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While employers are encouraged to offer coverage under the new health care reform rules, they can choose not to and (starting in 2014) pay a penalty that may be less than what they currently spend on health benefits.
In a survey released today by consulting firm Mercer, employers were asked how likely they are to get out of the business of providing health care once state-run insurance exchanges become operational in 2014 and make it easier for individuals to buy coverage. For the great majority, the answer was “not likely.”
The survey results, a preview of findings from Mercer’s 2010 National Survey of Employer-Sponsored Health Plans to be announced later this month, will be released today at Mercer’s inaugural Innovation Conversation webcast, which begins at 3 p.m. Eastern Time (click on the following link to register: “True Health Care Reform through Innovation”). More than 2,800 employers participated in the annual survey, now in its 25th year.
Survey responses vary by employer size. Large employers remain committed to their role of health plan sponsor. Just 6% of all employers with 500 or more employees – and just 3% of those with 10,000 or more – say they are likely to terminate their health plans and have employees seek coverage in the individual market after 2014 (Fig. 1).
Employers have never been required to offer coverage. They do so to promote a healthy, productive workforce and to attract and retain employees, who place a high value on health coverage because it can be expensive to purchase as an individual and, especially for those with health problems, difficult to obtain.
“Employers are reluctant to lose control over a key employee benefit,” said Tracy Watts, a Partner in Mercer’s Washington, DC, office. “But beyond that, 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.”
On the other hand, a fifth of small employers (those with 10–499 employees) say they are likely to terminate their health plans, especially those with low-paid workers and high turnover, like retailers. These small employers generally offer fully insured health plans and, with small risk pools and little purchasing power, are vulnerable to large rate increases.
“You can see why the idea of dropping employee health plans would be attractive to small employers,” said Beth Umland, who directed the study for Mercer. “On the other hand, when you look at the experience in Massachusetts, where insurance exchanges have been operating under state-based health reform for over three years, it hasn’t happened.”
A recent study1, reported in the June 2010 issue of Health Affairs, found that enrollment in employer plans in Massachusetts grew during the four years in which many of the reforms on which the federal law, PPACA, is based have been in place. This suggests that few employers have chosen to drop plans despite the low penalties under the state’s "play or pay" rule.
Cost impact of PPACA
Cost will certainly be a factor influencing whether or not an employer decides to stop sponsoring a health plan. Average health benefit cost per employee has been rising by about 6% a year for the past five years. PPACA will generally increase cost, although the impact will vary from one employer to the next depending on their employee demographics and current benefit program design, as well as the health care markets in which they operate. While 17% of employers with 50 or more employees say that the new PPACA requirements generally taking effect for 2011 – extending coverage eligibility to dependents up to age 26 and removing lifetime benefit limits – will have no effect on their cost in 2011, nearly as many (16%) estimate that it will raise cost by 5% or more (Fig. 2). Most commonly, PPACA will push up cost by 2% or less.
What might account for such a difference in cost impact? For example, for the 23% of small employers that currently require employees to pay the full cost of dependent coverage in a PPO, a change in dependent eligibility will have no cost impact. Similarly, there is no cost impact for the 11% of large employers (500 or more employees) that already covered dependents up to age 26 prior to the start of their 2011 plan year. In addition, about 30% of employers did not use lifetime benefit limits in 2009, so the requirement to remove the limits would not have an effect.
1”Sustaining Health Reform in a Recession: An Update on Massachusetts as of Fall 2009” by Sharon K. Long and Karen Stockley, Health Affairs 29:6, June 2010.
“The PPACA rules that set standards for plan design will typically have less of an impact on employers that already offer generous plans,” said Ms. Umland. “However, rules that will increase the number of plan members – like expanding eligibility to adult children – could hit employers with generous plans the hardest, since they will now be extending high-cost coverage to more individuals.”
Plan membership will likely rise still higher once all individuals are required to obtain coverage in 2014 and employers are required to auto-enroll new hires. Currently, 19% of all eligible employees, on average, opt out of their health plan.
Excise tax is the x-factor
The excise tax on high-cost plans is the PPACA requirement that concerns the most employers. Starting in 2018, health benefit coverage that costs more than $10,200 for an individual employee or $27,500 for dependent coverage will be subject to a 40% excise tax. Some employers offer high-cost plans because a generous plan is part of their attraction and retention strategy; some have high-cost plans because they have an older or less healthy workforce or are located in a high-cost area. In either case, a 40% excise tax on health benefits could prompt a significant change in health benefit strategy.
When asked about their most likely response to the excise tax, about a fourth of employers with 50 or more employees (23%) say: “We will do whatever is necessary to bring cost below the threshold amounts.” An additional 37% of employers say they will attempt to bring the cost below the threshold amounts, but acknowledged that “it may not be possible.” Only 3% say they will take no special steps to bring cost below the threshold amounts, and the rest (37%) predict their plans won’t ever hit the cost threshold, which will be tied to CPI and increase each year (Fig. 3).
To estimate the percentage of employers currently at risk for triggering the excise tax when it first goes into effect, employers were asked to provide the employee-only and family premiums for their highest-cost plans in 2010. These costs were trended forward using an annual increase of 6%, although this may be conservative. If they make no plan design changes, 39% of employers with 50 or more employees can expect to trigger the excise tax in 2018, the year in which it becomes effective (Fig. 4).
“It’s important to keep in mind that this new tax is still eight years out and a lot could change between now and then,” said Ms. Watts. “Given how often ERISA, tax, Medicare and Medicaid rules are modified, there’s a good chance that the excise tax that takes effect in 2018 won’t be exactly the same as the sketch we’re working from today.”
How will PPACA affect the majority of employers that continue to offer coverage?
The survey asked employers about their likely responses to specific changes required by PPACA. Following is a summary of the most common responses to three of PPACA’s provisions:
Dependent eligibility Despite the unavoidable increase in health benefit cost as newly eligible dependents join their plans, employers are not planning a draconian response to this requirement. About two-fifths of employers with 50 or more employees will require dependents above a specified age to verify that they have no other employer coverage available, as permitted for grandfathered plans until 2014. While the law prohibits employers from requiring higher premium contributions specifically for the newly eligible dependents, some (17%) will change premium rate tiers so that employees covering more dependents pay more. Some (18%) say they are likely to increase the total share of cost for dependent coverage (Fig. 5).
Shared responsibility rule (2014): All employees working at least 30 hours per week must be eligible for coverage About a third all employers with 50 or more employees (30%) currently do not meet this new standard (Fig. 6). The most common response among large employers will be to open up the full-time employee plan to all part-time or hourly employees working 30 or more hours per week (45% say they are likely or very likely to do so). Less than a third of the employers currently not in compliance say they are likely to change their workforce strategy so that fewer part-time employees work 30 hours or more per week. Only 6% say they are likely to make no changes and will simply pay the shared responsibility penalty as necessary (Fig. 7).
Shared responsibility rule (2014): Employee premium contributions must meet “affordability” standard Under PPACA, employers must offer at least one health plan for which the employee’s premium contribution does not exceed 9.5% of the employee’s household income, or else be subject to penalties. Nearly two-fifths of employers with at least 50 employees (but fewer than a third of employers with 500 or more employees) say that their current health plan coverage would likely be considered unaffordable for at least some employees (Fig. 8). The majority of these employers (81%) say they will most likely take steps to ensure coverage is affordable to all (by lowering contributions or adding a low-cost plan, for example). Relatively few – only about one in five – say they are most likely to make no changes and pay the penalty as needed.
Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and multi-manager investment management. Mercer’s 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges. For more information, visit www.mercer.com.