If there's one issue mid-sized and large businesses can't afford to ignore, it's health care reform.
In 2014, changes from the passage of the Affordable Care Act (ACA) will pose the most significant operational and financial challenges many companies will face in a lifetime. Unless they act now, the costs and headaches will snowball and hurt their ability to grow and compete effectively in the marketplace.
To get out in front of the changes, employers need to take action and do the following:
1. Model the anticipated costs of health care reform to understand the significant financial fallout you may face.
2. Determine the best approach to providing health benefits based on your expense structure and needs. The key question: Should you execute a "Play" or "Pay" model?
3. Decide whether a defined contribution plan is the best way to proceed.
In evaluating the options, it's critical to factor in the human impact. Any strategy must ensure that the cost does not trump the satisfaction of your workforce or your ability to attract and retain talent. From a management standpoint, health care reform will require new cooperation between Chief Financial Officers and Human Resources Departments. The reason: Health care reform will have a material impact on the bottom line and your people.
ACA fuels additional rise in health care costs
Before looking at the solutions, it's instructive to understand the magnitude of the new expenses and restrictions it will place on employers.
Even before the passage of the ACA, health care costs were going up. For example, in 2008 when actuaries for the Centers for Medicare and Medicaid Services (CMS) produced their report on National Health Expenditures (NHE), they forecasted that health care spending would increase by 6.2 percent per year for 2008 through 2018. Three years later, when the CMS produced their NHE report in 2011, they concluded health care spending would rise to 7.4 percent in 2014, or some percentage points faster than without the influence of ACA. For individual employers, costs will likely more than double.
Higher cost isn't the only issue. The operational challenges will be significant. The implementation of more than 70,000 pages of reform regulation will cause an unknown compliance and regulatory burden on most organizations. And because costs will soar, health care reform may dampen hiring. It's entirely possible that companies with more than 50 employees, which will bear the full brunt of health care reform, may decide not to add more workers.
It's important to note that health care reform is not the sole factor exerting pressure on benefit costs. Many employers are still shouldering a disproportionate amount of employee benefits costs by shielding employees from the benefits decision-making process. Health care reform is an opportunity to accelerate the move to give employees more responsibility for their health care spending decisions.
Sizing the cost
Financial modeling is an essential first step to developing a strategy to comply with health care reform. The starting point for the analysis should begin in 2014, with the modeling extending to 2020. Calculating all of the costs, including the less obvious ones, is critical to having a comprehensive understanding of the financial implications.
The next step is whether companies should "Pay" or "Play," as the industry calls it. "Pay" means an employer opts out of offering benefits to employees and agrees to pay a penalty per full-time employee imposed under the ACA. "Play" means providing an employer-sponsored plan to your workforce.
The analysis should incorporate your current employee census data, plan design, premium amounts and contribution information. Taking into consideration if you will continue to offer benefits or drop coverage, alter employee salaries, move to a defined contribution approach or some other unique strategy, the financial modeling results should calculate the breakdown in cost and outline how much expense the company will incur under either "Pay" or "Play." It should also show the costs employees will be responsible for. Without getting under the numbers, however, it's likely that employers will miss costs or opportunities.
To understand the financial impact of a "Pay" or "Play" option for your company and your employees, it's important to engage the necessary legal and actuarial expertise to project the actual costs. The calculations can be complicated and nuanced.
Should you self fund?
Under health care reform, premiums for fully-insured plans are likely to increase more rapidly than costs for self-funded plans. The reason is that insurance companies face expanded risks due to escalating participation, which will trigger cost increases that will be inevitably passed on to fully-insured employers.
In a typical fully-insured plan, the employer contracts with an insurance company, pays a set monthly premium and claims are paid by the carrier. With an ERISA-governed self-funded plan, employers engage directly in the profit and loss of the plan and assume the partial risk for the payment of claims.
Additionally, self-funded employers will not have to comply with a handful of rules set forth by health care reform and can avoid having to pay various state taxes or fees.
Defined contribution and consumer-driven health care model
Whether fully-insured or self-funded, most companies are currently in an employer-driven "payor model." With the payor model, employers assume most of the cost and risk. They are responsible for administrative functions and must determine the benefit offering. They also must absorb the seemingly perpetual increases in premiums.
The ACA is actually accelerating the shift to defined contribution models because employers would still be "playing" (and would thus avoid paying penalties). Even so, employers would have more control over their costs because they know how much they will spend on each employee.
A defined contribution plan also enables employees to purchase the health care plan that is best for them. This model re-engages employees in the economics of health care by encouraging them to shop for health care coverage and services just like any other product. A similar shift occurred when companies largely phased out defined benefit programs in favor of defined contribution 401(k) plans.
In essence, a defined contribution model is simply a consumer-driven health plan (CDHP) coupled with a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA). The employer often contributes a set dollar amount to the HRA or HSA, a defined contribution. The employee uses the funds to help cover their deductible or other claims and services. This approach encourages employees to become better health care consumers.
The key to a successful program and keeping employees engaged as health care reform evolves is supporting and educating them in either a defined contribution model or a consumer driven health plan. It also demands that employers provide choice, decision tools and member counseling and support.
The bottom line: We're all in this
The ACA represents the most sweeping changes to benefits since the passage of Medicare. Brokers and consultants can play a leadership role in helping mid-sized and large employers work through the big challenges ahead.
Submitted by Shawn Pynes, principal of Barney & Barney LLC and the firm's Director of Employee Benefits Division.