Employers weigh next step in health care

Reform could lead to some companies dumping coverage

By Guy Boulton of the Journal Sentinel

When he first got into the myriad details of federal health care reform, what struck Daniel Cahalane, the president of American Roller & Plasma Coatings LLC, was that the penalty for not offering health benefits to employees was a fraction of their actual cost.

Cahalane wondered if the company’s largest competitors would drop their health benefits, forcing American Roller to do the same to remain competitive.

For now, the Union Grove company has no intention of doing that.

American Roller, which makes coatings and rollers used in printing, packaging and plastic, offers health benefits to its 250 employees for a reason: to attract and retain people.

“To not have benefits is a huge leap,” said Cahalane, 42, an engineering graduate of Marquette University.

A common contention among opponents of federal health care reform is that employers will stop providing health benefits after 2014, opting instead to pay a penalty.

The penalty is $2,000 for each full-time employee if no coverage is offered or $3,000 for each employee who receives the federally subsidized coverage. It applies only to employers with more than 50 workers.

That’s clearly a lot less costly than spending $10,000 or more a year on family coverage, excluding the worker’s share of the premium. And Cahalane isn’t the only person to do the math.

Dave Osterndorf, chief health actuary for Towers Watson, a benefits consulting firm, regularly has clients ask him why they don’t just pay the penalty.

“There’s the immediate answer that the reason you are not going to drop coverage is the reason you have coverage today: It’s an attractive piece of compensation,” Osterndorf said.

Nothing requires employers to provide health benefits now – there’s not even a penalty. Companies provide benefits to compete for the workers they need to make money.

“That hasn’t changed,” said Scott Weltz, an actuary with Milliman, an actuarial and consulting firm.

Tax advantage

What will change under the law is individuals would be able to buy health insurance through online marketplaces, or exchanges, and health insurers would be required to cover people with pre-existing health problems after 2014.

That could make buying their own insurance an affordable option for employees.

The contention is that employers would increase wages to offset the cost. Even with the penalty, some employers would come out ahead. So, too, would some workers. And employers would be free of the headache of providing health benefits.

“We didn’t go into this to be benefit specialists,” said Tim Nerenz, executive vice president of the Oldenburg Group, a manufacturer of heavy equipment and architectural lighting.

He said the ideal would be to let everyone buy their own health insurance – and many health economists agree with him. For now, the Oldenburg Group is keeping its options open.

“The default setting is to drop coverage,” Nerenz said.

But that would mean forgoing one of the key advantages of getting health benefits through an employer: The benefits are tax free.

An employee’s share of the premium in most companies also is paid for with pretax dollars.

Say your employer drops health benefits but increases your pay by $9,000 so you can buy coverage for your family. You already were paying $3,000 a year before taxes for your share of the premium. You now have an additional $12,000 in taxable income. In the 25% tax bracket, that works out to $3,000 in federal income taxes.

You also would pay more in payroll and state taxes. And your employer would pay a penalty.

Some lower-paid employees could come out ahead because they would be eligible for subsidies that limit the cost of health insurance to 9.5% of their income. But employers have to offer health benefits to all their employees. Carving out just their lowest paid workers isn’t an option.

In addition, older workers – generally those who are the highest paid and who make the decisions – probably would end up paying more for health insurance.

The new regulations under the federal law place a cap on what health insurers can charge their oldest customers to three times what they charge their youngest. But when people get health benefits through an employer, their share of a premium is the same whether they are 64 or 24.

Few to drop benefits

Some employers, particularly those with low-wage workers, will want to look at the alternatives, said Weltz, of Milliman. But once they do, they often conclude that they want to continue offering benefits for now.

In a survey released in November, Mercer, a benefits consulting company, found that just 6% of employers with more than 500 workers said they were likely to drop health benefits after 2014.

Among employers with 10 to 499 workers, 20% said they were likely to stop offering benefits.

But if Massachusetts is a guide – it enacted health reform legislation in 2006 similar to the federal law – few of those employers will follow through, Mercer noted.

The number of employers who offer health benefits in Massachusetts has increased since the state enacted the law.

Massachusetts, one of the most affluent states, isn’t typical.

“But is it so different in the behavior of its employers?” said Austin Frakt, a health economist at the VA Boston Healthcare System and a professor at Boston University School of Public Health.

Frakt expects the federal law to increase the number of people getting health insurance through an employer.

Studies by Rand Health, part of Rand Corp., a public policy research institute, and the Urban Institute, a policy research institute, came to the same conclusion.

The controversial requirement that everyone have health insurance could increase the number of people enrolled in employer health plans. It also could make health benefits more attractive to prospective employees.

The two studies, based on economic models, also predicted that more small employers would provide benefits, partly because plans sold through the exchanges would have lower administrative costs.

Those costs now average more than 30% of the premium for employers with fewer than 10 employees, according to one study.

Economic models are far from perfect, and some employers will stop offering benefits as costs continue to rise. But that’s a long-standing trend. The percentage of population under 65 with coverage peaked in the mid-1970s.

The law also is almost certain to bring about unforeseen consequences.

Many of the rules and regulations have yet to be written. And until they are, employers can’t gauge how the law will affect them, said Nerenz, of the Oldenburg Group.

“All employers are trying to figure out what it means,” he said. “And now, with the constitutional questions, we are trying to figure out whether we need to figure it out.”

For now, at least, employers still have an incentive to provide health benefits: the need to attract and retain workers.

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