Talent Management Column

HR Implications of Healthcare Reform

The recently signed healthcare legislation offers an interesting array of challenges and incentives for employers both big and small. One change is that offering healthcare benefits will no longer be a big source of advantage in recruiting for larger organizations.

Monday, March 29, 2010
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Political talk shows may not know what to do with themselves now that the 2010 healthcare act has passed, but in the meantime, the rest of us have to get down to business. While it will take decades to know all the effects of this legislation, we'll have to figure out before then the practical implications for employers and human resources.

Healthcare coverage is already a big deal for employers. The Employee Benefits Research Institute calculates that about 60 percent of employers offer it to their employees -- bigger companies are much more likely to do so and generally offer much more generous plans. A little more than 60 percent of the population, excluding those who are Medicare eligible, gets healthcare coverage from employers, and that coverage accounts for about 8 percent of total-compensation costs. Those figures are about to increase by a lot.

The legislation enacted this week has two attention-getting components. The big one is that covered employers have to either provide coverage or pay a roughly equivalent penalty. The second is to create a state-level marketplace where individuals without coverage can buy it at standards set by the federal government. The estimates are that about 32 million people without insurance will get it with these requirements. Other provisions also represent big changes. Children can stay on their parent's insurance policies until they turn 26. Individuals with preexisting conditions can get coverage either from a new employer or from special programs.

What are the big implications for human resources? Complying with the act is a big one. That begins with understanding which employers are covered. There are exemptions for smaller employers, hardship cases, etc. That's reasonably straightforward, but figuring out which employees are covered is less so (e.g., its full-time employees, but what will constitute full time?). The compliance requirements spill over into related topics as well. For example, an employer cannot pay for the costs of the mandated healthcare through reductions in wages, but how will that be assessed in practice? Will any reductions in pay become suspect as a result? One of the things we know about payroll taxes, for example, is that they don' t necessarily get paid for by the employer: Wages tend to fall somewhat, so that the tax burden gets shared between employer and employee, and exactly how much falls to each side depends on the tightness of the labor market.

And yes, the program creates lots of new compliance mandates. Special taxes apply to more expensive plans, employees have to be automatically enrolled, but they can also opt out of coverage. Those whose pay is low -- relative to insurance costs -- can go to the marketplace to buy insurance.

How will the legislation affect more strategic aspects of human resources? One change is that offering healthcare benefits will no longer be a big source of advantage in recruiting. While this may never have been a big deal for larger employers, most of whom offered equivalent healthcare policies, it did matter for smaller ones. At the other extreme, some companies may try to structure themselves to remain small enough to avoid coverage under the act. Others may decide that full-time employees are now too expensive. Will this contribute to greater use of part-time employees, temp workers or independent contractors? 

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On the other hand, smaller operations that are exempt from coverage may now be particularly good matches for very young workers as full-time employees. The employers won't provide healthcare, but the young employees can still get it from their parent's plans. So they aren't under pressure to find a job with healthcare benefits -- at least yet. We might expect turnover then to jump once workers reach age 26.

Further, offering health insurance no longer provides an advantage in retaining employees. My former colleague Bridgette Madrian identified the fact that people with existing health problems stayed with their current employer for fear that if they left, they would not get healthcare again because they had a preexisting condition. She called this "job lock," and the new legislation will end that situation by mandating coverage. How big will the uptick in turnover be as a result? Probably not huge, but possibly big enough to notice.

Finally, it's safe to say that the new legislation will have lots of other implications that we can' t easily imagine now. Whether one likes the legislation or not, these implications create new challenges -- and job security -- for human resources.

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School.

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