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Models use current assumptions to project future needs


Determining the impact of health care reform on an employer-sponsored health care plan requires more than just comparing the current cost of coverage against the cost of the employer surcharge to drop coverage, brokers and benefit consultants say.

It's a series of complex calculations that take into account factors such as employee salaries and annual pay increases; available plan designs; pretax contributions by the employer and the employee; annual cost increases; enrollment patterns; state, federal and FICA taxes for the employee and the employer; projected premiums for coverage purchased through the yet-to-be established state insurance exchanges; estimated annual household income; the cost of employer penalties; and the cost of the so-called Cadillac tax if the plan exceeds cost thresholds in 2018 when that tax begins.

Some models, such as that developed by Kansas City, Mo.-based Lockton Cos. L.L.C., consider the number of hours worked by part-time employees. Under the law, employers face stiff financial penalties if they don't offer coverage to employees working at least 30 hours a week.

While most models calculate both employer and employee costs in the event that an employer decides to drop coverage, these are only estimates since it is not known now what premiums will be charged by insurance exchanges, which will not be established until 2014.

For example, Lockton is using an estimate based on current individual market premiums, “but we believe that without medical underwriting, the premiums could be much higher,” said Shannon Demaree, director of actuarial services in Kansas City, Mo.

To project the likelihood that some low-wage employers might be eligible to receive federal subsidies to purchase coverage through one of the exchanges, Buck Consultants L.L.C. uses Census data, said Steve Ferruggia, a principal in health and productivity based in Secaucus, N.J.

“This is unique to the world of human resources,” Mr. Ferruggia said. “All HR planning has only looked at worker income. Now we have to start looking at household income. So far, we've found that of married employees, more than three-quarters have a working spouse.”

To determine whether a health benefit plan might become subject to the 40% excise tax that begins in 2018 and apply to premium costs that exceed certain amounts, modelers look at plan design as well as employee and employer contributions, and then project year-to-year increases in medical costs based on estimated future trends.

“Some employers could have Cadillac plans if health care costs continue their current trajectory,” said Robert Schmidt, a consulting actuary in the Boise, Idaho, office of Milliman Inc. “It depends in part on geography. If an employer operates in Southern California, their premiums are higher than they would be in Idaho.”

“Another variable is how rich the benefits are. A lot of employers, especially in the collectively bargained sphere, have low deductibles and low out-of-pocket maximums,” Mr. Schmidt said, which could elevate their health plan's cost beyond the thresholds that trigger the tax. The thresholds are $10,200 for individual coverage and $27,500 for family coverage.

“Even if they aren't quite Cadillac in 2018, the threshold only goes up by (the Consumer Price Index) plus 1%. So unless health care costs fall below that, more and more plans will be Cadillac plans,” Mr. Schmidt said.