What Does it Mean For Employee Benefits?

The Supreme Court deliberates. Citizens wring their hands about the fate of the the Individual Mandate. And the industry wonders what financial impact the Patient Protection and Affordable Care Act (ACA) is going to have on employee benefits.

The picture is coming into focus as  a series of studies conducted since 2010 bring an understanding of the areas of most concern to employers related to health reform.  Key findings from a 2012 employer survey conducted by the Midwest Business Group on Health (MBGH) and co-sponsored by the National Business Coalition on Health (NBCH), Business Insurance and Workforce Management concludes this: the financial impact of the provisions in the ACA  for most businesses have not been as significant as anticipated. Fewer U.S. employers responded that they plan to drop coverage due to the law’s mandate than reported in 2010.

“While employers uniformly expressed concern with the administrative costs and reporting burdens in the law, there was surprising support for many of the coverage and system reform provisions,” said Larry Boress, MBGH president and CEO. “It’s clear that what some call ‘Obamacare’ is actually a compilation of insurance, health system and coverage reforms that are perceived by many employers as having some good, as well as  some costly, impacts…As employers have evaluated their options, the vast majority have determined there is value in continuing to offer health coverage in order to retain and recruit talent, as well as to ensure a productive workforce.”

 Many survey respondents indicated support for the ACA provisions that enable changes in provider payment, medical care coordination and providing medical cost and quality information for consumers.

Key survey findings:

  • In contrast to what employers indicated in the 2010 survey, many of this year’s respondents found complying with the ACA provisions cost them less than anticipated.
  • The cost impact of the ACA in 2011, including extending coverage to adult children up to age 26, was less than 2% for large employers. The cost impact or most small- and mid-sized employers was increases up to 5%.
  • Only 6% of all employers said they were likely to pay the penalty fee and drop health benefits coverage for employees in order to save money. This is down by more than half from the 2010 survey results.
  • Of employers offering retiree benefits, 57% said they are likely to continue to offer these benefits.
  • Less than 30% of employers that are likely to drop coverage will raise salaries to enable individuals to buy health coverage on their own.
  • Many small employers anticipate increases in their health benefit costs over 10% in the future due to the ACA.

“Employers appear to be warming up to the potential value of ACA provisions on prevention and wellness incentives, provider payment reform, medical homes, ACOs, and cost and quality transparency even while expressing continued frustration with the law’s slow pace towards cost containment,” said Andrew Webber, NBCH president and CEO. “And while employers seem to have less of an appetite for dropping coverage than noted in previous surveys, alternatives like defined contribution strategies are beginning to be considered and bear close monitoring in the years ahead.”

Why the Supreme Court is Likely to Uphold the Individual Mandate

 An article by Slate makes the case that mandated coverage is not only consistent with current employer health care practice, but a de facto effective practice already. To understand this, you need to consider the principles of insurance and the history of employer-sponsored health insurance plans.
The history of employer provided health coverage in the U.S. dates back to World War II. During the war, to maximize war production, numerous government controls were put in place, including wage controls, price controls, rationing, and intense social pressure to invest in low-yield war bonds to depress domestic consumption. The idea was to devote as large a share of output as possible to the war cause.  Since wage controls led to windfall profits for some firms, which were then subject to high taxation, employers hit upon the idea of offering workers non-wage benefits including, among other things, health insurance.

in 1943, the IRS ruled  that employer contributions to a health insurance plan didn’t count as taxable income, giving firms an incentive to offer some compensation in the form of insurance.  In 1954, Congress codified this in Section 106 of the Internal Revenue Code, a decision that is one of the two pillars of the current American insurance system.

The second pillar is the rule that employers need to offer health coverage on the same terms to all full-time employees. This is partly risk management, but a tax issue as well.

The insurance principle: A healthy young worker pays the same premium as a middle-aged one with high blood pressure. This ensures that within any given firm there’s considerable cross-subsidy flowing from younger and healthier workers to older and sicker ones. If all the young people dropped out of the plan, then the premiums charged to the remaining members would need to go way up. That’s because the healthier employees are, on average, receiving fewer dollars per year in health care services than they and their employers are paying into the plan in premiums.

The tax principle: If  employers stopped subsidizing employee insurance premiums and just raised their salaries instead,  thousands of dollars of tax-free subsidies would become taxable income.  If an employees opted out of the insurance pool, it would cost them hundreds of dollars in taxes. But without that penalty, people would drop out of employer-provided insurance pools, leading to higher premiums, more dropouts, leading to even higher premiums. The system would become unworkable.  Because this principle operates invisibly in the background, it is mistaken for the operation of a “free market”. But is it, really?

The non-taxation of group health plans is actually a government program that, according to the Congressional Research Service will cost the federal government $164.7 billion in fiscal year 2014.  This is funded by taxes on everyone – including those who don’t benefit from the deduction, including many entrepreneurs, part-timers, freelancers, or small-business owners.

Although we can’t be certain about how the Supreme Court will rule on the Affordable Care Act, the individual mandate is consistent with the principles of insurance and is likely essential to make the Act work to expand coverage to most Americans.

Health Insurer Stocks Rise in Value:  Insurance companies have taken note of the Supreme Court Justices’ queries and comments, as they discussed the ACA over three days. They noted that the Justices appeared more concerned about the welfare of health insurers than the uninsured. As a result, health insurance stocks reached a 52-week high on Friday, March 30th, following three days of judicial review.  UnitedHealth was up 17 cents, WellPoint up 19 cents, Aetna up 59 cents, and Humana Up $1.12.

These were small gains in 2% to 3% range, but it seems that investors may well have been reacting to the President’s emphatic endorsement of mandates.  Investors seem to recognize that the mandate means that a surge in enrollment is coming for health insurers, followed by a flood of new revenue.

Survey Details

The online survey was conducted from February to March 2012 on the intentions and perspectives of employers concerning the Accountable Care Act. There were approximately 440 respondents from 34 states; 58% representing employers with more than 500 employees and 25% representing employers with 50-500 employees. Survey partners also included Aon Hewitt, Buck Consultants, Chicagoland Chamber and the Illinois Chamber of Commerce. A summary of the findings is available and can be ordered by contacting MBGH at info@mbgh.org.

About Business Insurance and Workforce Management
These publications are part of Crain Communications Inc, one of the largest privately owned business publishers in the U.S., offering publications and related Web sites in North America,Europe and Asia. Business Insurance and Workforce Management offer vital news and information to industry leaders and consumers worldwide. www.crain.com

About the Midwest Business Group on Health
Celebrating more than 30 years of advancing value in health benefits management, the non-profit Midwest Business Group on Health (MBGH) is one of the nation’s leading business groups of private and public employers. MBGH’s more than 100 members represent over 3 million lives, spending more than $3 billion on health care benefits annually. www.mbgh.org

About the National Business Coalition on Health
NBCH is a national, non-profit, membership organization of 56 purchaser-led business and health coalitions, representing over 7,000 employers and 25 million employees and their dependents across the United States. NBCH and its members are dedicated to value-based purchasing of health care services through the collective action of public and private purchasers. www.nbch.org

Source: Midwest Business Group on Health; National Business Coalition on Health

Snap principle of employer-sponsored health insurance benefits:

The market is here to stay and more lucrative than ever.