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The Play-or-Pay Decision for Employers

The U.S. Supreme Court's recent ruling on healthcare reform moved the national conversation forward. Now, employers are plotting their next moves, but what factors will weigh most heavily in their decision to either "pay" or "play"?

Tuesday, July 17, 2012
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The U.S. Supreme Court made up its mind on the Patient Protection and Affordable Care Act. Now, it's "play or pay" decision-time for employers.

The main questions are: What will employers do as the 2014 coverage deadline approaches? And what will the ACA's real financial impact be on employer-subsidized healthcare? For example, a recent data study by Truven Health Analytics, formerly the healthcare business of Thomson Reuters, reports that maintaining current plans will be the likely, and most cost-effective, choice for most employers in 2014 and beyond.

On the flip side, a controversial survey of 1,300 employers released by McKinsey in mid-2011 projected that 30 percent of employers "will definitely or probably" stop offering employer-subsidized healthcare insurance in 2014. For employers with a high awareness of reform, McKinsey reported that the proportion increased to more than 50 percent among survey respondents.

McKinsey's study was met with a chorus of critics (and some supporters, too), so much so that it felt compelled to post a detailed explanation of its survey methodology.

Avalere Health, an advisory services company based in Washington, posted a report in June 2011 that said the overall employer-subsidized insurance market will likely remain relatively stable after 2014. The report went on to say "microsimulation" model estimates by a number of entities along with "large-scale employer surveys and analyses conducted by benefits consultants, investor groups and other consulting firms also confirm that most employers will remain committed to providing coverage."

Those widely differing views on what actually will happen in 2014, when the ACA's healthcare exchanges are slated to be open for business, has fueled this hotly debated point-counterpoint scenario. Ray Fabius, Truven's chief medical officer, believes the debate is moot based on his company's recent research.

"Prior to this kind of modeling, most employers might have been under the impression that there is a real choice," Fabius says. "But our analytical modeling clearly shows there actually is a better option, and that is to maintain the status quo."

To reach that conclusion (and several others), Truven analyzed insurance claims and wage data from 33 large employers with a total of 933,000 employees. Its research examined the direct benefit and tax cost of eliminating group health benefits in favor of taking fines imposed under ACA for not providing coverage at all.

Truven's key findings included:

* Group health will be more cost-efficient -- Employers will bear a burden of as much as $17,269 per employee (roughly $9,000 more) to shift their benefits to federally-subsidized coverage obtained through an exchange in 2014 rather than continuing existing group-health plans.

* Cost-shift to employees means major compensation reduction -- Should employers choose to eliminate group health without providing a subsidy to employees to obtain coverage through an exchange, each employee would pay an average of $16,551 per year for health coverage in 2014.  

"Our research focused on large employers [that] provide health insurance, but it's safe to say that the modeling process we went through extends to mid-sized companies," Fabius says.

In addition, he adds, there has been speculation that employers that don't subsidize healthcare coverage are more likely to pay a penalty, as mandated by the ACA, rather than fund insurance because it's more expensive covering the latter. In other words, the obvious choice is to pay the fine, rather than offer new coverage. Fabius says that could be a mistake on the part of those employers.

"People don't like to pay something for nothing, and with a penalty, that's what you get," he says. "Employers forced to play or pay may take a second look at the merits of becoming an employer of choice by offering healthcare benefits."

Mary Setter, senior vice president of employee benefits and carrier relations at RJF Agencies, a Marsh McLennan Agency company in Minneapolis, says her firm is coming to the same conclusion that Truven and Avalere have arrived at -- most large employers will be keeping their group plans in 2014.

"These types of employers have had health coverage plans in place for a very long time," she says. "They are going to continue, going forward."

Apart from attracting and retaining employees, which helps companies compete in the marketplace, healthcare benefits also help build employee morale.

"We don't see a lot of changes in the Fortune 500 realm," she says.

For small or mid-sized employers, the challenge will be determining what strategy makes the most sense in terms of whether to continue with an existing plan or drop coverage. Also, if an employer drops its plan, what would the penalties be and what impact would it have on our employees?

Setter says that for small- to mid-sized clients, RJF Agencies offers an online analysis tool designed to help them decide which strategy will work best for their specific situations. She adds that the RJF healthcare reform assessment tool will be especially helpful for employers in retail and manufacturing, for example, so they can understand what the play-or-pay cost ramifications mean to them. For employers that do drop or do not offer ESI benefits, the penalties are between $2,000 and $3,000 per employee (after the first 30).

"They have to weigh any gains from paying the penalties against potential costs associated with attracting and retaining employees," she says. "There are financial and cultural considerations. Some of those employers may believe paying the penalty is best, but seeing it in black and white via our tool can give them more to think about."

No matter what, Setter predicts, the ACA and its complexities will undoubtedly drive up healthcare costs for employers as insurance costs rise through ACA provisions. For example, when the coverage mandate goes into effect in 2014, no one can be denied coverage. And there cannot be underwriting exclusions for preexisting conditions and no lifetime limits on insurance.

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"It's hard to imagine how costs would not increase when all of those features are factored in," she says.

Jonathan Clark, co-chair of the employee-benefits practice group at Pepper Hamilton, a Philadelphia-based law firm, says that while the Truven analysis is well done, he is hesitant to draw any solid conclusions about how any one employer will decide whether to play or pay.

"It's the age-old issue of aggregating data," he says, noting that such data does not always translate to a definitive result across all employers and market segments.

Another consideration, he adds, is that many workers in lower-paid sectors (retail, hospitality, etc.) who already eligible for ESI benefits, but choose not to enroll (the working uninsured), will still have a choice: They can buy the coverage via the exchanges or pay the tax/penalty as set forth by the individual mandate.

"It would not surprise me that, at the individual level, people choose to pay the penalty because they are not paying for employer-subsidized coverage already," he says.

Of course, for some employers, the decision to plan for ACA-mandated actions in 2014 will wait for another upcoming event, the November elections. According to a recent survey from Mercer, 16 percent of employers say they will wait until after November to start implementing ACA-mandated efforts for 2014 and beyond. Forty percent of the 4,000 employers polled in the Mercer survey, however, said they will begin taking action now that the court has ruled.

As for the play-or-pay scenario that takes effect in 2014, 28 percent of employers surveyed said compliance with the new requirement that employees working an average of 30 or more hours per week must be eligible for coverage will present a "significant challenge" for their organization.

"Employers with large part-time populations, such as retailers and healthcare organizations, are faced with the difficult choice of either increasing the number of employees eligible for coverage, or changing their workforce strategy so that employees work fewer hours," says David Rahill, president of Mercer's health and benefits business. "With the average cost of health coverage now exceeding $10,000 per employee, a big jump in enrollment is not economically feasible for many employers."

The requirement to auto-enroll newly eligible employees in a health plan -- which means that employees will automatically be covered unless they take action to opt-out -- is also expected to increase the rolls of the insured for many employers. Nearly one-third (29 percent of respondents) said this will be a significant challenge, especially because other provisions of the law will limit the amount of health-plan costs employers can pass along to employees through higher premiums or deductibles.

One result of the ACA is a renewed focus on healthcare cost-management strategies, including wellness, health/disease management, etc.

In fact, 54 percent of surveyed employers plan to be even more aggressive about managing plan costs going forward now that health reform has been upheld. Forty-one percent said they would not, mainly because they were already taking aggressive action to manage expenses.

"We've been seeing a lot more interest in cost-saving measures, such as consumer-directed health plans and employee-health management," says Sharon Cunninghis, U.S. leader of Mercer's health and benefits business.

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