The finances of companies in industries that employ large numbers of low-wage workers are potentially in peril starting next year.
The individual mandate — which states that all U.S. residents must buy health insurance or pay a federal-tax penalty — and other provisions of the Affordable Care Act (ACA) slated to take effect in 2014 may push millions of employees who hadn’t opted for employer-sponsored benefits plans to change their minds. Industries such as grocery, retail, food and beverage, hospitality, logistics, long-term care, and industrial services will see the greatest hikes in their health-benefit costs.
At the same time, those very industries are ones that can least afford big new costs. Traits they share include narrow profit margins, high labor costs as a percentage of total revenue, customer sensitivity to price increases, many full-time employees who have not yet elected health benefits, and many part-time employees who could be reclassified as eligible for health coverage under the ACA beginning in 2014. Under the act, employees would be reclassified that way if they work at least 30 hours a week or 100 hours a month.
In the worst-case scenarios, the higher costs could be ruinous. Think of a hypothetical company in such an industry with, say, 3,000 employees. Because most of them are at low income levels (and presumably can’t afford health insurance), maybe only 150 or 200 currently use the company’s health plan. Maybe half of the total workforce would become newly benefits-eligible.
“In that scenario, if half of the newly eligible opt in, the company could see its benefit costs go up by a factor of five to seven,” says Chris Ryan, vice president of strategic advisory services for ADP, a big benefits-administration and payroll-services firm. “For every new participant, the average company will see its costs go up $7,225. For any CFO at a company with a sizable number of newly eligible workers who is trying to forecast a health-care budget for 2014, their participation rate will be one of the most important variables.”
Such remedial steps as resetting insurance-premium tiers so that higher earners pay more, charging more for family coverage, or cutting back benefit levels across the board could mitigate the new costs. But in most cases, such steps wouldn’t eradicate them.
Ryan authored a study, released today by the ADP Research Institute, that provides information companies can use as a guide to begin understanding what financial impact may befall them as the size of their insured pool increases. Unlike other research on the financial implications of the ACA, the study is not based on surveys but on companies’ actual, experiential payroll and benefits data. The study aggregates information on 303 companies with at least 1,000 employees, both part-time and full-time, that use both the benefits-administration and payroll services of ADP.
The chart below is based on information for employees who are single and have no dependents. ADP studied that group because their base pay serves as a good proxy for their overall W-2 wages. The chart shows that only 37% of such workers earning $15,000 to $20,000 per year have elected to receive group health benefits. The percentage rises for those at higher income levels, before leveling off at about 82% for everyone making $45,000 a year or more.
It is “remarkable” how close the $45,000 threshold is to the income level below which such workers are eligible for federal subsidies and tax credits they can use to buy health insurance through one of the public exchanges being created under the ACA, according to the study. The 2012 federal poverty level for a household of one is $11,170. Those earning up to 400% of that figure, or $44,680, are eligible for the federal assistance.
That may be important, because employers will be hit with a penalty of $3,000 for each employee without dependents whose health-insurance costs are more than 9.5% of their income, who qualifies for the federal assistance, and who opts to buy insurance through a public exchange. ADP’s data shows that 8.6% of employees spend more than 9.5% of their income on group health insurance.
A good strategy for companies with employees who might be at risk of taking that route is to make additional contributions to such employees for use in buying into an employer-sponsored group-insurance plan, says Ryan.
The ACA had provided that the $3,000 penalty would apply to both single employees and those with families. But in December 2012, the Internal Revenue Service ruled that the penalty would apply to single employees only, a group that accounts for just 1% of employees, according to ADP.
The all-important question is, how many newly benefits-eligible employees will elect employer-sponsored group insurance, and how many will opt to buy insurance through one of the public exchanges? If they choose wisely, single employees without dependents who earn more than $22,340, or 200% of the 2012 federal poverty level for a household of one, would get better coverage and pay less for group insurance if they opt to pay into an employer’s benefit plan rather than buy insurance through one of the public exchanges, according to ADP’s analysis.
What about married couples? ADP’s benefits database does not capture spousal income, though the study offers some relevant inferences.
Results show that 16.0% of married employees spent more than 9.5% of base pay on health coverage, roughly double the percentage for unmarried employees. Assuming each dual-income household earns, on average, twice as much as a single household, and that typical family coverage is between two and three times more expensive than single coverage, the total number of married individuals above the 9.5% threshold is estimated to be between 8% and 12% of total employees, according to the study.
Meanwhile, Ryan notes that premium costs, at least on a per-employee basis, would come down to the extent companies enroll more young people, who tend to be healthier, in health-benefits plans. “Many of them are the ones not signing up,” he says.
The average age of those who enroll in benefits today is 43.3 years, but the average age of the overall workforce is only 40 years. If a company were to enroll everyone, per-employee premium costs would fall 12% to 15%, Ryan says.