Healthcare Reform Could Radically Change Your Benefit Plan

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Both before and after Congress passed healthcare reform, Americans with employee health benefits were assured the legislation would not disrupt their coverage.

U.S. President Barack Obama has often repeated that pledge, which includes anyone who has health insurance.

"If you're one of the more than 250 million Americans who already have health insurance, you will keep your health insurance," the president said following the Supreme Court decision on June 28 that upheld Obamacare. "This law will only make it more secure and more affordable."

Of course, Republicans claims on Obamacare take the opposite extreme.

"Frankly, the people who have healthcare in this country and like it will not be able to keep what they have," said House Majority Leader Eric Cantor, R-VA, the same day.

While something of an exaggeration, Cantor may be closer to the real-life impact of the Affordable Care Act than the president, particularly when it comes to employee-sponsored health benefits.

The Congressional Budget Office estimates 154 million Americans – 72% of the non-elderly population – have health insurance through their employer.

While nothing in Obamacare explicitly forces employers to drop coverage, the healthcare reform law does introduce new rules and requirements. Those provisions will affect how employers offer health insurance, what plans they offer and if they offer any at all.

Business owners, for their part, are still making up their minds as to how they'll deal with the changes healthcare reform will bring (unless, of course, the Republicans sweep in November and repeal it).

Predicting the Effect of Healthcare Reform

With much of Obamacare's impact uncertain – many provisions don't take effect until 2014 — attempts to predict how employers will deal with healthcare reform so far have come up with wildly different answers.

For example, the Congressional Budget Office (CBO) projected in March that between 3 million and 5 million people with employee health benefits – about 7% –will lose it as a result of healthcare reform.

Other estimates of how many might lose employer-sponsored coverage range from 500,000 to 65 million.

A better gauge of what to expect has come from surveys that ask employers directly about how Obamacare will affect them.

A survey of 368 mid-sized and large companies by consulting firm Tower Watson last summer indicated only about 10% of employers planned any significant changes for 2012 or 2013.

However, when the Tower Watson survey asked about 2014-2015, the picture got muddier. Most employers (71%) said they expected to continue sponsoring health insurance plans, but many are considering major changes as more of the healthcare reform law kicks in.

A new survey by Deloitte, conducted of 560 companies from February through April, shed more light on this trend.

Deloitte found that only 9% of employers planned to completely drop health care coverage over the next three years. But many said a variety of factors could change their minds.

For example, 34% said they'd consider dropping coverage if the Affordable Care Act forces them to provide more generous benefits. An equal number said the tax on more expensive "Cadillac" health plans, due to hit in 2018, might entice them to stop offering health insurance.

And 33% said they'd rethink their stance if the cost of paying the $2,000-per-worker penalty is less than the cost of offering benefits – the so-called "pay or play" decision.

Obamacare Changes Under Way

The surveys indicate that while employers suspect healthcare reform will cost them more money, they still would rather not drop health benefits altogether.

While dropping coverage might save money, it does have drawbacks. For example, 83% of companies told Deloitte that health benefits are important to attracting the best workers; 87% said benefits are important to retaining good employees.

So companies will be more likely to modify health insurance plans than drop them.

According to the Deloitte survey, changes employers are considering include:

  • Increasing cost-sharing with co-payments and deductibles (69%);
  • Increasing premiums (68%);
  • Adding high-deductible plans (52%);
  • Increase wellness programs (62%).

In fact, many employers said they've already started to make such changes. About three-quarters of all companies have raised employee contributions. An equal number have raised deductibles or co-payments. And about 70% of the larger companies have added or increased incentives to encourage healthier lifestyles.

Meanwhile, the "grandfathering" of existing insurance plans — one of the key points underpinning President Obama's assertion that people will be able to "keep what they have" –represents only a temporary delay.

The Department of Health and Human Services estimates 55% of the healthcare plans at large employers, and just 34% of the plans at small employers, will remain grandfathered by 2013.

Presidential assurances aside, it's clear almost all workers will see changes to their healthcare benefits sooner or later.

Responses to Healthcare Reform Will Vary

The surveys also make clear that one size does not fit all when it comes to how companies will cope with healthcare reform.

Large companies, for example, are less likely to drop coverage than smaller companies (at least those above the law's threshold of 50 employees that requires a company to provide health benefits).

In the Deloitte survey, only 2% of large businesses (1,000 workers and up) said they had plans to drop employee health benefits, compared to 13% of companies with 50-100 employees. Health benefits are a larger financial burden on small employers, which can't get the same discounts as their bigger brethren.

Salary level is another major factor. In general, companies with large numbers of low-wage employees, such as retailers and restaurant chains, are more likely to drop employee health benefits.

That's because the sliding-scale subsidy the government will provide to those earnings less than 400% of the poverty level will in many cases be a better deal for both employer and employee.

"The value of the subsidy to employees would dwarf the employer's tax for not offering coverage," benefits consultant Ed Kaplan, senior vice president and national health practice leader at The Segal Co., told CFO.com. "But at an engineering firm or an IBM, for example, employees' incomes are much higher so their subsidies would be much smaller."

Finally, many companies are expected to wait and see what their competitors do.

"I think it's going to be like the lemmings: who's going to jump off the cliff first?" Susan Nash, a partner at healthcare oriented law firm McDermott Will & Emery, told CFO.com. "I haven't heard any large employers say they'll do it yet, but it's highly possible. If Wal-Mart or Costco did it and were successful, it might become an easier and easier decision for other retailers to make and it could become a standard in that sector."

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