The Cost of Reform
By Andrew R. McIlvaine, Human Resource Executive, www.hreonline.com
Healthcare reform may be a no-win situation for employers. The changes mean the cost of insuring employees will be significantly higher than if the new law had not passed, according to one organization. However, dropping coverage will also entail significant costs.
New research from the Corporate Leadership Council has found that healthcare reform will trigger much greater increases in the cost of healthcare benefits than if the reforms had not been enacted.
However, HR leaders should not assume that dropping healthcare benefits will save their organizations money. Indeed, for most companies, dropping coverage will most likely end up costing them more than keeping it — or it will until 2016, according to the CLC.
The CLC, a division of the Washington-based Corporate Executive Board research organization, based its analysis on studies from a variety of sources, including the Kaiser Foundation and New York-based Segal Co., as well as its own research.
It determined that healthcare costs would have continued their upward trajectory regardless of healthcare reform, but that trajectory is forecast to be much steeper when the new law’s effects are factored in, said Michal Kisilevitz, managing director for benefits and compensation at the CLC, during a webinar last week.
The CLC estimates that healthcare costs would have nearly doubled between 2011 and 2018 — based on current pricing trends — had the Patient Protection and Affordable Care Act not been signed into law earlier this year by President Barack Obama.
But factoring in the PPACA means those costs will be 240-percent higher than they are today — or 37-percent more than if the new law had not been enacted, according to the CLC.
Based on rough estimates, the CLC projects that employers’ cost-per-enrollee for a PPO plan (the most popular form of health plan among employees) will rise from $8,085 in 2011 to $19,497 by 2018, representing an annual-growth rate of more than 13 percent.
It based its estimate on the effects of the 40-percent excise tax that will be levied on so-called “Cadillac plans” that will go into effect in 2018, as well as additional taxes that the PPACA will levy on high-income individuals, drug and medical-device manufacturers and health insurers.
However, employers shouldn’t plan on dropping their healthcare coverage anytime soon, warned Kisilevitz.
“Dropping healthcare coverage might have a pretty significant negative impact on employees,” she said.
It will also have a negative effect on companies’ balance sheets.
Despite the rise in costs, eliminating healthcare coverage will cost organizations more than retaining it will — at least until after 2016, according to the CLC.
That’s because of the intangible costs of ending coverage, such as the potential impact on employee productivity, the additional time employees will need to search for and manage benefits on their own, and the reduced appeal the employer may have in the talent marketplace as a result of dropping the benefit, said Kisilevitz.
“Employees would lose their implicit partner in providing coverage,” she said.
The tangible costs include the $2,000-per employee fine that will be levied on employers that drop coverage, as well as subsidies that those companies may end up paying to help workers secure coverage on their own — subsidies that will not be tax deductible, said Kisilevitz.
“In order to fully compensate their workers for the value of a dropped PPO plan, employers will need to add $11,000 to each worker’s annual base pay,” she said.
The outlook is different for employers that only offer less-popular plans — such as HMOs and high-deductible health plans.
Those employers will pay less because the cost of replacing the lost value of those plans will be less, said Kisilevitz. In addition, employers that decide to replace the lost-value of discontinued health insurance with non-cash alternatives — such as increased employer matches for 401(k) plans — will also have lower costs.
By 2016, healthcare costs will have risen to the point that dropping coverage and having employees transfer to the health exchanges set up because of the new law will make more financial sense for most employers, said Kisilevitz.
She cautioned, however, that there are still far too many “unknowns” for employers to be making any long-term decisions at this point.
Tom Billet, a senior consultant at New York-based Towers Watson, says most of the large firms he has spoken with plan on keeping their health benefits — at least for the next several years.
The retail industry is the exception, he says, adding that its mostly part-time, low-wage employee population means that ending healthcare coverage may make economic sense.
However, a few “wild card” employers could shake things up, he adds.
“Keep in mind that, 20 years ago, the idea that most companies would end up jettisoning their defined-benefit retirement plans was considered ridiculous,” he says. “But as we’ve seen, all it took was for a few large employers to do just that, and soon it became a trend. So it’s possible we’ll see something like that in healthcare.”
It’s also quite possible that the federal government will, in response to such a trend, dramatically increase the penalties employers would pay for dropping coverage, says Billet.
“The penalties in their current form may not come anywhere near close to paying for the cost of providing care to folks whose employers have dropped coverage,” he says. “Companies should not, when making long-term decisions about providing coverage, assume those penalties will stay the same.”
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