Pay or Play?

Reforms set to take effect Jan. 1 give employers hard numbers to use in weighing the costs and benefits of continuing to provide health coverage. Which will you choose?

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Last December, officers from Trinity Health, one of the nation's largest networks of Catholic hospitals, attended the Systems Thinking and Advanced Tactics class of Mendoza's Chicago Executive MBA Program. They were looking for help in forecasting the health-care landscape after Jan. 1, 2014. That's when all U.S. firms with 50 or more full-time employees will face a penalty if they either fail to offer their employees health insurance or offer a stingy or unaffordable plan.

The penalty is part of the so-called "shared responsibility" provisions of the Affordable Care Act of 2010, the sweeping package of federal reforms known by some as "Obamacare."

For much of the morning, Kevin Sears, executive in charge of payer relations at Trinity Health, and Al Gutierrez, president and CEO of Saint Joseph Regional Medical Center in Mishawaka, Ind., explained about the changes pending under the law, including the penalties for offering insufficient coverage. The penalties are actually far less than the cost of typical health plans, but employers run the risk of alienating and losing employees if they cut benefits.

After the presentations, the EMBA students—executives themselves—were divided into two sets of teams. Half were assigned to develop a convincing argument for continuing to offer coverage—the "play" option in the shorthand of legislators and benefits analysts. The rest were assigned to defend the "pay" option, as in drop coverage and pay the penalty instead.

When all the teams had presented, the course instructor, James Davis, adjunct professor of strategy and entrepreneurship, asked for a show of hands: Which would you choose?

The vote was close.

The pay option won by a narrow margin. But there was plenty of sentiment to keep the benefit, which is what Trinity Health decided to do, the company executives later revealed.

Among the students who mentioned the "moral obligation" of employers to protect employees was Bishop Thomas John Paprocki of the Diocese of Springfield, Ill. But even he said the law's reforms and protections could change the paradigm. Health coverage wouldn't necessarily have to be an employer's responsibility if it could be obtained elsewhere at a reasonable cost.

Many in the room seemed to agree with Dan Miekina, property manager with The Building Group property-management firm in Chicago, who said simply, "Nobody has any clue what's going to happen."

To pay or to play, that is the question facing employers. Whether 'tis nobler or smarter to suffer the ever-rising cost of offering health insurance or drop coverage and pay the penalties. The lawmakers and the economists who wrote the Affordable Care Act hope their brainchild will fix the dysfunctional U.S. health-care system, no matter which choice employers make.

The central idea of the plan is this: If we bring more people into the pool of premium-paying insurance subscribers, then doctors and hospitals won't have to overcharge the rest of us who have insurance. The overcharges have been necessary to make up for losses the providers incur in treating the millions of Americans who are uninsured and too poor to pay their medical bills, but not poor enough to qualify for Medicaid. Medicaid is the state-administered insurance program for the poor.

Along with penalizing larger employers who don't provide adequate or affordable coverage, the law contains an "individual mandate." Starting next year, most workers who don't get insurance through their employer or the government will have to buy coverage or face a fine. Subsidies and tax credits will be available to make buying on the individual market more affordable than it has been, but people are still likely to pay more than they would have if their employer continued to offer coverage.

Many people who frown on government involvement in health care hoped the Affordable Care Act would be struck down in the courts or repealed by Congress. But last summer's Supreme Court ruling upholding the constitutionality of the mandates, and last fall's elections—which maintained the status quo in Washington—mean the changes are moving ahead as scheduled.

State and federal governments already pay about half the cost of all medical care in this country, according to economist Jonathan Gruber. He helped devise the well-regarded Massachusetts reform plan—signed into law in 2006 by then-Gov. Mitt Romney—on which the federal plan is based. According to U.S. Census figures, about 1 in 3 Americans are on Medicaid or Medicare, and about 1 in 6 people are uninsured.

Below are details on some of the rules and penalties employers
will face starting Jan. 1, 2014. Unless otherwise noted, the information comes from the U.S. Department of Health & Human Services' HealthCare.gov website, the Congressional Research Service, the Internal Revenue Service, the Henry J. Kaiser Family Foundation, the Society for Human Resource Management, or Nolo.com, a legal information website aimed at consumers and small businesses.

WHAT ARE THE POTENTIAL PENALTIES?

It depends on whether you offer adequate health coverage and whether any of your employees qualify for and utilize new federal assistance to purchase health insurance.

Starting next year, all large employers will have to either offer their full-time employees adequate and affordable (as defined by the law) health coverage or pay a penalty. An adequate plan would leave participants paying no more than 40 percent of the cost of covered expenses. A Health and Human Services Department study in December 2011 found that virtually all employer-sponsored plans met this standard.

To qualify as "affordable" in 2014, the plan would have to cost an employee enrolled in an individual policy (the law's yardstick) no more than 9.5 percent of the employee's annual household income.

The penalties on employers kick in not when a bureaucrat discovers an employer's plan to be inadequate or unaffordable. The fines are triggered only when at least one employee applies for and is granted subsidized coverage through the private-insurance shopping marts the law creates. These entities are called insurance "exchanges."

There are two scenarios in which an employer could incur a penalty:

• If you are a large employer that does not offer coverage and at least one of your full-time employees applies for and is granted a tax credit or cost-sharing subsidy to buy insurance through the exchange—and that employee actually goes ahead and purchases a policy—your company will be assessed an annual penalty of $2,000 multiplied by your total number of full-time employees minus 30 (the first 30 full-time employees are considered "free"). For example, if a company has 50 full-time employees and one or more receives the credit to buy on an exchange, the employer's annual penalty in 2014 would be (50-30) x $2,000, or $40,000. Note: The $2,000 figure applies to 2014. The penalty will be subject to increase if insurance premiums increase.
• If you are a large employer that does offer coverage to at least 95 percent of full-time employees and one or more of your employees obtains discounted coverage through the exchanges because your plan failed to meet the cost or coverage tests, then you'll be subject to a penalty of $3,000 times the number of employees getting the tax credit or cost-sharing benefit and buying through the exchange. But you would never have to pay more than $2,000 times your total number of full-time employees minus 30 (the penalty on large employers who offer no health coverage). So, for example, if an employer with 50 full-time workers had 10 who received the premium credit, the annual penalty would be $30,000 (10 x $3,000). If same employer had 30 employees receive the credit, the penalty, theoretically, would be $90,000 (30 x $3,000). But that's more than the maximum penalty for a same-size employer that does not offer coverage ($40,000, above), so the annual penalty would the lesser amount, $40,000.

Important: Not just any employee can cruise over to the insurance exchange, buy subsidized coverage, and cause your company to incur these penalties. Higher-income employees won't be eligible for the new subsidies. Neither will Medicaid qualifiers, of course.

The subsidies will be available only to individuals whose total household income is no lower than the federal poverty line (the traditional ceiling for Medicaid qualification) and no higher than 400 percent (4X) the poverty line. In 2013, the poverty line was $11,490 for an individual, $23,550 for a family of four. That means one could qualify for a subsidy through the exchanges with household incomes ranging from a penny over the poverty line all the way up to $45,960 for an individual or $94,200 for a family of four.

In a move aimed at reducing the number of uninsured, the Affordable Care Act originally required states to expand Medicaid so that people making as much as 133 percent of the poverty line could qualify for Medicaid. In its landmark decision upholding the individual mandate last summer, the Supreme Court ruled the forced Medicaid expansion unconstitutional. However, many political and industry experts, including the executives from Trinity Health, believe that many states will adopt the new standard voluntarily because Washington has agreed to cover the additional costs for at least the next few years.

The reason this matters to employers is that the more employees there are on Medicaid, the fewer there will be who can qualify to buy subsidized plans from the exchanges and trigger a penalty on their employers. An employer cannot be penalized for offering no or inadequate coverage to an employee who qualifies for Medicaid.

In theory, an employer could analyze its payroll and offer insurance only to its employees whose incomes would allow them to buy through the exchanges and trigger the penalty, according to an analysis by the large international law firm Jones Day. But estimating every employee's total household income would be problematic.

The more meaningful calculus is this: The $2,000 a year penalty for not offering coverage to a full-time employee is less than a third of what a typical individual plan costs an employer, according to economist Gruber, one of the architects of the health reform plan for Massachusetts. However, for-profit employers can deduct the expense of their group health plans, whereas the penalty for not offering coverage or offering an inadequate plan is an excise tax, which is not deductible, said Mark Lam, benefits compliance manager for Assurance Agency, a large independent insurance brokerage.

TO WHOM DO THESE RULES APPLY?
The rules apply only employers with 50 or more full-time or full-time-equivalent employees.

A full-time employee is defined as someone who works at least 30 hours a week in a given month. However, an employer could find itself on the far side of the 50 full-time threshold without having 50 individuals each working 30 hours a week. That's because of how the law calculates full-time equivalency, which is as follows:

Start with the total number of hours worked by your part-time (less than 30-hour) employees in a month and divide the total by 120. If you had 15 part-time workers, each working 80 hours a month, that would total 1,200 hours (15 x 80), which divided by 120 would be counted under the law as 10 additional full-time-equivalent workers.

Note: Even though part-timers are counted in determining whether an employer is large enough to be subject to the penalties, employers are not required to offer coverage to any of their part-time (30 or fewer hours) employees, no matter how many they have. This has led some franchisees of fast-food restaurants, among other employers, to announce their intention to juggle work schedules so that none of their employees gets 30 hours a week, according to reports in The Huffington Post and other news outlets. That would allow them to skip offering health insurance and avoid paying any penalty.

WHAT ABOUT SMALLER EMPLOYERS?
If you're an employer with fewer than 25 workers and you pay at least 50 percent of the premium cost of your employees' health coverage, you're already eligible for a tax credit to help offset your generosity. From 2010 through 2013, the maximum credit has been 35 percent of the total cost of the premium. For tax-exempt businesses, the maximum credit has been 25 percent. As of 2014, the maximum credit will grow to 50 percent.

WHO PAYS THE ‘HEAD TAX'?
Starting next year, employers will have to pay $63 a head for everyone their plans insure—not just employees, but dependents who are covered under the plan. The tax is levied for three years and is set to decrease each year. According to The Wall Street Journal, the tax is designed to raise $25 billion for a fund to offset insurance companies' costs in covering people with high medical bills. The number of such subscribers is expected to increase because, starting in 2014, insurers will no longer be allowed to deny coverage based on pre-existing conditions.

WHAT IS THE ‘CADILLAC' TAX?
In an effort to curb unnecessary consumption of medical care, starting in 2018, a 40 percent excise tax will be imposed on health-care plans that cost more than $10,200 annually for individual coverage and $27,500 for family coverage. The tax would apply to only the amount that exceeds those limits.

SO WHAT ARE EMPLOYERS LIKELY TO DO?
The overwhelming majority appear to be taking a wait-and-see attitude.

A survey last June by the benefits consultant Mercer Inc. found that 6 percent of firms offering coverage planned to cease doing so, Bloomberg.com reported. In July 2012, the Congressional Budget Office estimated that 2.5 percent of workers who are counting on their employer to offer coverage might lose the benefit by the end of the next decade, according to Bloomberg.com. A Gallup poll found that 44.6 percent of Americans got their health insurance from an employer in 2011, a rate that has been in decline for more than a decade. The Congressional Budget Office projects that, on balance, the law's reforms will expand coverage to about half of the 58 million people who don't have insurance today.

Mark Lam, benefits compliance manager for Assurance Agency, said employers are wise to hesitate at dropping health coverage, because in addition to being a deductible expense, the plans are powerful tools for employee recruitment and retention.
Coverage purchased on the exchanges will be "significantly more expensive than what employees are accustomed to when purchasing it from their employer," he predicted. The result will be employees demanding more pay to offset the lost benefit or people simply leaving for another employer that still provides coverage, he said.

Gary Rufo (BBA '73), director of human resources for Chicago-based Sunstar Americas, Inc., said his company, whose products include GUM brand oral care products, has no changes planned for 2017.

"As we have analyzed the impact of the law, aided by some very competent benefit brokers, we don't see the impact as particularly large to the company," the Mendoza alum said. The U.S. division of a Japanese firm, Sunstar Americas has about 450 employees, he said.

Ed May (BBA '78) is human resources and operations manager for a U.S. consumer foods company. The company's parent company is based in Europe, and because of that, he said, it is accustomed to employees having full coverage, albeit usually provided by the government. The U.S. operation, which has about 175 full-time employees, he said, charges workers only 5 to 11 percent of the insurance's cost, compared with 20 to 33 percent at most U.S. employers. He said the company realizes that its robust benefits package is likely to incur the 40 percent Cadillac tax in 2018, but management is looking at ways to minimize the impact.

Like all large employers, the University of Notre Dame will feel the sting of the $63-per-head tax. The University has about 5,000 employees but, including dependents, its plans cover about 12,000 individuals, said Denise Murphy, director of benefits and wellness. The fee will amount to more than $500,000 a year, she said. The University currently spends in excess of $60 million annually on health care, she said.

Murphy said that like other organizations, Notre Dame's leadership decided to continue to offer coverage at the current time and will continue to monitor the impact of future changes.