Here We Go (Again)
The challenges employers will soon face when implementing healthcare reform echo the same ones they wrestled with when traditional pension programs began giving way to defined-contribution plans decades ago.
By Rick Guzzo and Katie Noonan
The results of the presidential election ensure that the Patient Protection and Affordable Care Act will be the law of the land by 2014, which means employers now face a defining decision: Offer subsidized healthcare benefits to employees, or pay a penalty for not doing so and leave their employees to find their own way via health-insurance exchanges.
This decision is not so different from the one made by employers some 20 years ago with regard to what kind of retirement benefits to provide employees. For many companies, the choices made then are now having unintended -- often adverse -- consequences. But before exploring the lessons to be learned from that experience, let's look first at some essentials of the new law.
The PPACA presents employers of 50 or more workers with two alternatives. One is to fulfill the requirement to offer a health-insurance plan, valued above a calculated threshold, to all employees deemed eligible for such a benefit. Alternatively, employers can elect not to provide such a benefit and instead pay a "shared responsibility" penalty per eligible employee beyond the first 30. For many employers, the choice to provide health-insurance benefits or not will be driven by estimates of the comparative costs of the two alternatives.
For either alternative, one of the ways that employers can reduce expected costs is by minimizing the number of employees eligible for health insurance. The key criterion of eligibility is hours worked. Only those employees who work an average of 30 or more hours per week will be eligible for employer-provided health insurance. We know that many employers are, at this moment, exploring scenarios in which their workforces are made up of as many part-time employees as possible whose hours are capped at fewer than 30 per week.
So what is the parallel to choices made years ago about whether to provide pension benefits? Although not driven by the need to respond to national legislation, employers began, in large numbers, to freeze and terminate defined-benefit retirement plans. These benefit programs provided guaranteed pension income to employees, funded by employer contributions and associated investment gains. At their peak in the mid-1980s, 112,000 such plans existed among US employers; now, about 30,000 exist.
The unforeseen consequences of those pension choices are being felt today. Specifically, companies are realizing that they ceded control over an important leverage point for managing their workforce. A well-designed pension plan optimizes the incentives for an employee to exit at the right time. In the absence of such plans, many employers are now experiencing an internal quagmire due to the more senior employees staying too long in their positions, often to rebuild their retirement savings. As a result, these employees block the career opportunities of more junior up-and-coming talent.
The upward flow of talent -- and individual careers -- stagnates. The more junior members of the enterprise may become inclined to search for opportunity elsewhere, potentially leaving behind an employer with a hole in its pipeline of talent for future leadership positions. The well-designed retirement plan also reduces the premature loss of highly productive employees, preventing them from retiring too soon. In short, many employers have lost the chance to use an important financial inducement -- retirement income -- to influence rates of opportunity within, and exit from, the enterprise.
Employers pondering their response to the PPACA would be wise to consider what influence they may be giving up if they elect not to provide health-insurance benefits. One sphere of influence they may diminish is the capacity to attract and retain desired talent if, for example, better workers find their way to those employers offering health and wellness benefits. Another is operational control. Employers who minimize the number of employees eligible for health insurance by building a workforce of under-30-hours-per-week part-timers may experience operational constraints, such as when the demand for staffing bumps up against company policy to limit hours worked.
Imagine a restaurant where the employees on duty one night are approaching their monthly limit of hours worked yet the restaurant is booming with stay-late customers -- would it just send the staff home and forego the revenue? A third area of potential lost influence concerns employee performance. If there is a connection between employee health and productivity -- and evidence is mounting that there is -- then employers who elect not to provide health-related benefits, such as medical insurance, may miss the chance to reap the productivity benefits of employee health. Compared to the unforeseen consequences of retirement benefit decisions that took a long time to materialize, these potential consequences will be felt very quickly.
Electing not to provide health insurance or reducing the number of eligible employees may be right things to do for many employers. For many others, however, there will be more to the story than just holding down the costs of health insurance. Our point is that employers would be wise to learn from the past and to engage in the appropriate prospective analyses that will help them avoid getting caught, downstream, with a loss of influence over one of the most important drivers of business results: the workforce.
Rick Guzzo is a Mercer human capital strategy consultant based in Washington and Katie Noonan is a workforce strategy consultant and research fellow in Mercer's Workforce Sciences Institute.