Push for Healthcare Reform
Employers providing health coverage will lose big if healthcare reform fails, says an employee benefits expert in this opinion piece. Comprehensive reform eventually will provide substantial financial savings, compared to maintaining the status quo.
By George Faulkner
Many larger employers still seem to be on the fence regarding the healthcare-reform proposals under consideration.
Some very large employers, including many members of the Business Roundtable (as reported in the Wall Street Journal on Sept. 25, "Overhaul Divides Business and Its Traditional GOP Allies"), support the need for comprehensive reform.
But others are still concerned that the reforms enacted will raise costs, and perhaps offer compliance difficulties as well.
A survey of 160 employers by Watson Wyatt, released on September 28, indicated that 73 percent of respondents believe healthcare costs will rise due to enactment of healthcare reforms. The survey also found that while 60 percent would support an individual mandate, only 20 percent would support an employer mandate.
The House of Representatives and the Senate Health, Education, Labor, and Pensions Committee drafted bills earlier in the summer, and at this time the Senate Finance Committee has a "chairman's mark" draft that is continuing to be modified before going to a vote by the full committee.
Then, the two Senate bills will have to be combined, leaving employers anxious to see how some very different provisions will reconciled.
Both the House bill and the HELP Committee bill include a mandate for employers over a certain size to provide health coverage to employees and pay a major portion of the cost.
The Senate Finance Committee bill lacks a full employer mandate, but does impose a potentially perverse requirement: Any employer with 50 or more employees and any of whose employees qualify for a federal subsidy, would have to either reimburse the government for the cost of those subsidies or else pay them $400 for each full-time employee.
The requirement could discourage employers from hiring low-paid employees who might qualify for the subsidies.
But for larger employers, nearly all of whom already provide healthcare coverage, the issue is moot. Plus, it's quite possible this provision will not survive either the cut in compiling the full Senate bill or the final combined bill emerging out of Congress.
Certainly, the draft bills have many potential implications that could positively or negatively affect various employers in different ways, depending on their current plan designs, workforce characteristics, costs and so forth.
But looking at just the financial impact for employers that already provide, and largely pay for, their employees' health benefits, should lead one to conclude that passage of comprehensive reform eventually will provide substantial financial savings, compared to maintaining the status quo.
If so, employers should be more proactive in lobbying for passage of healthcare reform.
While the three draft bills differ in details and it is uncertain what, if anything, will finally emerge and become enacted, some of the key provisions employers might expect to see in the final legislation include:
* A mandate for larger employers to provide health coverage and pay for a large part of its cost.
Employers with 25 or more employees (Senate HELP Committee bill) or with an annual payroll of $500,000 (House bill) must provide coverage or pay, as a penalty, a contribution to a national health exchange (House bill) or regional/state exchange (HELP bill) for employees to obtain coverage.
While this certainly means more costs for some small employers, their contribution requirements are less than for large employers, and many of the smallest ones would be able to obtain a tax credit to help offset much of their costs.
The HELP bill would require employers that provide coverage to pay at least 60 percent of the premium, while the House bill who require paying 72.5 percent for employee coverage and 65 percent for family coverage.
* A mandate for all individuals to have coverage, with subsidies for those who have difficulty paying for it.
* A nonprofit national exchange or state/regional exchanges that would administer coverage (enroll, and collect premiums from individuals not covered by employer plans, Medicare or Medicaid) and from any employer participants, and then disburse premiums to health plans.
They would also regulate participating health plans by requiring certain coverage standards, plan design structures and limits on how premium rates could vary. They would also perform risk adjustments in order to ensure that plans enrolling more higher risk/cost individuals are adequately compensated so that plans to not make (or lose) money by taking on more healthy (or sick) individuals.
* Strong regulations of insurance carriers and markets, with the House bill and Senate HELP bill also providing a public-plan option for those getting coverage through a health exchange.
* Expansion of Medicaid eligibility, community clinics, rural-care services and funding to strengthen the healthcare workforce.
* Promotion of provider-payment reforms under Medicare and Medicaid, use of electronic records and other delivery-system reforms.
The purpose of this article is not to speculate on the likely outcome for this process or critique specific provisions in the existing draft bills. Instead, it attempts to show that the overall provisions of an employer pay-or-play mandate, an individual mandate, insurance-market standards and exchange-based purchasing, and provider-system reforms should lead to lower costs for larger employers -- almost all of whom already provide healthcare benefits to their active employees.
Here is how employers already providing healthcare coverage should benefit:
* First, employers that already provide healthcare coverage bear more than their "fair share" of society's healthcare costs.
By requiring more equity among employers for providing healthcare coverage, increasing Medicaid coverage eligibility and making purchase of individual coverage easier (e.g., through an exchange) and financially more affordable (through subsidies), employers that currently cover many employees' dependents should see some savings.
Here's a
simple example
that shows the potential.
* Second, if universal coverage is essentially achieved, employers would no longer be subject to what insurance companies call "adverse selection" from new employees who previously lacked coverage and come on board with pre-existing conditions, deferred elective care or plans for having children until they gained employer coverage.
This phenomenon typically adds about 3 percent to employers' costs, according to actuaries. For example, if an employer replaces 15 percent of employees annually and one in five of the new hires has double the average costs, the impact is an extra 3 percent (15 percent times 20 percent times an extra 100 percent).
* Third, several studies have cited the phenomenon and consequences of "job lock," when employees stay longer with a particular employer because of their healthcare coverage, instead of going to another employer that does not provide coverage, starting their own business or retiring (particularly employees under age 65).
While the impact on employer healthcare costs apparently has not been quantified, the impact for many could be substantial both on healthcare costs and on employee productivity. Employees who stay because of health insurance are likely to be older or have current or anticipated health conditions (or their covered dependents do).
Providing healthcare coverage is one of the top reasons for picking or staying with an employer, according to most employee surveys. According to a study by Jonathan Gruber in 2000, up to 25 percent of employees may be constrained by job-lock. (See "Will Health Reform Free Workers from 'Job-Lock'?" in the August 5, 2009 issue of U.S. News & World Report.)
If we assume that 10 percent of employees are locked into their jobs due to their own health concerns and another 10 percent have dependents who have health issues, and that the cost for these individuals is 50 percent higher than the average costs, then that's almost an extra 8 percent load on the employer's costs.
* Fourth, according to a recent study by the actuarial firm Milliman Inc. (commissioned by Families USA, and published this past May), some of the cost for hospitals and doctors to treat those without health insurance (nearly 40 percent of their total costs) is shifted into the rates charged to those with insurance.
This means the average employer's cost in 2008 included $368/year for each single employee and $1017/year for each employee with family coverage. Trending these costs to 2009 by 8 percent, this equates to an 8 percent load on the above sample employer's costs (and each employee's share, for that matter).
* Fifth, if healthcare reform delivers on its promise to create more competition among insurance companies --including through competing against a public option in the exchange(s) -- more efficient administration, less unnecessary care and defensive medicine, and overall delivery system reforms, employers and employees should all eventually save at least another 5 percent.
This figure could go higher if stronger delivery-system provisions and greater administrative simplification were enacted. Plus, one could argue that much greater savings are possible under other reform models, such as those used in Canada, Europe, Taiwan or Japan. But that is beyond the scope of this analysis.
Put these figures together and employers now providing health coverage eventually could save perhaps 30 percent or more [(1-16 percent) x (1-3 percent) x (1-8 percent) x (1-8 percent) x (1-5 percent) = 34 percent].
Employers who currently provide medical coverage might want to run their own estimates, applying the factors and formulas above to their own data. Remember that these potential savings would apply to the total premium cost (or claims plus administrative costs for self-insured plans). This means that both employers and employees would save on their respective contributions.
Those reading the article in the August 20 issue of Fortune by Shawn Tully entitled "Obamacare Could Cost You $4,000 a year," might still be concerned that the reform proposals will hurt more highly paid employees.
However, the example Tully uses is unrealistic.
It hypothesizes an employee named Harry earning $88,000 a year and electing family health coverage for $13,500 per year, of which he pays $3,000 in contributions and his employer pays the balance. The employer decides to get out of the business of administering health coverage and opts to pay the 8 percent of payroll penalty contribution to the health-insurance exchange.
In this example, the employer would spend the same amount and give the employee a raise reflecting the difference between the $10,500 it was spending and the 8 percent payroll contribution. In the example, the 8 percent of payroll contribution assumes Harry's pay is the average pay for the organization (a critical assumption as we shall see).
Harry pays more for the same coverage through the exchange (even if he qualifies for $3,800 in "affordability credits") and comes up short by $3,700/year.
There are two problems with this scenario. First, it's not that likely employers will discontinue administering healthcare plans. An evaluation of the results of the Massachusetts pay-or-play requirement for employers after two years of the program showed a net increase in employers providing coverage, even though the penalty to drop it was very modest, according to a study released in September by the Urban Institute.
Second, in the above example, if the organization's average salary was $50,000 (rather than Harry's $85,000), it would be able to provide higher raises to make up the difference. Harry would only be behind by about $1,040, not $3,840, if the company dropped its coverage and gave the dollar difference to him in a raise.
If we look at another employee who earns the average salary, $50,000, the results are also quite different. If the employer drops health coverage, this employee would get about $8,500 in "affordability credits" under the House bill (which assumes he can afford 9 percent of his pay for healthcare) and only pay out $5,000 for the original $13,500 family coverage premium.
As before, if the company just needs to break even on its costs, then the employee would get a raise of almost $5,660. His take-home income from using the health exchange increases from $47,000 ($50,000 pay - $3,000 in plan contributions when the employer provided the coverage) to $50,660 ($50,000 + $5,660 raise - $5,000 plan contributions to the exchange).
Since this average employee comes out ahead, the employer could apportion its pay increases a little differently to give higher-paid employees slightly more, while lower paid employees would still have a net gain due to the credits. However, employers might have difficulty explaining and justifying any complex formulas that appear to favor higher-paid employees.
So the original example is hardly reflective of the situation for most employees. Even if Harry was originally earning $100,000, the company could afford to give him a sizable raise (again, up to 13 percent, if the average salary were $50,000), without spending any more.
Employers thinking through these issues carefully should find that they have a strong case to push Congress to pass healthcare reform with universal coverage, a more competitive group health insurance system and strong delivery-system reform measures.
On the other hand, if employers don't take advantage of the remaining window of opportunity, and reform of any sort fails for another several years, they will surely be big losers. Not only will they fail to gain the potential savings discussed above, but several forces will further drive up the costs for those that try to keep offering healthcare coverage:
* More smaller employers will drop coverage and shift their employees on to larger employer's plans;
* The number of uninsured will increase, translating into more cost shifting by healthcare providers to insurance plan payers;
* Administrative complexity will grow, as more states move ahead with their own reforms and requirements;
* The insurance market will continue to consolidate and limit employer options and bargaining power;
* Adverse selection by new employees and employees hanging on to jobs for health benefits will be more pronounced;
* Wellness and prevention programs will become less affordable as other plan costs increase and as the economy continues to shift to a more mobile, higher-turnover workforce; and
* Utilization and costs will continue to trend up, due to providers' unchecked reliance on the fee-for-service payment model for profitability, an inadequate contingent of more cost-effective primary-care practitioners (especially in rural areas) and further adoption of new technologies and drugs with marginal treatment value.
One can find fault with many provisions of the current draft bills in Congress or still hold out hope that a totally different reform model might be adopted at some point.
But if any healthcare reform passes in the near future, it is politically most likely to reflect the broad principles to these bills, expanding the current mixed system of government plans and employer-based coverage, along with one or more purchasing exchanges for individuals and at least small employers.
Over time, we may all want to revise many detailed provisions. But if we do not enact some foundation of universal coverage, insurance-market regulations and delivery-system reforms, then we will continue on the downward spiral of a system that has huge gaps in coverage, poor care quality for too many individuals (despite well-known exceptions), Byzantine administrative processes and costs that are generally double what other advanced economies pay and threaten the stability of private employer plans and the solvency of federal and state governments.
George Faulkner retired in 2009 after 25 years as a consultant with Mercer Health & Benefits and a predecessor firm, A. Foster Higgins/Johnson & Higgins, and after nearly 35 years in employee benefits altogether. During his career he was a primary author for several national benefit surveys and consulted with larger employers on healthcare, disability and paid-time-off programs, health management, flexible benefits, and (in the early 1990s) healthcare reform. He also has several published articles and media citations on these topics and served as a representative for Mercer on various committees within the National Business Group on Health, the Integrated Benefits Institute, and other employee benefits organizations.
October 16, 2009 Copyright 2009© LRP Publications
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