companies that want to attract and retain talented employees.
Companies that have done the best job of managing the health of their workforces and, therefore, of controlling medical costs, will be the ones most likely to keep their health care benefits.
Employers who haven’t applied management disciplines to health care often pay more than $20,000 per year. At that level, the small penalties under ObamaCare for dropping coverage, $2,000 per employee, look like an easy way out. In short, the higher the costs of a plan, the more likely the company is to drop coverage and pay the penalties for not offering coverage.
The “Cadillac plans,” those that cost more than $27,500 for a family, face a 40 percent surtax under ACA, effective 2018. Those bloated plans cover some executives, many union members, and some public employees. They show how far out-of-control costs can climb if not managed. Assuming an 8 percent upward trend in premiums, more than 50 percent of plans could face the 40 percent tax within a decade.
Employers will only escape the penalty if they redesign their plans or Congress yields to pressures to raise the cap. Companies are already trimming back their plans in anticipation of 2018.
SOFT COSTS
The proposed rules are maddeningly complex, and thus the decision to stay with health care or drop coverage has been complicated. For openers, the soft costs are as vexing as the hard costs. For exempt smaller companies, among the soft costs are legal fees. They are hiring lawyers and benefits experts to make sure they stay exempt at fewer than 50 employees. The new law has created an army of consultants.
For medium and large employers, the soft costs of discontinuing the health benefit go beyond turnover, but that is the biggest one. Another major one is the loss of influence over promoting health among employers.
If a company drops coverage and instead chooses to pay the modest ACA penalties, what’s the cost of losing a top engineer who leaves for a position with a full-benefit employer? Turnover brings the steep expenses of recruiting a replacement, of training a successor, of slower technology advancement in the interim while there is a vacant position. Such transitions could easily cost $100,000 each. Further, recruiting an equivalent engineer to a company not offering health care would be a challenge. The same can be said of other skilled positions, from press operator to programmer to executive.
As for losing positive leverage over the health of the workforce, companies in the vanguard of containing health costs do it by managing health. In the process, they enjoy improved productivity, higher morale, less absenteeism, and lower workers’ compensation charges.
Companies in the vanguard of containing health costs do it by managing health. In the process, they are enjoying improved productivity, higher morale, less absenteeism, and lower workers’ compensation charges.
Where health plans are well designed, including such amenities as on-site primary care, employees see their employer as making an investment in their families. That commitment creates a long-term bond. It acts much like tuition reimbursement and is appreciated by employees as a similar investment in their futures.
In contrast, dropping health care and telling people to go to the public exchanges for individual policies will inevitably be viewed as a step backward in a company’s commitment to its workers. That will be true even if the employer gives the employees a raise or a “defined contribution” to help purchase the individual policies.
It will be especially true if the premiums for individual policies sold on private or public exchanges show a big hike over today’s prices. Because of expensive ACA mandates on what a health insurance policy has to look like, some major insurers have decided not to offer policies in some states. That means less competition for individual policies, and less competition always means higher prices.
HARD COSTS
There is also a numbers side, the hard costs, in a company’s go or no-go analysis.
Suppose an employer currently delivers health care at a total cost of about $8,500 per employee, which is tax deductible to the employer and tax exempt to the employee. If it drops the benefit, it would have to give an employee a taxable raise of more than $14,000 to buy an equivalent policy on an exchange. Plus, the employer may have to pay the $2,000 penalty for dropping coverage. The employee then comes out whole, but the company would be at least $7,500 worse off per employee than if it kept its health care benefit.
Suppose, instead, that a company wanted to drop coverage but be cost-neutral with its current expense of $8,500 per employee. In that scenario, it would limit the raise it gives to an employee to buy a policy to only $5,700.
Unfortunately, in most cases, that added compensation of $5,700 would not be enough to buy an equivalent policy on the exchange. That’s true for many employees even if the employee qualifies for the subsidies offered by the federal government for buying a policy through a public exchange.
Here’s a worse scenario for employees. If the employer drops coverage and offers no contribution, the worker gets hit hard. The employer may pay the $2,000 penalty, versus its previous $8,500 expense, so it saves a lot of money. But the employee is on the hook for a policy that currently could cost the national average of $16,000 or more for family coverage. That’s before the rate increases that the new law could cause in the years ahead.
Analysts say a family premium could rise to $23,000 by 2020. That would be unbearable for an uncovered worker, even taking into account offsetting federal subsidies. And it gets close to the Cadillac tax on premiums of more than $27,500 in 2018.
At present premium prices, ACA’s federal subsidies for a family of four range from about $3,000 for a household making $94,000 to $11,000 for a household making $31,000. Clearly, that’s just not enough. The gap between the premiums and the subsidies could be huge. It’s a good bet that future administrations will have to hike the subsidies, which carry an estimated price tag of $23 billion in 2014. That tab will escalate beyond 2014.
When Serigraph did its go or no-go exercise, the after-tax costs were about a wash for keeping or dropping coverage. That assumed a $5,000 annual contribution to each employee if we dropped coverage.
Taking into account the soft and hard costs, the best answer for many employers will be to continue to offer health care. The obvious exception among medium and large employers is those that do not value a long-term relationship with their workers. Where wages are low and turnover is high, in sectors such as restaurants, hotels, nursing homes, and call centers, employers may choose to pay the penalties. Those uncovered workers will have to head to the exchanges for individual policies and the subsidies.
THE INNOVATIONS IN HEALTH CARE ARE AT HAND
Serigraph’s decision to stay in the health care game was made possible because managers in the private sector have invented a new business model that makes it tolerably affordable for companies to offer a health care benefit.
The maelstrom surrounding ObamaCare, which is insurance reform, not health care reform, has proved a monumental distraction from the fundamental problem facing the country—the staggering costs. What I call “real reform” of the delivery system has gained momentum at the grassroots level, as companies have become smarter managers of the supply chain for health care.
ObamaCare . . . is insurance reform, not health care reform.
As three million companies make the go or no-go call on providing coverage, they