Get ready for the jockeying over health care insurance plans to begin.
A new study from consulting giant Mercer asked the question, “How likely is it that your company or organization will get out of the business of providing health care once state-run insurance exchanges become operational in 2014 and make it easier for individuals to buy coverage.”
It’s a great question, of course, and for the great majority, the answer was “not likely.”
Although survey responses vary by employer size, only 6 percent of all employers with 500 or more employees – and just 3 percent of those with 10,000 or more – say they are likely to terminate their health plans and have employees seek coverage in the individual market after 2014, when some of the key provisions of health care reform start kicking in.
The survey results are a preview of findings from Mercer’s 2010 National Survey of Employer-Sponsored Health Plans that will be announced later this month, but some of the highlights are being announced today on a Mercer webcast that begins at 3 pm Eastern. More than 2,800 employers participated in the annual survey, now in its 25th year.
Mercer rightly points out that although employers have never been required to offer health care coverage, they generally do so to both attract and retain employees AND to promote a healthy, productive workforce. Employees generally place a high value on health coverage because it can be expensive to purchase as an individual and, especially for those with health problems, difficult to obtain.
“Employers are reluctant to lose control over a key employee benefit,” said Tracy Watts, a Partner in Mercer’s Washington, DC, office, in a press release with the survey highlights. “But beyond that, once you consider the penalty, the loss of tax savings and grossing up employee income so they can purchase comparable coverage through an exchange, for many employers dropping coverage may not equate to savings.”
However, the Mercer survey found that a fifth of small employers (those with 10–499 employees) say they are likely to terminate their health plans, especially those with low-paid workers and high turnover, like retailers. These small employers generally offer fully insured health plans and, with small risk pools and little purchasing power, are vulnerable to large rate increases.
“You can see why the idea of dropping employee health plans would be attractive to small employers,” said Beth Umland, who directed the study for Mercer. “On the other hand, when you look at the experience in Massachusetts, where insurance exchanges have been operating under state-based health reform for over three years, it hasn’t happened.”
Cost impact of PPACA
Cost will certainly be a huge factor that influences whether or not an employer decides to stop sponsoring a health plan. Average health benefit cost per employee has been rising by about 6 percent a year for the past five years. The PPACA (aka, the Patient Protection and Affordable Care Act, or Obamacare) will generally increase costs, although the impact will vary from one employer to the next depending on their employee demographics and current benefit program design, as well as the health care markets in which they operate.
While 17 percent of employers with 50 or more employees say that the new PPACA requirements generally taking effect for 2011 – extending coverage eligibility to dependents up to age 26 and removing lifetime benefit limits – will have no effect on their cost in 2011, nearly as many (16 percent) estimate that it will raise cost by 5 percent or more. Most commonly, PPACA will push up cost by 2 percent or less.
What might account for such a difference in cost impact? For example, for the 23 percent of small employers that currently require employees to pay the full cost of dependent coverage in a PPO, a change in dependent eligibility will have no cost impact. Similarly, there is no cost impact for the 11 percent of large employers (500 or more employees) that already covered dependents up to age 26 prior to the start of their 2011 plan year. In addition, about 30 percent of employers did not use lifetime benefit limits in 2009, so the requirement to remove the limits would not have an effect.
Excise tax is the x-factor
The wild card in all of this, and the one thing that concerns employers the most, is the PPACA requirement for an excise tax on high-cost plans.
Starting in 2018, health benefit coverage that costs more than $10,200 for an individual employee or $27,500 for dependent coverage will be subject to a 40 percent excise tax. Mercer notes that some employers offer high-cost plans because a generous plan is part of their attraction and retention strategy, while some have high-cost plans because they have an older or less healthy workforce or are located in a high-cost area. In either case, a 40 percent excise tax on health benefits could prompt a significant change in health benefit strategy.
When asked about their most likely response to the excise tax, here’s what employers say:
- About a fourth of employers with 50 or more employees (23 percent) say: “We will do whatever is necessary to bring cost below the threshold amounts.”
- An additional 37 percent of employers say they will attempt to bring the cost below the threshold amounts, but acknowledged that “it may not be possible.”
- Only 3 percent say they will take no special steps to bring cost below the threshold amounts, and,
- The rest (37 percent) predict their plans won’t ever hit the cost threshold, which will be tied to CPI and increase each year .
But as Mercer’s Watts noted, all of this is subject to change.
“It’s important to keep in mind that this new tax is still eight years out and a lot could change between now and then,” Watts said. “Given how often ERISA, tax, Medicare and Medicaid rules are modified, there’s a good chance that the excise tax that takes effect in 2018 won’t be exactly the same as the sketch we’re working from today.”