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For Employers, the Pros and Cons of Health Care Reform Emerge

December 15, 2009
Related Topics: Benefit Design and Communication, Medical Benefits Law, Health and Wellness, Featured Article, Compensation
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Many employers have said that the health care reform plan passed by the House in November would lead them to drop health insurance, undermining the employer-based health care system.

    Yet the government’s fiscal analysis contradicts that conclusion. According to two estimates from the Congressional Budget Office, the House bill would actually strengthen employer-sponsored health care by increasing the number of Americans who get their insurance through work.

    A bill under consideration in the Senate, meanwhile, is likely to reduce the number of people who get insurance through their employers. Yet, employer associations have said that while the Senate's legislation is far from perfect they prefer it to the reform bill passed by the House.

    So who is right? Which version of health care reform is most likely to bolster the employer-based health care system, which many employers claim to support?

    While fully predicting the consequences of legislation not yet enacted is impossible, the two preliminary estimates created by the CBO and the Joint Committee on Taxation show that increasing coverage is not the best measure—at least in employers’ eyes—of the success of health care reform.

    “Why we came to the reform table was to reduce the cost of care, of coverage,” says Neil Trautwein, vice president of the National Retail Federation.

    Rather than reduce overall health care costs, employers say the reform bills increase coverage by limiting the freedom of employers to provide health benefits as they see fit.

    “There’s a real concern under pay-or-play mandates whether employers can maintain their flexibility to fashion benefits that are right for their employee populations,” says Andrew Webber, president and CEO of the National Business Coalition on Health. Since both bills are likely to impose some requirements on employers, it is likely that reform will, to a degree, force employers to rethink the scope and nature of the benefits they provide to employees.

    That’s because lawmakers, with the help of economists, have focused on penalizing employers that do not offer adequate coverage as a way to pressure them to provide workers with richer health benefits. Most of the money allocated in the approximately $1 trillion reform bills ($1.05 trillion in the House; $849 billion in the Senate) will go toward subsidies that make it easier for individuals—and, to a lesser extent, small employers—to obtain health insurance. Much less money is devoted to changing the health care system to bring down costs.

    “I think the way the mandates with penalties were built, the objective was not to get employers who do not offer coverage to offer coverage but to make sure employers that do offer coverage don’t drop it and buy it on the exchange,” says Jon Gabel, a health care economist and senior fellow at the National Opinion Research Center.

    Gabel and other economists say, however, that the penalties as they are crafted are not stiff enough, leaving many employers to pay a fine rather than improve health coverage. A weak penalty, they say, is the surest way to erode the system of employer-based health insurance. The more the penalty resembles the cost of providing insurance, on the other hand, the greater the likelihood employers will provide coverage. And the penalties in the House bill are higher than in the Senate version—one reason why more people will be covered by an employer if the House measure passes.

    Under the House bill, most employers that do not provide coverage that meets the bill’s minimum standards will pay a tax equal to as much as 8 percent of their payroll. For this reason, more employers are likely to offer health insurance under the House plan. The CBO estimates that the House bill would increase the number of people insured by employers by 6 million by 2019. That would mean 57 percent of nonelderly individuals would get their insurance through an employer, up from 56 percent today.

    By contrast, the Senate’s health reform plan, which levies a smaller annual fee of $750 per full-time employee against employers that do not provide insurance, would reduce the number of Americans with employer-sponsored health insurance by 5 million people by 2019. Already, employers are weighing the cost of these penalties against the cost of providing insurance. Karen Kulp, president of Philadelphia-based home health care service Home Care Associates, says the insurance she provides to more than 100 workers is more expensive than the penalties in either bill. She says she is likely to stop offering coverage to her employees if reform is passed.

    “I think we would save money,” she says.

    Some employers say the minimum benefit requirements in the bills would make insurance too expensive, causing them to drop what they already offer rather than upgrade it.

    That is the view of Michael Perlman, CEO of BrandsMart, a midsize consumer electronics retailer in Florida. He says he is likely to drop the health insurance he offers to his 2,700 employees because it will not meet the minimum coverage standards of the bill in the House. Perlman opposes the regulations, especially the House plan, because they would increase his health insurance costs. By contrast, he would save $1.4 million annually by simply paying the fine.

    “My company, in this economy, can’t afford this plan,” Perlman says. As a consumer electronics and appliances retailer hard-hit by the recession, Perlman say his profit totals 1 percent of his revenue, down from 3.5 percent a few years ago.v Although the House bill provides a five-year grace period before companies that already offer health insurance have to comply with the new minimum standards, the current bills are likely to make employers reconsider whether to continue providing health insurance at all, says Paul Fronstin, senior research associate with the Employee Benefit Research Institute.

    “I think it’s safe to say that all employers will rethink their health benefits strategy,” if reform is passed, he says. Employers may find it more cost-effective to pay a penalty and simply provide supplemental health benefits to employees in the form wellness and prevention programs.

    “That is one way employers can change their benefits,” Fronstin says. “They offer something to keep workers healthy because that impacts absenteeism and presenteeism.”

    Employers that are most likely to drop coverage in favor of paying a penalty are small businesses and employers with low-wage workers, according to the CBO estimates.

    Under the House legislation, employers that do not offer adequate insurance would have to pay a sliding-scale penalty of between 2 and 8 percent of their payroll. Employers must also pay 72.5 percent of the premium for individual plans and 65 percent of the premium for family plans. Employers would also have to provide plans with a minimum actuarial value of 70 percent—meaning the employer covers at least 70 percent of the total cost of coverage, which is more than is paid by retailers like BrandsMart.

    “There is not a retailer today that would meet those requirements,” Trautwein says. If employers do not meet these standards, employees would be eligible to buy insurance through the health insurance exchange. Lower-income workers would have access to subsidies from the government to help pay for insurance.

    Employers are quick to point out that estimates like the CBO’s have not always stood the test of time. After Massachusetts passed a health care reform law in 2006, many predicted that the relatively weak penalty against employers would lead them to drop coverage. That has not been the case. Today, more Massachusetts residents get their insurance from an employer than before reform, even when taking into account a large drop in enrollees between 2007 and 2008 because of layoffs due to the recession, according to state enrollment figures.

    But there are many caveats to this statistic, says Rick Lord, president and chief executive of Associated Industries of Massachusetts, a business association.

    “I don’t know if the experience here is directly transferable to the nation,” says Lord, who is also on the board of the Commonwealth Health Insurance Connector Authority, the state-run health insurance exchange. “We have fewer low-wage workers. We had [a] higher number of employers offering health insurance to start with and we have a culture of employers offering health insurance.”

    The Massachusetts experience and national reform efforts overlap on the requirement that individuals purchase insurance. The federal law would ensure that both healthy and sick people buy insurance, thereby spreading the cost of health care among people who spend less on health care than they pay into the insurance system. This would give employers an incentive to provide insurance: Since individuals must be covered somehow, getting insurance from an employer is easier and, for those who do not qualify for subsidies, it would usually be cheaper.

    “Employees need to have health insurance, or else they pay a fine,” Lord says. “That puts pressure on businesses that are looking to attract employees.”

    Lord says the requirement in Massachusetts that individuals purchase insurance may be the most important element of any reform bill—something economists, lawmakers and employers agree on. They also say the penalty in the Senate’s reform bill for individuals who do not purchase insurance is not strong enough.

    Commenting this fall on a version of the bill that appeared in the Senate, James Gelfand, a senior manager for health policy at the U.S. Chamber of Commerce, said the fine on people not purchasing coverage was not severe enough. He added: “If the individual mandate doesn’t work, then this bill doesn’t work.”

    Unless the fines are higher, it will be cheaper for individuals to wait until they get sick before purchasing insurance. This is similar to the argument used against employers: If fines against employers that do not offer insurance are not high enough, it will be cheaper for them to drop coverage altogether.

    For employers like Kulp, who is proud that her home health care business has offered employees health insurance for years, dropping coverage is simply a matter of economics. She says she spends 18 percent of her payroll on health insurance, an amount that is going up every year. It’s reaching the point where fewer and fewer employees, who earn about $10 an hour, can afford to take her up on the insurance she offers.

    Kulp is more attached to the idea of staying in business than maintaining the system of employment-linked health insurance, especially if reform means her employees can find affordable coverage elsewhere. For this reason, she supports health care reform—even the bill in the House—as a way out of burdensome costs.

    “I believe we will save money,” she says. “Right now my health insurance costs 18 percent of my payroll. So if you’re talking 8 percent,” the maximum fine, “that’s a big difference.”

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