A Call to Action: How will PPACA motivate you and your employees to cancel their health insurance?
The Patient Protection and Affordable Care Act (PPACA) was enacted in March 2010. In an earlier edition of the Corner Office Gazette we described some of the impacts of this legislation on employers, employees and citizens in 2010.
One of the key provisions of this act will not take effect until 2014 (as currently written or understood). The act creates government-sponsored exchanges which will provide the ability (requirement) for all citizens to purchase health-care insurance coverage from exchanges or insurance companies without regard for individual pre-existing medical conditions or any other restrictions. So, if you are an employer, and already have employee health-care insurance, why should this matter to you?
Employers and employees will both have options when exchanges arrive. The two separate or joint choices will be—
- As an employer (with 50 employees or more), you will pay a $2,000 free-rider penalty for every employee (who works over 30 hours per week) that you do not insure or whose coverage you terminate. Further, if your employee has to pay more than 9.5% of their household income, your plan is deemed unaffordable and the employee will be able to go to the exchange for coverage. Your penalty in this case increases to $3,000.
- As an individual, you will pay a non-coverage penalty of 1% (starting in 2014 and with a $95 minimum) to 2.5% (by 2016) of your household income if you do not purchase health insurance—supplied by company or exchanges.
Let’s look at a “back-of-envelope” analysis of the situation for employer “ABC” in 2014 considering both a single employee and a married employee with 3 dependents with identical household incomes of $80,000 each. The 2014 estimated premium data is forecast using Kaiser Family Foundation information.
The above example is an interesting result if one only considers employer annual cost. This would seem to indicate a potential situation where both parties may be highly motivated to mutually drop coverage. This is because the cost savings for both parties is quite favorable and the individual can reapply (without any apparent penalty) just before or at the time they need some type of medical procedure and someone to pay for it. Let’s call such coverage (payment arrangements) sick-party coverage [or SPC].
Four questions present themselves when you look at the back of the envelope and think of the implications of the analysis for both employer and employee.
- What would an employer do with future premium savings (if real)? In the end, we believe that most employers know that the health and welfare of employees is their concern and hence the current benefits will somehow be preserved. The employer will likely decide to provide supplemental insurance to cover their sick employees when the employee must rely on the SPC—and bridge the coverage gaps that will surely be built into SPC or exchange coverage by 2014 (just look at the history of Medicare). Also, many would argue that health insurance coverage is just another form of compensation. Hence, some of this apparent employer cost savings may also go back to the employee in the form of pay raises—but not everyone would agree with that thinking. Will there still be employer savings left to do any of this; who knows?
- What will be the fate of the private insurance companies if employers and employees begin to systematically and mutually drop insurance policies in lieu of SPC? I expect that private insurance companies will lead the way with packaging premium SPC policies to cover the gaps or restrictions (such as continuing access to your physicians or healthcare systems), just like premium Medicare coverage. Also, who do you think is going to process and pay the claims—a bunch of clerks in the basement of Congress?
- Will both employers and employees be motivated to cancel all their current health insurance policies, when possible? Yes, history (and Massachusetts) says both parties will act in their economic interest and reduce these costs by dropping all coverage as soon as possible. Why not; what is the risk? We are not entirely sure what the value proposition for exchanges will be by the time 2014 rolls around.
- What should a prudent employer do about this situation in 2010-11?
Wilkening & Company believes that 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 exchanges that 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? Act to complete the above fours steps by 4Q11.