Will employers be dropping health-care coverage for employees in 2014 as the result of PPACA? New information is emerging.

Will employers be dropping health-care coverage for employees in 2014 as the result of The Patient Protection and Affordable Care Act? New information is emerging.

In August 2010, Wilkening & Company discussed our view of the landscape facing both employers and employees as the result of enactment of the 2010 Patient Protection and Affordable Care Act (PPACA) in the coming few years. In short, we felt that employers would have strong incentives to drop long-standing employee health-insurance coverage for major groups beginning in 2014. Consequently, it can be expected that many will do so. 

It was our assessment that employers will be highly motivated to drop employee-sponsored insurance (ESI) in 2014 because insurance pools will become available as a ready alternative to company-sponsored employee health insurance, and new rules and financial penalties (incentives) will present cost-savings opportunities for employers. The economics were (and remain) quite compelling. However, our intuitive conclusions seemed to run contrary to the original Congressional Budget Office (CBO) estimates that stated only 7% of employers (representing 9-10,000,000 estimated employees) would drop coverage. We just seemed to disagree, at the time.

In early June 2011, the consulting firm of McKinsey & Company published the findings and conclusions of a study it recently conducted on the subject. It was entitled: How US health care reform will affect employee benefits. The report is the result of opinion and proprietary research. In their work, they surveyed 1,300 employers across industries, geographies and employer size. They interviewed each regarding such matters as: their current understanding of PPACA provisions, what they planned to do at its advent in 2014, and why.

The reported results of the McKinsey survey were more consistent with our earlier analysis and in stark contrast with 2010 CBO estimates.

There were many findings of the study, but we believe two were very material to the actions employers must take or consider in the coming months.

  • McKinsey’s survey results found that on average 30% of employers plan to drop ESI coverage for some or all of their employees in 2014 and that ratio could be as high as 60%. (It appears that those survey respondents that are more familiar with the provisions of PPACA today said they are more likely to drop employee health-care insurance.)  That is nearly eight times the CBO estimate and suggests 70-80,000,000 employees may involuntarily be moved to government insurance pools. The term “drop” is used above to describe ceasing employee health insurance coverage, but it does not mean you can (or will) wash your hands of the employee and the cost of health-care insurance. It is widely believed that companies that drop ESI will also use compensation dollars to bridge the part of the new employee insurance cost that is not picked up by the Feds. Also it is believed that when employees are in a position to select their own coverage, they will select more cost-effective alternatives tailored for individual need.
  • Contrary to what many employers assume, the McKinsey report concludes that 85% of employees would remain at their jobs even if their employer stopped offering them ESI—and not go to another employer who retains insurance coverage. As we said above, dropping ESI does not mean a clean break with your employee—they are very likely to remain with you, company-sponsored coverage or not.

The McKinsey survey has proved to be quite controversial during the last month in some parts of Washington DC for obvious reasons. [They must not have read my August 2010 E-Notes.]

As you may recall In our August 2010 article, we made broad recommendations to our employer-readers regarding what they should do to prepare for 2014. We still believe these actions remain quite valid (and likely even more so in light of the McKinsey survey findings). Let me again reprint these below.

The prudent company will begin to develop its future employee healthcare strategy and corresponding compensation strategy as soon as possible. While we have only discussed a well-paid employee in our example, also recognize that lower-paid employees may be eligible for federal subsidies through exchangesthat will impact your cost and decision making in a variety of other complex ways. We recommend that you strongly now consider—

  • A full analysis of your work force and healthcare costs and demographics;
  • An analysis of cost scenarios under current PPACA rules;
  • Development of 2011-2014 healthcare and compensation strategies in light of PPACA requirements; and
  • Creation of an action plan to respond quickly and implement required changes in the event of inevitable PPACA rule and deadline changes.

While you technically have plenty of time to consider and act, we suggest you anticipate that changes will surely occur in this arena that will negatively impact your company if you are not ready to respond and act in your own defense—what do they say; the prepared will survive?

As an employer, you should also begin to anticipate questions from your employees regarding health-care economics and decision making. Many have never had to do this in the past and will likely need your help and guidance throughout the process. The greatest benefit you can provide is to support and restore the employee’s peace-of mind as they transition through the uncertainty that 2014 will certainly bring—to everyone. Clearly, while you may choose to drop their ESI (and send them to the pool), they may still very likely remain your employee. You must assure them that dropping ESI does not mean being fired or enduring a large pay cut. (Help!)

A year ago we said that time was of the essence for employers wanting to prepare for 2014. Today nothing has changed, only you have a year less to do so.

Wilkening & Company has developed information and methodologies to assist clients in the selection of 2011-2014 insurance and compensation strategies. We will continue to cover this evolving and changing mandates for our readers in future issues of the Corner Office Gazette.

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