While much is uncertain about the future of health-care reform, one thing seems clear: many employers that currently offer health coverage will see their costs go up over the next three years if the budget reconciliation bill the House passed on Sunday clears the Senate without major changes.
On the other hand, experts say the impact of the reconciliation bill will not be nearly as severe or immediate as that of the legislation it is intended to amend, the sweeping health-care reform bill also passed by the House on Sunday and by the Senate last December. President Obama is expected to sign the reform bill, the Patient Protection and Affordable Care Act, into law on Tuesday.
Among other changes, the reconciliation bill raises the penalty for companies that do not offer health-care coverage to $2,000 per employee, up from $750 per employee in the original version. Part-time workers must also be considered when companies determine whether or not they must provide insurance or pay a penalty. On the positive side, the bill modifies the excise tax on high-value or “Cadillac” plans, pushing out its implementation to 2018 and creating the possibility that the coverage levels that would trigger the tax will be reset according to standard policy rates eight years from now.
“There’s the misconception that everything is going to happen at once, and that’s not the case,” says Chantel Sheaks, head of the government affairs group for Buck Consultants. While insurance companies, pharmaceutical companies, and medical-device makers will bear the brunt of near-term costs, employers are not likely to see higher costs trickle down until about 2012, a year after the changes go into effect, she says.
Still, “there is nothing in this bill that is going to hold down health-care costs in the short term, and there are some elements that could cause costs to go up,” says James A. Klein, president of the American Benefits Council (ABC).
One major reason for cost increases is a timing disconnect between when insurance companies must start covering people with preexisting conditions and eliminating coverage caps (which will increase insurers’ costs) and when individuals will be required to buy insurance (a boon for insurers). The disconnect means that in the interim, insurers are likely to pass premium increases on to corporate customers, says Klein, unless they can make up some losses in higher volumes.
There is also a significant administrative burden related to complying with the new measure, which sets out various coverage thresholds and allowable cost-to-income ratios. For example, the “free-rider” penalty imposes a fine on companies that make employees pay more than 9.5% of their incomes toward health care. Keeping track of premium costs versus incomes, though, adds a whole new layer of compliance. Companies will also likely be subject to federal audits to make sure they are in compliance with the new law.
Thom Mangan, CEO of health-insurance brokerage Corporate Synergies, expects companies to draw heavily on compliance-related services like the ones his company offers. “If you call me in three years and we haven’t tripled our staff, I’ll be shocked,” he says.
Retiree prescription-drug coverage is one issue that some finance chiefs must consider in the near term. Under the current bill, the tax benefit for companies that provide such coverage would be eliminated, which would create an immediate impact to the present value of tax liabilities. One analysis pegged the overall impact at $14 billion in additional tax liabilities, says Klein, while an ABC-commissioned report found that between 1.5 million and 2 million retirees will see their coverage change as companies drop it.
Cuts in federal Medicare spending will also accelerate cost shifts to employers, since the private sector already subsidizes costs for Medicare patients.
In general, midsize companies — those with between 50 and 500 employees — will face the worst of the costs, experts estimate. That’s because firms with fewer than 50 employees won’t face penalties for not providing insurance, while small companies (those with 25 employees or fewer) will be eligible for some tax breaks if they offer insurance. Large companies, which often self-insure, may also be able to insulate themselves from some of the cost shifts.
Experts don’t expect many companies to drop health coverage entirely, even if they are squeezed by rising costs. “Many employers say if they’re going to pay for something, they want to have control over it,” says Sheaks. But that could change as well over time. “All employers will be looking at their competitors’ practices as well as their own, because you have to consider what the effect is on your competitive recruitment and retention standpoint,” says Biggs Porter, CFO of Tenet Healthcare, who says Tenet is still considering its options for employee health-care coverage.