Horizon for Healthcare Reform Liabilities Closer than Many Employers Think
By RANDALL K. ABBOTT, a Boston-based senior consultant and practice leader in the Health and Group Benefits practice at Towers Watson, with more than 30 years of experience advising large employers on health benefits and workforce health strategies and more than 140 monographs and articles published on health issues
The Patient Protection and Affordable Care Act (PPACA) heralds a new world for health plan sponsors that will fundamentally transform the way that employers provide healthcare benefits to their employees. Although nearly every large employer will continue to subsidize employee coverage for the foreseeable future, employers can't sit back. Instead, they must act quickly to boost healthcare plan efficiency and minimize their reform liabilities in the face of new mandates and tax levies.
While intended to improve access to insurance for individuals, reform legislation itself does little to reduce employer healthcare costs in the near term. This is a primary concern of employers that have struggled to cope with year-over-year healthcare plan cost increases of 6 percent to 8 percent or more and will continue to bear the responsibility for controlling future costs.
What's more, penalties and fines, including an excise tax on employers that fail to manage their healthcare plans efficiently, can produce significant additional costs for employers beginning in 2014.
Some healthcare reform provisions are already taking a toll on companies' earnings. The 2013 elimination of the Medicare Part D federal tax subsidy for employer drug programs has led the nation's leading employers in the telecommunications, manufacturing and utilities industries to take billions in charges to first-quarter earnings.
By 2011, employers will be required to extend coverage of employees' adult children up to age 26 and will be forced to eliminate lifetime and annual coverage maximums, which will bring additional healthcare cost challenges, including a likely increase in stop-loss insurance costs.
TIME TO PLAN
Still, with many of the significant changes not taking effect until 2014 and 2018, employers can use the next few years to evaluate and plan. In particular, they can conduct financial analyses, business scenario planning and employee communication. The goal is to prevent being hit with unanticipated or abrupt plan changes; potential employee relations issues; and additional costs related to the enactment of minimum required benefit levels, new plan entrants due to the individual mandate and the excise tax cap.
One of the most challenging provisions employers will face is the excise tax cap, which will trigger substantial penalties for health plans whose annual value exceeds an effective ceiling. The provision will levy a 40 percent nondeductible tax on health plans that exceed $10,200 for single coverage or $27,500 for family coverage. Originally designed to penalize "gold-plated" or "Cadillac" health benefits plans, the excise tax will actually penalize many typical benefits programs as a result of average annual healthcare cost increases.
A recent Towers Watson analysis shows that more than 60 percent of more than 550 large employer plans will hit the excise tax cap in 2018, assuming continuation of the current plans. Respondents in the survey were primarily Fortune 1000 companies, providing medical and dental benefits costing $57 billion annually to approximately 10.3 million employees, retirees and dependents If these employers fail to reduce their rate of annual cost growth, they will be forced to either absorb the tax or pass it along to employees in the form of higher premiums.
To hold health benefit plan costs below the ceiling, employers will likely need to reduce benefit values and turn to higher deductible plans and account-based solutions. In addition, they may be under pressure to restructure, reduce or eliminate health flexible spending accounts and self-funded dental benefits, as these are included in the excise tax calculation.
THE EMPLOYEE DEAL
Healthcare reform will require many companies to reconsider their "deal" with employees, taking into account not only health costs but also their overall compensation or total rewards strategy. To remain attractive to top talent and sustain employee engagement levels and productivity, employers that are revisiting the positioning of healthcare benefits may need to shift employee total rewards dollars or reconsider the entire employee value proposition.
For example, an employer choosing to eliminate health coverage will need to decide how to fill the resulting void in total compensation. An employer choosing to continue coverage may find total compensation dollars strained and may need to reduce other coverages or redirect compensation dollars from direct pay to health benefit expenses.
Employers with low wage earners will need to carefully assess the impact of the 2014 subsidy penalties and free choice vouchers. These provisions are often overlooked in the reform discussion but can have a significant influence on overall costs and health plan premium contribution strategies.
Beyond cost-sharing, reductions in benefit values, new healthcare benefit options and workforce management strategies, employers will need to continue to focus on other tactics to limit their healthcare reform liabilities and slow healthcare inflation. Top-performing companies regularly hold their healthcare costs well below median annual increase levels, due in large part to a strategic focus on consumerism, wellness, health improvement, chronic-condition management and care coordination.
While many employers already have some form of health improvement strategy in place, these programs are only successful if employees truly feel accountable and proactively maintain health (rather than reactively treat illness). Despite the economic downturn, employers continue to emphasize health and wellness with many moving aggressively to engage employees through effectively designed incentives, mandatory requirements, and the application of behavioral economics to better frame health messaging and participation.
The effective dates for the most significant employer challenges in health reform are years away; however, employers need to take the appropriate, incremental steps today to redesign their plans, or they will not have enough time to enact the changes necessary to minimize the adverse impacts of health reform in the future.
June 1, 2010
Copyright 2010© LRP Publications