Hopefully, most companies will find strategies that will work for them in 2014.

How employers may respond to new healthcare laws

Nixon Peabody says the following trends will likely develop as companies begin complying with new healthcare legislation in 2014: 

• More employers may include high deductible plan as an option

• Increased use of salary-based healthcare contribution schedules

• Some employers may increase their use of part-time employees

• Worker misclassification will create potential liabilities.