Wednesday, November 10, 2010

How will employers respond to health reform?

The $64,000 question of health reform is this: What will employers do in response to health reform changes? Will they continue to offer health benefits to their employees or will they drop health insurance as an employee benefit altogether? Thanks to a new survey by benefits consultant, Mercer, we have a better idea of what will likely happen once the state-run health insurance exchanges become operational in 2014 when employers can opt out by paying a penalty.

Not likely to abandon plan sponsor role. When Mercer asked employers how likely they will be to get out of the business of providing health coverage to their employees, for most employers, the answer is “not likely.”  Survey responses varied by employer size, with larger employers most committed to their health plan sponsor role. In fact, Mercer says, only 3 percent of the largest employers (10,000+ employees) say that they’re likely to terminate their health plans and let employees seek coverage through insurance exchanges and only 6 percent of employers with 500+ employees say the same thing.

Why? “Employers are reluctant to lose control over a key employee benefit” suggests Mercer’s Tracy Watts.  After considering “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,” she suggests.

On the other hand, small employers, who have less purchasing power and are more vulnerable to large rate increases, are far more likely to terminate their health plans in response to health reform, with about one-fifth saying that they’re likely to do so. However, Mercer’s Beth Umland cites the experience in Massachusetts, where exchanges have been operating for 3 years, as evidence that small employers may not leave the health plan sponsor market, despite the low penalties under the Massachusetts “play or pay” rules.

Health reform’s cost impacts. Cost, of course, plays a key role in determining whether an employee will continue to offer health insurance to its employees. Though costs have been rising by about 6 percent for each of the past 5 years, Mercer suggests that “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.” For most, Mercer believes, health reform provisions taking effect in 2011 will increase costs by 2 percent or less.

Cadillac plan tax is key concern. The excise cost on high-cost plans (the so-called “Cadillac plans”) is the health reform legislation rule that most concerns employers, Mercer says. When asked about their most likely response to the excise tax, about a fourth of employers (23%) with 50+ employees say that they’ll do whatever is necessary to bring their costs below the threshold amounts. An additional 37 percent of employers say they will attempt to bring the cost below the threshold amounts, but acknowledge that this might not be possible. Only 3 percent 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.

Interestingly, assuming current costs and 6 percent annual cost increases, Mercer found that, if employers make no plan design changes, 39% of employers with 50+ employees can expect to trigger the excise tax on Cadillac plans in 2018, the year the tax becomes effective. Seems like a lot, doesn’t it? But, as Mercer’s Watts points out, “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,” who added that “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.”

For a comprehensive analysis of the Patient Protection and Affordable Care Act, including the full text of the law and additional information on health reform and other recent developments in employee benefits, just click here.

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