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The implementation of the 2010 health care reform legislation might appear to open the door for employers to drop their health care plans and eliminate a huge and growing financial obligation.
But after employers do the math, they nearly always find the costs of eliminating coverage far exceed what they would pay by continuing it.
“We have run hundreds of models for employers, and when you add in all the factors, eliminating coverage will cost more for nearly all of them,” said Rick Kahle, president of employee benefits at Lockton Cos. L.L.C. in Kansas City, Mo.
For most employers, “eliminating coverage just does not make economic sense,” said Karen Vines, vice president and director of employee benefits/governance and compliance with broker IMA Inc. in Wichita, Kan.
With the cost of a group health care plan now averaging more than $10,000 per employee, the financial gains an employer would reap by dropping coverage appear to be considerable, even though starting in 2015 the firm would have to pay an annual penalty of $2,000 per full-time employee, minus the first 30 employees.
And employees, in certain situations, also could appear to come out ahead if their employers eliminated coverage. Under the Patient Protection and Affordable Care Act, lower-paid uninsured employees are entitled to federal premium subsidies to buy coverage in public health insurance exchanges.
In some situations, employees — especially lower-paid workers — might pay less for coverage in a public exchange than what they are paying for coverage offered by their employers. Indeed, retailer Target Corp., which is eliminating coverage for part-time employees on April 1, says the subsidies could reduce those individuals' health care premiums.
Similarly, if an employer had many low-paid employees and offered a generous health care benefits package, terminating coverage could be financially attractive.
“But that would be a rare situation,” said Shannon Demaree, senior vice president and director of actuarial services at Lockton Benefit Group in Kansas City, Mo.
For most employers, trying to save money by terminating a health care plan and shifting employees to public exchanges “just does not work out,” said Michael Thompson, a principal with PricewaterhouseCoopers L.L.P. in New York.
The biggest reason for that is the cost that employers would face boosting salaries of employees whose incomes make them ineligible for federal premium subsidies. Employees whose federal premium subsidies would be far less than what they now pay for their share of the group premium also would expect a salary bump.
Under the health reform law, an employee with adjusted gross family income exceeding $94,000 would not be eligible for a federal premium subsidy and would have to pay the full premium for coverage he or she obtained. With the average premium for family coverage now over $16,000, upper middle income and upper income employees would have a big reduction in compensation if their employers terminated coverage and employees had to pay for coverage. Employers wanting to retain employees would likely have to boost salaries.
Take the case of an employer plan that costs $16,000 for family coverage, with the employer paying $13,000 and the employee paying $3,000. For an employee earning $50,000 with a spouse also earning $50,000, no federal premium subsidies would be available.
The employer, though, would have to give the employee more than $13,000 to prevent a reduction in total compensation. That is because employees nearly always pay their share of the health insurance premium with pretax dollars through salary reduction, reducing their taxable incomes.
If an employer boosts employees' salaries, their taxable incomes would increase. In addition, Social Security and Medicare taxes paid by employers and employees also would jump.
At the same time, the employer would have to pay the $2,000-per-employee penalty, which under the health care reform law is not tax-deductible, for not offering coverage. And that penalty could easily increase.
“There is no reason to believe that the penalty will remain static,” said George Katsoudas, division senior vice president and compliance counsel at Gallagher Benefit Services in Itasca, Ill.
Similarly, there is considerable uncertainty on how stable premium rates will be in the public insurance exchanges. Already, there are concerns the base of enrollees buying coverage through the public exchanges does not include enough young and healthy individuals.
If exchange enrollment comprises a disproportionate number of older and less healthy employees, insurers writing coverage through the exchanges could significantly boost premiums charged to enrollees. For employers terminating their own coverage and agreeing to offset, through higher salaries, premiums paid by employees for coverage through exchanges, those big increases in premiums would be shifted to them.