Wellness programs could mitigate projected 2013 health care cost increases
By David Morgan
May 31, 2012
Source: https://eba.benefitnews.com
The cost of U.S. health care services is expected to rise 7.5% in 2013, more than three times the projected rates for U.S. inflation and economic growth, according to an industry research report from PricewaterhouseCoopers.
But premiums for large employer-sponsored health plans could increase by only 5.5% as a result of company wellness programs and a growing trend toward plans that impose higher insurance costs on workers, the firm concluded.
The projected growth rate of 7.5% for overall health care costs contrasts with expectations for growth of 2.4% in U.S. gross domestic product and a 2% rise in consumer prices during 2013, according to the latest Reuters economic survey.
Health care costs have long been known to outstrip economic growth and inflation rates, driving up government spending on programs such as Medicare and Medicaid at a time when federal policymakers and lawmakers are wrangling over how to trim the U.S. budget deficit of $1 trillion a year.
But PwC's Health Research Institute, which based its research on input from health plan actuaries, industry leaders, analyst reports and employer surveys, said data for the past three years suggest an extended slowdown in healthcare inflation from earlier decades when annual costs rose by double-digits.
"We're in the early beginnings of a shift toward consumerism in health care. And we think that you'll see more of that in the coming months and years," said Ceci Connolly, the health institute's managing director.
More than half of the 1,400 employers surveyed by the firm are considering increasing their employees' share of health care costand expanding health and wellness programs in 2013, according to the report.
Connolly said health plans with higher deductibles and co-pays for workers tend to dissuade unnecessary purchases and offer lower premium costs for employers, while successful wellness programs can reduce the need for medical services.
The report said prospects for higher growth are also being held back by the consolidation of hospitals and physician practices, insurance industry pressure on hospital expenses, a growing variety of primary care options such as workplace and retail health clinics, price transparency and the increasing use of generic drugs.
Upward pressure on health care costs comes in part from a rebounding economy and the growth of new medical technologies, including robotic surgery and the nuclear medicine imaging technique known as positron emission tomography.
PwC's projection of 7.5% growth is nearly double a 3.9% rise in U.S. health care spending that the federal government says occurred in 2010, the last year for which official figures are available.
OVERVIEW OF MEDICAL LOSS RATIO REBATES
The Affordable Care Act requires health insurers to spend a minimum percentage of their premium dollars on medical claims and quality improvement. Insurers in the large group market must achieve a medical loss ratio (MLR) of 85%, while insurers in the individual and small group markets must achieve an MLR of 80%. Insurers that fail to achieve these percentages must issue rebates to their policyholders. The first of these MLR rebates are due in August of 2012, so plan sponsors should begin planning how to handle any rebates they might receive.
Which Plans Are Covered?
The MLR rules apply to all fully insured health plans (even grandfathered plans). Self-funded plans are exempt. Certain types of insured coverage, such as fixed indemnity, stand-alone dental and vision, and long-term disability, are also exempt.
If a rebate is payable to a group policyholder, the insurer must issue a single rebate check to the plan. The plan sponsor must then decide whether and how to pass the rebate on to the plan's participants.
Calculating a Medical Loss Ratio
The calculation of an MLR is not specific to each policyholder, but is a state-by-state aggregate of the insurer's overall MLR within a particular market segment (e.g., individual, small group, or large group). Thus, even if a specific employer plan has a low MLR (i.e., favorable claims experience), the employer may not necessarily receive a rebate.
States are permitted to set higher MLR targets. In those states, insurers must comply with the more stringent state requirements.
Notices to Subscribers
Insurers must send written notices to their subscribers, informing them that a rebate will be issued. Plan sponsors should be prepared to respond to questions from participants who receive these notices, particularly if the sponsor does not intend to share any of the rebate with those participants.
Likewise, even if an insurer meets the MLR requirements, it must notify subscribers that no rebate will be issued. This notice must be included with the first plan document provided to enrollees on or after July 1, 2012. Model notices<https://cciio.cms.gov/programs/marketreforms/mlr/index.html> are available on the Centers for Medicare & Medicaid Services website.
How to Allocate MLR Rebates
The Department of Labor (DOL) issued Technical Release 2011-04<https://www.dol.gov/ebsa/newsroom/tr11-04.html>, summarizing how ERISA plan sponsors should handle MLR rebates. To the extent that all or a portion of the rebate constitutes a "plan asset," the sponsor may have a fiduciary duty to share the rebate with plan participants.
In the absence of specific plan or policy language, the determination of whether an MLR rebate is considered to be a plan asset will depend, in part, on the identity of the group policyholder. If the plan or trust is the policyholder, the MLR rebate will likely be considered a plan asset under ordinary notions of property rights.
However, if the employer is the policyholder, the determination will hinge on the source of the premium payments and the percentage of premiums paid by the employer, as opposed to plan participants. If the premiums were paid entirely out of plan assets, the DOL's view is that the entire amount of the rebate would be considered a plan asset. In other circumstances, only the portion of the rebate that is attributable to participant contributions will be considered a plan asset.
If all or a portion of a rebate does constitute a plan asset, then the plan sponsor will have to determine how and to whom to allocate the rebate. For example, must a portion of the rebate be allocated to former plan participants? The selection of an allocation method must be reasonable and it must be made solely in the interest of plan participants and beneficiaries.
However, a plan fiduciary may weigh the costs to the plan - and the ultimate plan benefit - when deciding on an allocation method. Thus, for example, if the cost of calculating and distributing shares of a rebate to former participants approximates (or exceeds) the amount of the proceeds, a fiduciary is permitted to limit the allocation to current plan participants.
Similarly, if it is not cost-effective to distribute cash payments to plan participants (because the amounts are de minimis, or they would produce negative tax consequences for the participants), a fiduciary may use the rebate for other permissible plan purposes. These might include a credit against future participant premium payments or benefit enhancements.
Tax Consequences
Before deciding to pass an MLR rebate on to participants, a plan sponsor will want to understand the tax implications of doing so. The IRS has issued a set of questions and answers<https://www.irs.gov/newsroom/article/0,,id=256167,00.html> on this topic. Because this guidance is entirely in the form of examples, with few general principles provided, the tax treatment may not always be clear. What is clear is that a number of factors will affect the taxability of an MLR rebate.
For individual policyholders receiving an MLR rebate, the IRS treats the rebate as a return of premiums (i.e., a purchase price adjustment). As long as the premium payments were not deducted on the individual's federal tax return, the MLR rebate should not be taxable. However, if an individual did deduct the premium payments, the MLR rebate will be taxable to the extent the individual received a tax benefit from that deduction.
For participants in a group plan, the tax consequences will depend on factors such as the source of the premium payments (employer versus participant), whether participant premiums were paid on an after-tax or pre-tax basis, and whether a participant who paid premiums on an after-tax basis later deducted those premiums on his or her federal income tax return.
Another key factor is whether the rebates are passed through only to participants who participated in the plan during both the year to which the rebate relates and the year it is received, or to all participants who participate during the year the rebate is received (i.e., without regard to whether they also participated during the year to which the rebate relates).
For instance, if a participant paid premiums on an after-tax basis and the MLR rebate is specifically conditioned on the participant having participated in the plan during both the year to which the rebate relates and the year it is received, any rebate allocated to that participant will generally not be taxable - regardless of whether the rebate takes the form of a cash payment or a reduction in future premium payments. However, if the participant claimed a tax deduction for the premium payments (as might be the case for a self-employed individual), the rebate will be taxable to that participant.
On the other hand, if an MLR rebate is passed through to all current plan participants (regardless of whether they participated in the plan during the year to which the rebate relates), the rebate should not be taxable even if a participant took a tax deduction for premiums paid during that year.
Finally, if a participant paid premiums on a pre-tax basis (i.e., through a cafeteria plan), the return of those premiums - whether received in cash or as a credit against future premiums - will be subject to both income and employment taxes.
SUPREME COURT LARGELY UPHOLDS PPACA
The U.S. Supreme Court upheld the individual mandate and most of the Patient Protection and Affordable Care Act (PPACA). As expected, it was a close decision -- 5-4 -- with Chief Justice Roberts and Justices Breyer, Ginsburg, Kagan and Sotomayor agreeing that the individual mandate is a permissible tax. Because the individual mandate was found to be acceptable, most of the rest of the law (including the exchanges and the requirement that larger employers provide minimum coverage or pay penalties of their own) automatically stands.
Because PPACA has been upheld, employers need to move forward with implementing the changes required by the law. The most immediate requirements are:
- All group health plans, regardless of size, must provide "summaries of benefits coverage" (SBC) with the first open enrollment beginning on or after Sept. 23, 2012. The content and format of these SBCs must meet strict guidelines, and the penalties for not providing them are high (up to $1,000 per failure). Insurers will be expected to provide the SBCs for fully insured plans, while self-funded plans will be responsible for preparing their own.
--- - Employers that issued 250 or more W-2s in 2011 must report the total value of each employee's medical coverage on their 2012 W-2 (which is to be issued in January 2013).
--- - High income taxpayers (those with more than $250,000 in wages if married and filing jointly, or more than $200,00 if single) must pay additional Medicare tax, and employers will be responsible for deducting a part of the tax (an additional 0.9 percent on the employee's wages in excess of $200,000) from the employee's pay beginning in 2013.
--- - The maximum employee contribution to a health flexible spending account (FSA) will be $2,500 beginning with the 2013 plan year.
--- - The Patient Centered Outcomes fee (also called the comparative effectiveness fee) is due July 31, 2013. The fee is $1 per covered life for the 2012 year. Insurers will remit the fee on behalf of the plans they cover, while self-funded plans will pay the fee directly.
Politically, while House Republicans have pledged to repeal PPACA, it is unlikely a repeal bill would pass the Senate, and it would be vetoed in any event by President Barack Obama. The fall elections, of course, could result in a change in control of Congress and/or the White House, and Republican victories would likely re-energize efforts to repeal PPACA or to discontinue funding needed to implement various parts of the law.
The opinion is long (193 pages) and complex, and we will provide additional details -- through both written alerts and a webinar -- once there has been more time to study the opinion.
Mixed Small Business Reaction to Health Ruling
By Emily Maltby and Sarah E. Needleman
Source: wsj.com
If there’s one thing many small-business owners can take away from the Supreme Court’s decision to uphold the Affordable Care Act, it’s a little more certainty.
Consider Richard Balka, owner of The Home Rubber Company L.P. in Trenton, N.J., which offers health insurance to its 37 employees. He said Thursday that he was pleased that the Supreme Court upheld the provision that ensures people can get coverage despite having a pre-existing health condition.
“That freed my conscience in the event I have to stop offering health care to my employees,” he said. “If I had dropped it, anyone who either had a pre-existing condition or family member with a pre-existing condition would be in a horrible position.”
The Supreme Court voted 5-4 to uphold a provision requiring taxpayers to carry health insurance or pay a penalty. The majority opinion, by Chief Justice John Roberts, found that the penalty effectively functioned as a tax, by increasing the income taxes of those without qualifying insurance, and was therefore justified under Congress’ constitutional power to levy taxes and provide for the general welfare.
Of course, the decision still leaves small-business owners wondering how the law will impact the cost of health care.
Some expect the law to lead to lower health-care premiums, with the cost of health care spread among a larger pool of insured Americans. Others, though, predict that premiums will rise and worry that they’ll be forced to provide coverage that they can’t afford, starting in 2014, when many of the law’s key provisions take effect.
Even Mr. Balka said he is still concerned that health exchanges, expected to roll out at the state level come 2014, “may not go far enough” to curb the cost of providing insurance to employees.
Premiums at the rubber-manufacturing facility have increased between 8% and 20% each year in the last 15 years.
Makini Howell, owner of Plum Bistro, a group of four vegan restaurants in Seattle, had no reservations about Thursday’s ruling. “It’s a good thing it wasn’t shot down because we wouldn’t be able to offer coverage,” she said.
Plum Bistro began offering insurance to its eight full-time employees about three months ago. Ms. Howell credits a small-business tax break that rolled out as part of the law as one reason for her ability to offer insurance. She is also looking forward to the health exchanges, which, she believes, could “level the playing field for us.”
Some small-business owners say the law doesn’t affect them now, but voiced concern about how provisions of the law might impact their plans to add to their payroll as they grow.
Elie D. Ashery, president of Gold Lasso Inc., a 10-year-old Gaithersburg, Md., marketing firm, currently has 25 employees and is growing fast, he said. He thinks the law will only push premiums higher.
Though the firm offers health insurance, its premiums have been rising by 26% on average annually over the past four years, he added.
If the firm’s headcount rises above 50, then it might turn out to be less costly to pay a penalty than continue to provide health insurance. “It’s an option I’d have to consider,” he said.
Ruling Lifts Cloud of Uncertainty Over Health Industry
By Ron Winslow
Source: blogs.wsj.com
The Supreme Court’s decision largely upholding the Accountable Care Act lifts a huge cloud of uncertainty over the health-care industry and sets companies and hospitals back on a course to prepare for the bulk of the law’s implementation over the next two years.
As WSJ’s Anna Mathews reports: One-sixth of the U.S. economy just started breathing again.
Health insurers and hospitals were already embarked on a host of strategic changes to prepare for the law as well to respond to as growing pressure in the marketplace to contain costs and improve quality of care.
The decision affirms hospital initiatives that were launched even before the law was passed in 2010 to consolidate and make strategic investments in outpatient clinics and information technology, as WSJ’s Chris Weaver reports.
“We’ll have 32 million potential customers who will come in, get treatment and pay,” saysAlan Miller, the chief executive of Universal Health Services, a hospital operator. “Previously, they got good treatment, and said, ‘we can’t pay.’”
Meantime, the pharmaceutical industry is generally pleased with the decision as it supported the law and also stands to gain from tens of millions of new insured. But that will be offset by billions in fees and other concessions.
Investors reacted to the decision by bidding up hospital stocks while punishing health insurers’ shares in a broadly down market. Pharmaceutical, biotech and medical device stocks also generally fell.
To be sure, while the law’s constitutionality was upheld in today’s decision, the political debate is further inflamed ahead of the November election, which means additional uncertainty lies ahead.
Employer Penalties Under Healthcare Reform
By Joe Giangola
One of the most misunderstood areas of Healthcare Reform has been the mandating of coverage and the associated penalties for employers. There is a lot of confusion as to who the mandates will apply to, when they will begin and who must be covered. Fortunately the mandates do not begin until 2014, which should give employers ample time to prepare.
Company Size and Who is Affected?
Let's take a look at who will be affected by the law. The PPACA (Patient Protection & Affordable Care Act) mandates will apply to companies with 50 or more full time employees.
How exactly is the company size determined? The employer must employ 50 or more full time employees for 120 or more days in the preceding calendar year. So your number of employees in 2013 will determine whether the law applies in 2014.
An employee is considered full time if they work an average of 30 or more hours per week. The law also takes into account part time employees as they are counted as full time equivalents. Part time employees are used to help determine who must comply with the law but are not used in the calculation of the penalties.
Who and what must be covered?
In 2014 an employer must offer minimum essential coverage to all of it's full time employees and their dependents. Failure to comply will subject the employer to a $2,000 per year penalty per employee over 30 employees. This can also result if any full time employee receives subsidized coverage through an Exchange.
What will be considered minimum essential coverage?
The Federal Government's office website, healthcare.gov , defines Minimum Essential Coverage as follows:
"The type of coverage an individual needs to have to meet the individual responsibility requirement under the Affordable Care Act. This includes individual market policies, job-based coverage, Medicare, Medicaid, CHIP, TRICARE and certain other coverage."
As you can see the law is not clear as to the level of coverage required, your current plan may exceed or fall short of the law's required level of benefits.
Will offering a plan make my company compliant with the PPACA?
First, your plan must meet the, to be determined, essential level of coverage. Second, your plan must be considered "affordable" and offer "minimum value".
Employees who are eligible for coverage through work are able to receive subsidized coverage through the Exchanges created by the PPACA. An employee may qualify for a subsidy if their income falls below 400% of the Federal Poverty Level, $88,200 per year for a family of four or $43,320 per year for an individual. The employer must pay 60% of the allowed costs of the coverage and the employees contribution may not exceed 9.5% of their household income. This number will be virtually impossible for employers to determine since spouses income will be unknown.
The penalty for non-compliance is $3,000 per employee over the first 30. The penalty cannot be greater than $2,000 per employee for failure to provide coverage. After 2014 the penalty can be indexed.
Many questions remain unanswered at this time leaving business owners helpless to prepare for the upcoming changes. Be sure to check back often as I will be keeping a close eye on the developing regulations from the Department of Health and Human Services and will help explain the pending clarifications as they are released.
SCOTUS upholds PPACA, industry ready to tackle ongoing health care issues
By Marli D. Riggs
June 28, 2012
Source: eba.benefitnews.com
The Court ruled 5-4 Thursday with Chief Justice John Roberts joining the liberal wing. Roberts in the opinion noted that the individual mandate — the core provision of reform that would pay for many of its initiatives — “is not a valid exercise of the Commerce Clause,” which covers congressional ability to regulate commerce. However, the Court added that Congress has the authority to implement the mandate under the taxing clauses of the Constitution.
Brokers reacted strongly to the ruling, but say while it will take time to fully understand the impact of it on their business and clients, the health care system in America remains broken, with continued rising costs.
“It will likely take several months to sort through the implications, political and otherwise,” says LouAnne Drenckhahn, human resources and compliance consultant at Edina, Minn.-based David Martin Agency. “The current state of our health care system is not a result of PPACA. We have seen the cost of health care rising too quickly and employers exiting the employer-based health care system for years. Our health care system as a whole has not been working as efficiently as it could.”
The Act does not fix the rising cost of health care in this county, adds Perry Braun, executive director of Benefit Advisors Network.
“Insurance market reform, reforming and regulating the distribution and marketing, as well as regulating the development of insurance premiums and how you reimburse and compensate providers are not the only aspect of the cost equation,” he says. “The Act does not address the demand side of the equation, which is where an equal amount of attention should be given.”
Adam Bruckman, president and CEO of Atlanta-based Digital Insurance, the nation’s largest employee benefits-only agency, echoed those statements, saying that the United States “still does not have measures in place to control a [health care] system that is on an unsustainable cost trajectory. If we are to effect meaningful change, we are obligated to devise methods to curb rising expenses.”
Bruckman says that the solution system is a system that produces “engaged” health care consumers that can be achieved through innovation, “not through mandates, regulation and government programs. Evolution must be led by the private sector and requires collaboration between benefits advisors, employers, insurance carriers, providers and consumers.”
Industry organizations were quick to offer their opinion as well about the Court’s decision and cite most specifically the costly compliance burden on employers in America.
“This ruling offers some clarity on the future of the health insurance industry and allows American individuals, families and businesses to adjust to the law,” says Janet Trautwein, CEO of the National Association of Health Underwriters. “While we still have concerns that PPACA does not address the true drivers of health insurance costs in this country, and the law is having a huge and costly compliance burden on American employers, it is our responsibility as industry leaders to move forward within the constraints of the law to help Americans access high-quality, affordable health care.”
Trautwein adds that there are still legislative actions that can be taken to fix parts of the health care law and though they support some of the efforts, NAHU’s focus is to help customers transition to the policies, procedures and regulations PPACA outlines.
“It is imperative that the administration and regulatory agencies provide information in a timely manner on the many aspects of PPACA that remain unclear,” Trautwein says.
National Association of Insurance Commissioners President and Florida Insurance Commissioner Kevin M. McCarty said that they “will continue to work to give regulators the tools they need to ensure a stable health insurance marketplace in the states. Where the ACA provides states with latitude, regulators will continue to work with insurers, consumer groups and the public to provide the best regulatory framework going forward.”
The ruling leaves intact new health care programs in various stages of implementation, including substantial expansion of community care centers in medically underserved regions, accountable care organizations with coordinated population health management programs, coverage for persons with pre-existing medical conditions, coverage on parental policies for adult children up to age 26, and lower prescription drug costs for many persons, particularly those on Medicare.
Robert Miller, president of the National Association of Insurance and Financial Advisors, says that the organizations “primary health care reform goal is to ensure access to affordable health services in a sustainable, competitive insurance market without jeopardizing the high quality of care and service expected by consumers.”
NAIFA believes Congressional modification is needed and will ask the following of Congress:
• Remove agent commissions from the medical loss ratio (MLR)
• Repeal the CLASS Act
• Raise or remove the contribution cap for flexible spending arrangements (FSAs)
• Reverse the 3.8% tax on unearned income (including annuities)
• Enhance HSA and FSA use
• Build on the employer-based system
• Reduce consumer costs
Be sure to tune into EBA’s exclusive web seminar that will be held this afternoon at 2 p.m. EST and will give a detailed review of the ruling and impact analysis for health benefit plan sponsors and advisers. The web seminar will feature a Q&A session with the speakers to provide an opportunity for you to get answers to your most urgent questions.
Check out our new slideshow as employee benefit brokers and consultants across the country react and share their plans for moving forward.
Listen as Diane Boyle, VP of Federal Government Relations at the National Association of Insurance and Financial Advisors, shares the organization’s top priority in this exclusive podcast.
The House will vote on a full repeal of Barack Obama's health care law during the week of July 9, Majority Leader Eric Cantor (R-Va.) said Thursday.
How US health care reform will affect employee benefits
Shubham Singhal, Jeris Stueland, and Drew Ungerman
Source: Healthcare Systems and Services Practice
US health care reform sets in motion the largest change in employer-provided health benefits in the post–World War II era. While the pace and timing are difficult to predict, McKinsey research points to a radical restructuring of employer-sponsored health benefits following the 2010 passage of the Affordable Care Act.
Many of the law’s relevant provisions take effect in 2014. Our research suggests that when employers become more aware of the new economic and social incentives embedded in the law and of the option to restructure benefits beyond dropping or keeping them, many will make dramatic changes. The Congressional Budget Office has estimated that only about 7 percent of employees currently covered by employer-sponsored insurance (ESI) will have to switch to subsidized-exchange policies in 2014. However, our early-2011 survey of more than 1,300 employers across industries, geographies, and employer sizes, as well as other proprietary research, found that reform will provoke a much greater response. See more information about the survey methodology.
- Overall, 30 percent of employers will definitely or probably stop offering ESI in the years after 2014.
- Among employers with a high awareness of reform, this proportion increases to more than 50 percent, and upward of 60 percent will pursue some alternative to traditional ESI.
- At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.
- Contrary to what many employers assume, more than 85 percent of employees would remain at their jobs even if their employer stopped offering ESI, although about 60 percent would expect increased compensation.
In this new world, employers must quickly examine the implications of health care reform on their benefit and workforce strategies, as well as the opportunities and risks that reform generates. Of course, the type and extent of the changes employers make will vary by industry, collective-bargaining agreements, and other constraints. Most employers, however, will find value-creating options between the extremes of completely dropping employee health coverage and making no changes to the current offering. Even employers that intend to provide benefits similar to those they currently offer can take no-regrets moves, like tailoring plans to maximize what their employees will value most about ESI after 2014. Employers pursuing more radical changes will have to rethink benefit packages for higher-income employees.
And all employers must continue to keep in mind their employees’ health and wellness needs, even as insurance coverage levels evolve. To serve employers, insurers must retool their business models to provide more consultative support during the transition and develop innovative approaches to support employers’ new benefit strategies (see sidebar “Implications for health insurers”). For employers and insurers, success after 2014 will require a better understanding of employee and employer segments, and the development of the right capabilities and partnerships to manage the transition.
A transformed employer market
Health care reform fundamentally alters the social contract inherent in employer-sponsored medical benefits and how employees value health insurance as a form of compensation. The new law guarantees the right to health insurance regardless of an individual’s medical status. In doing so, it minimizes the moral obligation employers may feel to cover the sickest employees, who would otherwise be denied coverage in today’s individual health insurance market. Reform preserves the corporate tax advantages associated with offering health benefits—except for high-premium “Cadillac” insurance plans.
Starting in 2014, people who are not offered affordable health insurance coverage by their employers will receive income-indexed premium and out-of-pocket cost-sharing subsidies. The highest subsidies will be offered to the lowest-income workers. That reduces the social-equity advantage of employer-sponsored insurance, by enabling these workers to obtain coverage they could not afford on today’s individual market. It also significantly increases the availability of substitutes for employer coverage. As a result, whether to offer ESI after 2014 becomes mostly a business decision. Employers will have to balance the need to remain attractive to talented workers with the net economics of providing benefits—taking into consideration all the penalties and tax advantages of offering or not offering any given level of coverage.
What the law says
Health care reform imposes several new requirements on employer health benefits. Some changes will be incremental; for example, annual and lifetime limits on care must be eliminated, and coverage must be offered to dependents through age 26. Plans with premiums above certain levels will be subject to a so-called Cadillac tax.1
Other requirements are game changing and could prompt employers to completely reconsider what benefits they offer to employees. Reform requires all employers with more than 50 employees to offer health benefits to every full-timer or to pay a penalty of $2,000 per worker (less the first 30). The benefits must provide a reasonable level of health coverage, and (except for grandfathered plans) employers will no longer be able to offer better benefits to their highly compensated executives than to their hourly employees. These requirements will increase medical costs for many companies. It’s important to note that the penalty for not offering coverage is set significantly below these costs.
Reform also offers options for workers to obtain affordable insurance outside the workplace. Individuals who are unemployed or whose employers do not offer affordable health coverage, and whose household incomes are less than 400 percent of the federal poverty level,2 are eligible for subsidies toward policies they will be able to purchase on newly created state insurance exchanges. These will offer individual and family policies of set benefit levels (bronze, silver, gold, and platinum) from a variety of payers.
The subsidies will cap the amount lower- and middle-income individuals and families will have to spend on health coverage, to 9.5 percent of household income for those at 400 percent of the federal poverty level and less for those at lower income levels. The subsidies will keep the cost of insurance coverage from the exchanges below what many employees now pay toward employer-sponsored coverage, especially for those whose earnings are less than 200 percent of the federal poverty level.
A bigger effect than expected
As we have seen, a Congressional Budget Office report estimated that only 9 million to 10 million people, or about 7 percent of employees, currently covered by ESI would have to switch to subsidized exchange policies in 2014. Most surveys of employers likewise show relatively low interest in shifting employees from traditional ESI.
Our survey found, however, that 45 to 50 percent of employers say they will definitely or probably pursue alternatives to ESI in the years after 2014. Those alternatives include dropping coverage, offering it through a defined-contribution model, or in effect offering it only to certain employees. More than 30 percent of employers overall, and 28 percent of large ones, say they will definitely or probably drop coverage after 2014.
Our survey shows significantly more interest in alternatives to ESI than other sources do, for several reasons. Interest in these alternatives rises with increasing awareness of reform, and our survey educated respondents about its implications for their companies and employees before they were asked about post-2014 strategies. The propensity of employers to make big changes to ESI increases with awareness largely because shifting away will be economically rational not only for many of them but also for their lower-income employees, given the law’s incentives.
We also asked respondents questions about their philosophy and decision-making process for benefits: the current rationale for providing them, which employee group is considered most when decisions are made about them, their importance in the respondent’s industry, and geography. These questions prompted the respondents to consider all the factors that will influence their post-2014 decisions. Finally, we tested options beyond dropping coverage outright. These alternatives will probably be the most effective ones for delivering a reasonable return on a company’s investment in benefit programs after 2014. We would therefore expect to see a level of interest higher than that generated by surveys asking only about plans to keep or drop ESI.
Estimating the employer impact
As employers consider their post-2014 options, they should take a dynamic view by considering how competitors for talent—other employers—and their own employees will react. Many employers will be shifting from ESI; it is unlikely that only one company in an industry or geography will move away from it.
ESI might also be less valuable than most employers assume. Among employers not likely to drop ESI, three of the top five reasons given (and two of the top three) were concerns about talent attraction, employee satisfaction, and productivity. Among employees, however, McKinsey consumer research found that more than 85 percent—and almost 90 percent of higher-income ones—say they would remain with an employer that dropped ESI. Overall, employees value cash compensation several times more than health coverage. Further, many younger employees also value career-development opportunities and work–life balance more than health benefits.
Making employees whole
To make up for lost medical insurance, most employers that drop ESI will increase employee compensation in other ways, such as salary and other benefits like vacation time, retirement, or health-management programs. Employees think this will happen: 60 percent say they would expect employers to increase compensation if health benefits were dropped, our consumer research shows. Employers will do so to remain competitive for talent. In addition, ensuring some level of employee health, through higher investment in wellness programs or another mechanism, helps to maintain the productivity of workers.
Our research found that even with conservatively low assumptions about eligibility for employee subsidies, at least 30 percent of employers would benefit economically by dropping health coverage even if they make employees 100 percent whole. Employers could do so by paying sufficient additional compensation to help employees purchase coverage with no other out-of-pocket expense (less subsidies for employees with household incomes below 400 percent of the federal poverty level), the additional individual income and payroll taxes levied on the increased compensation, and the $2,000 government penalty.
But we believe that employers will not have to provide 100 percent of the value of the lost insurance. If so, even more employers will benefit economically. In the course of our research, we interviewed executives at Liazon, a defined-contribution-benefit company. They have found that when employees are shifted from coverage selected by their employer to a defined-contribution plan (under which the employer provides a fixed dollar amount and the employee can choose how to allocate it among a variety of benefit options), about 70 percent of employees choose a less expensive health plan.
Higher-income employees, who won’t receive subsidies and would have to pay the entire cost of individual coverage out of pocket, will have a greater need to be made whole. These higher-income employees, however, are also more likely to be satisfied with partial compensation or with tax-advantaged forms of compensation, such as retirement benefits.
The need to make employees whole will decrease over time. Subsidies will be awarded to keep premiums below a fixed percentage of an individual’s household income. As long as income continues to rise at a rate lower than that of medical inflation, even employees who initially have to pay more out of pocket toward an exchange policy than they would toward ESI will have less of a difference to make up each year, and the employer will have to provide less to make employees whole.3
This development should not suggest, however, that employers considering the elimination of ESI are focused exclusively on the bottom line, at the expense of their employees. In fact, because of the subsidies, many low-income employees will be able to obtain better health coverage, for less out of pocket, on an exchange than from their employer.
In fact, employers indicating that they will definitely or probably drop (or otherwise shift from) ESI post-2014 are more likely to consider the impact on low-income workers (as opposed to other groups of employees) when making benefit decisions and two to three times more likely to view benefits as important to attracting talent in their industry and geography. These employers are considering shifting from ESI not because they don’t care about their employees but because they recognize that, after 2014, ESI may not be the most efficient way to provide health coverage (see sidebar “The range of coverage options for employers”).
Getting ready for the new world
To prepare for 2014, employers should explore the economics of benefits after reform, maximize the return on investment (ROI) of benefit packages, design them for higher-income employees, and satisfy the health and wellness needs of the whole workforce.
Explore the economics of postreform benefits
Employers must understand, at the microsegment level, the eligibility of employees for subsidies under different scenarios—for example, when the employer provides no coverage at all, coverage defined as “unaffordable” (at a premium above 9.5 percent of the household income) for some employees, or coverage above the Cadillac-plan threshold. Companies must determine the cost of making employees whole, using market research tools to find out how much they value ESI, cash compensation for it, and a variety of other benefits. The importance for workers of a given benefit may not correlate directly with its tax-adjusted cost to the employer.
Maximize the ROI of the benefit package
The discussion to date has largely focused on dropping versus keeping coverage, but for most employers the most value-creating options lie in between. Employers should evaluate the economic impact not only of expanding ESI to every employee (compared with dropping it completely) but also of shifting toward part-time labor, allowing lower-wage employees to qualify for exchange subsidies through setting premiums above 9.5 percent of their household income, or adopting defined-contribution models. These intermediate options will probably be the most effective way to secure a reasonable ROI for benefits after 2014, because they enable employers to provide the best possible result for each segment of employees—ESI for higher-income ones not eligible for subsidies, as well as affordable coverage from a subsidized exchange for lower-income workers.
Even employers that continue to offer ESI—and many will, especially in heavily unionized industries where flexibility may be limited—could make no-regrets moves to maximize the ROI of benefits after 2014. Market research tools could be used to determine the preferences of employees, so that the benefit plan emphasizes what they value most while minimizing other features. Other strategies would involve designing plans and enrollment features to reduce costs, pricing plans to promote responsible use, and ensuring that wellness spending produces a positive return. Retiree medical benefits could be shifted from traditional ESI toward Medicare (the federal government’s health care program for those 65 and older) and Medicare Advantage (the private-sector version of the government plan).
Design benefit packages for higher-income employees
Because lower-income employees will be eligible for exchange subsidies if their employers don’t offer them affordable health coverage, we expect that ESI will shift toward higher-income employees. This group will have more demanding expectations for service levels and convenience, as well as different attitudes toward benefits covered.
Employers should tailor their ESI offering to include navigation tools that make it easier to identify and get appointments with high-quality health care providers and fast access to well-informed people for assistance with billing or coverage issues. These services could be provided through partnerships with enterprises that specialize in explaining medical bills and pricing. Higher-income employees may also value preferred-access or other enhanced-care physician services more than a traditional Cadillac ESI plan. These alternative benefits may be more cost effective for employers once the Cadillac tax comes into effect, in 2018.
Satisfy employee health and wellness needs
Even for an employer that drops ESI for all or some employees, maintaining their health, productivity, and satisfaction will continue to be important. Employers could not only expand or refine wellness programs to focus on elements that have a substantive, positive, and documentable impact on employee health and satisfaction but also provide the right incentives to encourage participation. In addition, employers could establish clinics at work sites, or partnerships with local providers or pharmacies so that employees can easily and affordably receive preventative care, such as flu shots or annual physicals. Another way to keep employees satisfied and avoid disrupting their lives would be to partner with a broker or another enterprise that helps them understand their benefit options and enroll for coverage on insurance exchanges.
Employers should recognize that as the ESI market changes after 2014, the system will react dynamically. If many companies drop health insurance coverage, the government could increase the employer penalty or raise taxes. Employers will need to be aware of actions by participants at any point along the health care value chain and prepare to adapt quickly.
Whether your company is poised to shift from employer-sponsored insurance or will continue to offer the same benefit package it does now, health care reform will change the economics of your workforce and benefits, as well as how your employees value coverage. Understanding these changes at a granular level will enable your company to gain or defend a competitive advantage in the increasingly dynamic market for talent.
What The Health Care Decision Means for Your Small Business
The Supreme Court decision Thursday upholds the Affordable Care Act. But as a small-business owner, you may wonder what that means for you.
Most of the law's key provisions are set to take effect roughly two years from now, on January 1, 2014.
Based on the ruling, all individuals -- including small-business owners -- must have health insurance starting in 2014, or pay a penalty.
Certainly, the cost of health insurance has become a significant issue for small firms over the past decade.
Overall, about 71% of firms with 10 to 24 employees offered health insurance in 2011, compared with 77% in 2001, according to a 2011 Kaiser Family Foundation survey. Of firms with three to nine workers, just 48% offered insurance in 2011, compared with 58% in 2001.
The high-profile decision is a blow to the National Federation of Independent Business, a Washington, D.C., lobbying group that joined 26 states in fighting the mandate. The NFIB argued that small businesses would suffer if the owners of those entities had to pay for their own health insurance. The NFIB spent more than $1.2 million on the lawsuit in 2010 alone, according to disclosures.
Here's a look at how you might be affected:
Q. What if I am a one-person business?
A. The impact for sole-proprietors and others with no employees will be much like the impact on individuals.
For people in this group, the crux of the 2014 roll-out is the individual mandate, which requires all U.S. citizens and legal residents to have health coverage or pay a penalty.
You, as a one-person business, would buy insurance through your state's benefits exchange that will roll out in 2014.
There are some exemptions, however, such as those from certain religious backgrounds and those who are eligible for the so-called "hardship exemption" if the cost of the annual premium exceeds 8% of household income.
There are penalties intended to ensure compliance. The top penalty for individuals, once fully phased in, for not having insurance is $695 or 2.5% of income -- whichever is greater.
Q. I have employees or may be hiring. What provisions impact me?
A. If you have employees, the health-care provisions are a bit more complicated.
Since 2010, firms with fewer than 25 full-time equivalent employees have been eligible for a tax break if you cover at least half the cost of health insurance. (Full-time equivalent is the number of employees on full-time schedules plus the number of employees on part-time schedules, converted to a full-time basis.)
But only if you have fewer than 10 full-time equivalent employees and average salaries of $25,000 or less is your firm eligible for the full credit. Today, that full credit is 35% of your contribution toward an employee's insurance premium. As your firm size and average wage amount goes up, the tax credit goes down. And once your business hits 25 full-time equivalent employees or $50,000 in average salaries, the credit is completely phased out.
Q. What happens to the tax credits going forward?
A. In 2014, the state-based Small Business Health Options Program Exchanges will be open to small firms. And getting insurance through those exchanges could bump the maximum tax credit to 50% of your contribution, up from the current 35%.
But the tax credits won't last. The credit is only available for a maximum of five years and only two years once the exchanges are up and running.
Q. Will I have to provide health insurance to my employees in 2014?
A. No firm is mandated to provide insurance, but in 2014, only the smallest businesses will be exempt from penalties if they don't.
Q. What are the penalties and under what circumstances would I be exempt?
A. Once your firm reaches 50 full-time equivalent employees, a penalty will kick in if you fail to provide coverage for employees who average 30 or more hours a week in a given month. The penalty is $2,000 for each full-time employee in excess of 30 full-time employees. There are no penalties if part-time employees are not offered coverage.
A key factor in calculating the penalty is that the equation isn't based on full-time equivalents, but rather on actual full-time employees. That means some businesses that are subject to the penalty may end up owing nothing.
Here's a basic example: Say your firm has 25 full-time employees and 50 half-time employees that, combined, equal 25 full-time equivalents. Your firm, in effect, has 50 full-time equivalents and would be subject to the penalty if you don't provide health-care coverage. However, your penalty cost likely would be zero because the $2,000 tally starts at the 31st full-time employee and you only have 25 full-time employees.
Q. What should I know about getting insurance for my employees?
A. You can't just buy any old insurance to avoid the penalty. You have to provide so-called "minimum essential" and "affordable" coverage. Minimum essential coverage means covering 60% of the actuarial value of the cost of the benefits. And affordable means the premium for the coverage of the individual employee cannot exceed 9.5% of the employee's household income.
If the coverage you offer is unaffordable, qualifying employees can get subsidized coverage through the tax credit on the state exchanges. In such a case, you will have to pay the lesser of $3,000 per subsidized full-time employee, or the $2,000-per-employee penalty after the first 30 full-time employees.
Behavioral health costs account for 6% of health plan spending
Source: eba.benefitnews.com
By Lisa Gillespie
Behavioral health, including depression and stress, is an increasing area of concern to employers, according to the Disability Management Employer Coalition 2012 Behavioral Risk Survey of small, mid-sized and large companies. The concerns and costs — including direct medical expenses, lost productivity, workers' compensation and disability payments — are made more challenging due to the uncertain future of the Patient Protection and Affordable Care Act.
The survey found that direct costs of mental health care represent around 6% of overall health care costs and nearly 30% of young adults (those aged 18 to 25) were estimated to have had a diagnosable disorder, which is more than any other age group. The estimates for adults between the ages of 26 and 49, and those 50 and over were 22.1% and 14.3%, respectively.
Overall, 11.4 million U.S. adults — about 5% of the adult population — have a disorder that greatly impairs their ability to function in daily life. According to the DMEC survey, 47.7% of respondents believe behavioral risk is an important emerging area of concern. Forty percent include a behavioral component in their integrated or coordinated disability/absence management program.
The survey indicates adoption of behavioral health programs could be impacted by the uncertainty surrounding health care reform. Under PPACA, individual and small group insurance plans will most likely be required to offer parity in behavioral health benefits.
With 78.3% of respondents noting that their behavioral health component is a "carve-in" and is attached to their health plan, they may be reluctant to add/develop programs such as behavioral health if they have to "carve it back out" due to the potential for increasing health insurance costs and the uncertainty associated with the legality of PPACA.
Behavioral health conditions are among the most widespread, damaging and yet preventable illnesses from which people suffer,” says Marcia Carruthers, CEO of DMEC. "It is heartening that awareness of behavioral health and its costs to employees, employers and the entire health care system continues to grow. Employers need legal and regulatory certainty to enable them to effectively manage and reduce these costs."