Employers in Texas and other states are at a crossroads.
Increases in health insurance premiums have eased somewhat over the past two years, but employers still face a staggering cost burden. This year, health insurance premiums average $12,535 per employee, according to a survey by Towers Watson and the National Business Group on Health. Employers are paying about $9,560 of the tab.
For a business with 100 employees, that’s nearly $1 million – money that could be spent replacing aging equipment or hiring workers. Yet the Affordable Care Act (ACA) will impose penalties on companies that don’t offer coverage.
As they come to terms with unsustainable cost increases and the provisions of the ACA, employers face possible four courses of action – and countless tough questions.
1. Maintain the Status Quo
Although health care costs remain steep, premiums rose just 4.1 percent in 2013 and 4.4 percent in 2014. For employers satisfied with the current benefits package, maintaining the status quo might be the best course of action, particularly if employees also are satisfied.
In a year or two, as the landscape continues to shift, change might be in order.
A risk associated with maintaining the status quo is that many employers soon will run into an excise tax that the federal government will impose on “Cadillac” health plans, or those plans that offer unusually rich benefits.
Beginning in 2018, a 40 percent tax will be levied on health plans that exceed annual cost limits of $10,200 for individual coverage and $27,500 for self and spouse or family coverage. Employers offering insured or self-funded group health plans will have to pay the tax on spending beyond those limits.
Employers may sidestep the excise tax by increasing employee copayments, deductibles and co-insurance and dropping some benefits. The tradeoff is that such changes will undermine employee satisfaction. Employers will need to decide what’s worse: higher taxes or unhappier employees.
Employers also must decide whether to continue to offer other benefits they offer today, including life, vision, dental and disability, for example, and whether these should be single-sourced or obtained from multiple vendors. Making adjustments to these elements of the benefits package may enable employers to continue to offer rich health care benefits, at least for the time being.
2. Move to a High Deductible Health Plan
Approximately 20 percent of U.S. workers were enrolled in high-deductible health plans in 2013, up from just four percent in 2006, according to the Kaiser Family Foundation and Health Research & Educational Trust. That trend is likely to accelerate as employers continue to seek affordable coverage options.
A high-deductible plan is one with a minimum deductible of $1,250 for individuals and $2,500 for families. Maximum out-of-pocket spending for employees is $6,350 for individuals and $12,700 for families. This includes deductibles, copayments and other amounts, but not premiums.
As employers move to high-deductible coverage, many also establish tax-free health reimbursement arrangements (HRAs), which help employees meet the higher out-of-pocket costs associated with high-deductible plans. An employee undergoing an emergency appendectomy might be required to pay the full or remaining deductible amount for the year and then pay an agreed-upon percentage of the remaining cost of the procedure. The employee could withdraw funds from the HRA to cover those expenses.
Although high-deductible plans can save employers substantial money, a tradeoff is that employees need help understanding the costs of various treatment options. Many insurers offer online tools to help employees resolve such questions, but studies suggest that few people use these. The result: additional challenges for the human resources department.
3. Switch to a Defined Contribution Model
Forty-seven percent of employers have moved or are moving to a defined contribution model for health care benefits, according to a 2013 survey by Prudential. The main reasons cited for making the switch: the prospect of lower health care costs and increased employee choice.
In the defined contribution model, the employer offers a range of benefits and then contributes a set amount of money to each employee. The employee then selects benefits based on his or her needs. The arrangement is similar to a 401(k) plan to which the employer sends contributions but for which the employee selects the investments.
The obvious advantage of defined contribution is that employer spending is capped. Another is that the employee determines how much to allocate to health, dental and vision coverage and to voluntary coverage such as life, disability, accident and critical illness insurance.
That flexibility can help attract and retain employees, but it also can create an administrative challenge, as employees may need help deciding how to allocate the money.
One solution that many employers are adopting is to work through private health insurance exchanges. These are online marketplaces – separate from state and federal health insurance exchanges – that offer health insurance and related products. Private exchanges are rapidly gaining ground in the health care industry, especially among employers who offer defined contribution coverage. Accenture, a consulting firm, reported that three million people signed up for employer-sponsored health care coverage for 2014 through private exchanges. The number could reach 40 million by 2018, the firm estimated.
“So far, the (private) exchanges seem to appeal to companies that have a range of employees at varying pay levels – like retail and restaurant companies, which have hourly workers as well as salaried employees – because employers can offer more options in plan design,” according to a recent article in The New York Times.
Private exchanges also can handle many administrative tasks and answer employee questions about benefits, reducing calls to the employer’s human resources department.
4. Drop Coverage Altogether
In mid-2012, in view of high costs, nine percent of U.S. eemployers said they would drop health care coverage for employees over the next three years, according to the consulting firm Deloitte. Yet the ACA requires that businesses with 50 to 99 full-time equivalent employees (FTEs) provide affordable health care coverage to their workers by 2016. Those with 100 or more FTEs will need to provide coverage to at least 70 percent of their FTEs by 2015 and 95 percent by 2016. Employers who don’t comply will face penalties.
Moreover, as the job market continues to recover, employers who don’t offer coverage could find it more difficult to compete for qualified workers.
Still, the prospect of saving $9,500-plus per employee per year is enticing. The penalty, referred to as an “employer shared responsibility payment,” is a relatively small $2,000 per FTE, and the first 30 FTEs are exempt.
Although the penalty is not tax-deductible, it could be cheaper to drop health care coverage, use the savings to pay the penalty and then raise wages so that employees could buy their own coverage. That may be an attractive option for employers with a lower-wage workforce, but it could hurt recruitment and retention of higher-wage workers.
Employers who might consider dropping coverage for most employees but keeping it for the executive team also face problems. Federal nondiscrimination rules now bar insured and self-funded plans from covering only highly compensated employees.
These considerations raise a number of questions not easily resolved: What is the proper role of the employer with respect to employee health and health benefits? Are health benefits merely another form of compensation? Or should they be viewed in a different light? Those are questions that growing numbers of employers are wrestling with as they look ahead.
Teri Mullaney is president and CEO of DST Health Solutions LLC, whose software and services improve health plan efficiency and cost-effectiveness.
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