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Will employers terminate their group health care plans when key provisions—including federal premium subsidies of the lower-income uninsured—of the health care reform law take effect? For most employers, especially larger firms, plan termination will not be an attractive option, says Don Garlitz, executive director of health exchange solutions at Chicago-based bswift. Among other things, Mr. Garlitz notes, to retain talent, larger employers will continue to provide coverage. In addition, grossing up employees' salaries to offset employees' premium expenses in state exchanges may not be cost-effective.
With the nationwide advent of guaranteed issue individual products, will employers exit group health plans en masse and send employees to public exchanges or the private individual market to buy their own coverage?
The employer mandate penalties imposed by the Patient Protection and Affordable Care Act will discourage most large employers from dropping group coverage in 2014 and beyond. Given the ongoing “war for talent” in the labor market, the elimination of group health plans will be even less likely for mid- to high-wage employers because group health coverage will continue to be a central component of total compensation. Even if large employers believe they could attract and retain top talent without a group health plan by increasing cash compensation for key employees, such an approach will be realistic and practical only if individual products are relatively affordable compared with group rates—and this is an unlikely scenario for most large employer groups.
Challenges with individual product affordability
The affordability of individual products may be challenged in at least three ways. First, many healthy lower-income individuals will not buy coverage even when offered premium tax credits and cost-sharing subsidies, and the modest tax penalty of the individual mandate may not be enough to encourage them to buy coverage. The federal budget may benefit from individual fines paid by those who do not claim available premium tax credits, but some adverse selection against the individual market is inevitable.
Second, the healthiest groups will be most likely to self-insure, which will pull healthier risk out of the reach of risk adjustment mechanisms designed to mitigate risk selection in the individual and small-group markets. At the same time, larger employers with high-risk profiles will be more likely to drop group coverage in favor of individual product solutions if individual rates are lower than that group's rates. The simultaneous attraction of high risk and the drain of good risk will not bode well for individual product rates.
Third, premium tax credits and cost-sharing subsidies only will be available to lower-income consumers who buy individual products and, as a result, the individual market is expected to become heavily weighted with low-income individuals. According to a 2008 study conducted by Columbia University, low-income consumers tend to be less healthy than more affluent individuals. Higher individual product rates may result when the market is skewed to low-income individuals.
The key message for employers is that group health plan solutions are most likely to result in the best premium cost outcomes for large groups of employees. Large multistate employers may find that individual coverage is affordable in some states but not others, which likely will influence the decision to maintain a group health plan.
Employers that may eliminate group coverage
Employers that may consider avoiding group insurance under ACA market conditions fall into three broad categories:
1. Employers (including small, midsize and large) who primarily employ low-wage workers.
2. Employers (including small, midsize and large) with relatively unhealthy workforces.
3. Smaller employers who operate in states where individual products are priced comparably with small group plans.
Any employer that eliminates the group health plan likely will implement or maintain a Section 125 cafeteria plan in order to retain corporate tax breaks that will accrue from the pretax withholding of premiums for individually owned health plans as permitted under current regulation. If the employer wants to offer some premium funding for individual plans in a nondiscriminatory fashion, the employer may consider using a health reimbursement arrangement, although it remains unclear whether this funding will satisfy the employer mandate under the ACA.
Employers that employ mainly low-wage workers will probably consider one of three alternatives when the employer mandate arrives in 2014. The first option will involve maintaining minimum essential group health coverage, continuing to have low-wage full-time job positions, and funding enough of the “employee-only” or “single” rate to avoid employer mandate penalties. Nondiscrimination rules under Internal Revenue Code Section 105(h) are expected to prohibit the employer from leaving eligible low-wage earners at a financial disadvantage to higher-wage earners with respect to benefits and premium funding. Low-wage employers exploring this option will need to consider the labor demand of higher-wage workers related to health care, which might be satisfied by “grossing up” salaries of certain employees and offering all employees the opportunity to withhold employee contributions (for single or family premium) pretax under a Section 125 cafeteria plan. Under this option, the employer may have some difficulty recruiting low-wage labor if the worker has dependents because the availability of “affordable” employee-only coverage through the employer will disqualify the entire family from receiving relatively low-cost family coverage through a federally subsidized plan in the public exchange.
The second approach would involve reducing low-wage jobs from full-time to part-time status and maintaining a group medical plan only for the higher-wage earners that are offered full-time employment. This will relieve the employer of the financial burden of providing group medical coverage to low-wage workers, and also leave the employer out of harm's way regarding the employer mandate as it relates to low-wage workers. On the surface, this looks like an attractive option with respect to health care cost containment. On the other hand, employers that follow this track will find themselves dealing with significantly higher human resource costs as they deal with recruiting, hiring and training many more employees. Further, the employer will need to carefully consider the overall effect of employing mainly part-time people as they look at turnover rates, productivity and quality. What might appear to be the low-cost health care option may be detrimental with respect to the overall performance of the company.
The third option for low-wage employers will involve eliminating the group medical plan altogether and accepting the employer mandate penalty as a cost of doing business. Many low-income wage earners will find that family insurance coverage is significantly more affordable in the public exchange than in the group plan of the low-wage employer. For example, a family of four with two full-time low-wage workers may be able to access family health insurance in the public exchange for just over $100 per month. The best deal on family health insurance for many low-income wage earners will be in the subsidized public exchange, but the worker will be disqualified from receiving the premium tax credits and cost-sharing subsidies in the public exchange if affordable employee-only coverage can be obtained through an employer's plan. Low-income wage earners with families therefore may intentionally seek employment with firms that do not offer group medical insurance. The employer mandate penalty will be equivalent to $166.67 per full-time employee per month (counting all full-time employees—minus the first 30 employees) assuming that at least one full-time employee obtains a premium tax credit or cost-sharing subsidy in the public exchange, which is very likely with a low-wage employer. The employer penalty will be lower than the cost of providing employee-only insurance for many firms, and much lower than the employer contribution (i.e., employer cost) required to offer its employees family coverage for a net employee contribution of around $100 per month. As under the first option, the employer may consider “grossing up” wages for higher earners and offering pretax withholding for individual medical insurance to satisfy labor demand. Higher earners should be satisfied with this approach as long as individually owned policies are relatively affordable in the state in which the employee resides.
Long-term survival of large group health plans
Employers will remain involved in health care finance one way or the other. Employers that choose to eliminate or avoid group health plans will generally pay penalties for having no group plan, and will still have a strong tax incentive to remain involved in administering pretax premium withholding on behalf of higher-wage employees who buy individual coverage. The broad reality for large employers is that labor market demand and ACA employer mandate penalties will combine to encourage large employers to continue sponsoring group health plans for the foreseeable future, and, as a result, most American workers will continue to obtain health insurance through employment relationships.
Don Garlitz is the executive director of health exchange solutions at Chicago-based bswift, a provider of software and services for employee benefits administration. He can be reached at 312-373-3498 and firstname.lastname@example.org.