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Survey Notes Few Firms Plan to Drop Coverage After Health Reform

November 9, 2010
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Only a small percentage of employers intend to drop their health care plans despite potential financial incentives that the health care reform law gives to fold their plans, according to a survey released Nov. 9.

Just 6 percent of employers with at least 500 employees and only 3 percent of employers with at least 10,000 employees said they are likely to drop their plans once key provisions of the law take effect in 2014, according to Mercer.

Some 20 percent of small employers—those with between 10 and 499 employees—say they likely will drop coverage in 2014.

However, consultants at Mercer, which conducted the survey of more than 2,800 employers, said fewer small employers may decide to drop coverage than the survey indicates.

The appeal of terminating coverage is obvious. Employers who do so in 2014 will face an annual $2,000 penalty for each employee working at least 30 hours a week. With annual health insurance costs averaging about $9,000 per employee, the savings would dwarf the penalties paid.

In some cases, employees could financially benefit from health care plan terminations.

Lower-paid employees will be entitled to federal health insurance premium subsidies to buy coverage through state insurance exchanges, which are to be set up by 2014. Those subsidies could result in some employees paying less for coverage than they would under their employer’s plan.

But the $2,000 penalty is not the only cost employers would incur for dropping coverage.

To prevent a huge reduction in compensation, many would have to increase the salaries of middle- and upper-income employees, who would not be eligible for subsidies and would have to pay the entire cost of their coverage.

That added cost, plus the penalty, could exceed the premium savings from dropping coverage.

“Once you consider the penalty, the loss of tax savings and grossing up employee income so they can purchase comparable coverage through an exchange, for many employers, dropping coverage may not equate to savings,” Tracy Watts, a partner in Mercer’s Washington office, said in a written statement.

For smaller employers, the dynamics could be different. Small employers, which are more likely to fully insure their plans and have less purchasing power, are vulnerable to big rate increases, Mercer noted.

“You can see why the idea of dropping employee health plans would be attractive to small employers,” said Beth Umland, Mercer’s director of research for health and benefits in New York.

Still, in Massachusetts, where state-subsidized coverage is available to the lower-income uninsured through an exchange, small employers have not dropped their plans despite a $295 per employee annual penalty if they do not offer qualified coverage, Umland said.

In fact, between 2007 and 2009, the percentage of Massachusetts employers with 11 to 50 employees offering coverage rose to 92 percent from 88 percent, according to a report issued earlier this year by the Massachusetts Division of Health Care Finance & Policy.

The findings are included in Mercer’s annual survey of employer health care costs that will be released later this month. Other findings include:

• Twenty-two percent of respondents estimated that health care reform requirements that begin next year, which include extending coverage to employees’ adult children up to age 26 and eliminating lifetime dollar limits, will boost costs by 1 percent to 2 percent, while 15 percent estimated that compliance will increase costs by less than 1 percent. On the other hand, 16 percent estimated that their health plan costs will increase by at least 5 percent, while 9 percent estimated cost increases of 3 percent to 4 percent. The remainder of respondents either didn’t know how much their costs would increase or didn’t think compliance would increase their costs.
• Thirty-seven percent of respondents didn’t believe their plans ever will be affected by a provision in the law—due to take effect in 2018—that imposes a 40 percent excise tax on health insurance premiums that exceed $10,200 for individual coverage and $27,500 for family coverage. The same percentage said they will attempt to bring plan costs below the threshold triggering the tax, but said that may not be possible. Twenty-three percent said they will do whatever is necessary to bring plan costs below the excise tax threshold amounts, and 3 percent said they would not take special steps to reduce costs below the threshold amounts.  

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

 

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