Many senior finance executives who aren’t as well-versed on health care matters as they are on other factors that determine financial results are about to get an education.
The dawn of the Affordable Care Act’s individual-mandate era and other ACA-related issues, as well as emerging macro trends in health care and continued cost increases, will command more attention from CFOs and their teams next year.
In a September CFO survey of 148 finance executives, 71% said they expect to spend more time on health care in 2014 than they did in the previous two years. Just over a quarter (27%) said they will devote “much more” time to the topic. The shift in priorities will play out more vividly at small companies, for which costs are rising much more steeply than for large ones.
“I’m definitely going to have to spend more time analyzing and reviewing what’s going on with health care, what I’m providing to my employees and how things are going to change,” says Ed King, CFO at 600-employee Marina del Rey Hospital and a principal at Hardesty, a provider of contracted financial management services. The government “will tinker with the ACA to alleviate some of the issues that will certainly come up, and I’ll have to keep up with all of that to manage my costs,” he says.
Ironically, for King and other small-company CFOs, the heightened focus on health care will occur during a period of “wait and see.” The Obama Administration in July delayed the imposition of penalties on employers that don’t offer affordable health benefits meeting minimum quality standards. That gave companies more time to decide whether to stop offering health care themselves and instead make direct contributions to help employees buy health care from the new public exchanges. If they do, in 2015 they will owe an annual $2,000 per-employee penalty, although the penalty plus the stipend may often add up to less than they have been paying in premiums or claims costs.
“I’ll wait and see what the coverage is like in the exchanges,” says King. “I don’t think I’ll know where the numbers are going to fall out for six to 12 months. Then I’ll be at a decision point that will factor in the potential for losing employees to competitors with a health care plan, the cost of replacing those employees and the lost productivity in the meantime.”
Also in waiting mode is Gary Rihani, CFO at Ace Metal Crafts, a $17 million stainless-steel fabricator with just over 100 employees. “We’ll let everyone else experiment,” he says. But the time and effort required to watch what’s going on with health care and make decisions will be such that the company probably will hire an insurance expert dedicated to that role, Rihani adds.
Cost Forecast: Variably Cloudy
Consulting firm Towers Watson forecasts that for companies with more than 1,000 employees, the vast majority of which are self-insured, medical costs will rise between 5% and 6% next year. That’s after accounting for the usual changes in plan design (like higher deductibles and co-pays) and tweaks to wellness programs. As was the case this year, that’s a historically low figure; before that costs were rising 7% to 10% a year for decades.
But smaller self-insured companies are looking at much higher increases for next year — on average, that is. “There is greater fluctuation and variability in the rates of increase for smaller companies,” says Ron Fontanetta, senior health care consulting leader at Towers Watson, “but even among big companies, some will be seeing increases of 10% or more.”
Indeed, in the CFO survey, 43% of companies with revenue of $250 million or less are expecting health costs to rise by more than 10%, compared with 20% of companies larger than that. And just 12% of the smaller employers are looking at a cost change of 5% or better, compared with 32% of the larger firms.
A company’s risk profile — the number of chronically sick, obese or older people in the employee population — accounts for much of the variability, as does the particular steps each company takes to mitigate costs (see “Mitigation Matters” at the end of this article).
Fashion Footwear, a 28-year-old family-owned company with fewer than 50 employees but more than $50 million in annual revenue, is expecting its health care cost tab to climb 14% to 15% in 2014, says CFO Thomas Paccione. That’s in line with recent years’ cost hikes, although it’s still better than the 22% blow the company suffered in 2010. At Ace Metal Crafts, Rihani says health care costs will rise by at least 10% and perhaps as much as 15%.
Many small companies that fall on the positive side of the cost-trend spectrum are in the technology field. For example, about 60 tech firms have signed up for a new buyer pool set up by Sequoia, a benefits provider. Employees can select from among several health plans and carriers offering attractive premiums based on the firms’ combined buying volume — which spreads risk over a larger population — and on the fact that such companies tend to have mostly younger, healthier workers.
“We recently ran through our initial health care cost estimates for 2014, and if we kept our existing plan and coverage, we were looking at about a 10% increase year over year,” says Ned Sizer, CFO at Hightail, an online file-sharing service with 230 employees. “By entering Sequoia’s tech pool for 2014, we’ll save about 10% year over year and 20% versus what we would otherwise have paid.” The program is generally available to tech firms with 50 to 1,500 employees.
Such buying consortiums have been around for many years, in various business segments, but are more in vogue now because of the chaos surrounding health care reform, says Sequoia CEO Greg Golub. “Insurers are focusing more on verticals to improve efficiency, increase volume and keep costs down,” he says.
The Price of Reform
Aside from trends in insurance premiums and claims costs, there are a number of new costs associated with the ACA that companies will have to bear in 2014. Here is a rundown:
• The employer-responsibility provisions of the law were delayed until 2015. Those include a requirement to offer health insurance to employees who work 30 to 40 hours per week, who in some cases have not been eligible for coverage. Still, many companies likely will start offering insurance to such workers next year.
“If employers don’t expand eligibility to these people in 2014, many of them will go to the public exchanges,” says Michael Thompson, health care practice leader for the New York metropolitan area at PricewaterhouseCoopers. “They are eligible for federal subsidies, but when the employers offer them coverage in 2015, they will be effectively blocked from the exchange subsidies. So lots of employers will move forward despite the penalty deferrals.”
• A “temporary reinsurance” fee, expected to be $63 per employee for most companies, will kick in. The money is intended to defray the adverse risk that insurers participating in public exchanges will be taking. With insurers barred from denying coverage to those with preexisting conditions starting Jan. 1, sick people who don’t have access to a group plan are expected to pour into the exchanges.
• For fully insured employers only, there will be a separate health insurance industry tax that will come to 2% to 3% of premium costs, depending on which insurer is used.
• Also, the new prohibition on annual claims maximums in group plans and the extension of coverage for dependents to age 26 likely will exert some upward pressure on premiums and claims costs. Companies that were offering the now-barred “mini-med plans” — which provided very inexpensive, very limited coverage and low annual maximums — will see their costs rise. The Obama Administration, though, has given its blessing to so-called skinny plans that are still very limited but have no annual maximums and pay 100% for a certain amount of preventive care.
• Some workers who haven’t bought into their employer-provided health plans will do so now because of the individual mandate, driving up companies’ costs. The viability of the ACA rests significantly on that new money coming into the insurance system. But how much will there really be?
“The theory is that because everybody has to buy insurance, there’s going to be a lot of younger people who are not sick buying insurance. The problem is, it remains to be seen whether that will really happen,” says Doug Fenstermaker, executive vice president, health care, at Warbird Consulting Partners, whose division provides counsel to CFOs of hospitals and clinical practices. He notes that the first-year tax penalty for not buying insurance is only $95 or 1% of income.
But companies that tend to have lower take-up rates on their health-benefits plans, like retail, hospitality and food-service businesses, will be hit harder because they have more people who could potentially sign up, Fontanetta notes. “The individual mandate will not affect all companies equally,” he says, if indeed the mandate is not delayed until 2015, as some speculate may happen.
A Long-Term View
The ACA has been much criticized for adding costs and not including mechanisms to rein in costs. An opposing (and admittedly biased) thought comes from MIT economics professor Jonathan Gruber, who was the principal designer of the Massachusetts Health Connector program and also helped formulate the ACA. The cost factors are overblown, he says.
“More people will be signing up for group insurance, that’s true, but they will be the healthiest, lowest-cost people. The sick ones are already in,” Gruber says. “There are a few other minor things that will have a small effect on costs. But the law starts us down the road to lowering costs.”
Nothing on that road is likely to have much impact in 2014; rather, lower costs would occur over the next few years. There are several reasons for hope. For one, under the ACA, providers of Medicare services are now getting to share in cost savings they pass on to payers, such as from performing fewer tests and procedures that may contribute little to better outcomes.
Medicare incentives are also being offered for providers’ acceptance of bundled payments; for example, a hospital and a physician group that both provide portions of a patient’s overall treatment receive a single payment and decide how to share it. And the ACA provided for accountable care organizations, or organized groups of Medicare providers that coordinate patient care in part to reduce cost drivers like duplicative care.
Such changes, once entrenched, almost surely will eventually seep out into the broader health care system, says Fenstermaker.
Also, medical providers across the country are increasingly dabbling, in conjunction with payers, in adjusting payments to reflect the quality of care provided. Mark Eustis, former CEO of Fairview Health Services, a Minnesota hospital system that has been a leader in that effort, says CFOs can help the cause.
“Some CFOs have said, ‘We’d love to work with you, but if our contracted health plan won’t participate, it’s impossible,” Eustis says. “Well, it really isn’t. The CFO can pressure the health plan, demanding that the new care model be used for the company’s employee population. That will get the health plan to participate.”