July 14--Nancy Peyton believes providing health insurance for workers is a key part of being a good employer.
Even so, Peyton, owner of 15 Great Clips hair salons in the Twin Cities, isn't sure she'll still be offering coverage in 2014, when key provisions of the federal health care law kick in.
Under the law, employers with more than 50 workers will need to either offer coverage or pay a penalty -- a decision routinely described as "pay or play."
Peyton is philosophically drawn to sticking with her "play" decision. But she wonders whether the "pay" option could make more sense for her business and her employees.
Some workers might find better coverage through state health exchanges, which are being created by the health law and will offer subsidies to many health insurance shoppers. At the same time, the law brings changes to group policies that could make employer-sponsored plans more expensive to maintain.
"I kind of feel it's morally right to offer it," Peyton said. "But if there's a savings in paying the penalty and greater flexibility for my employees, I'll probably go that way."
With the U.S. Supreme Court's decision in June to uphold the constitutionality of the federal health law, employers in the Twin Cities and across the country are becoming fully engaged with the "pay or play" question.
Many firms had been putting off answering such questions. A majority of more than 4,000 employers recently surveyed by Mercer, a national
human resources firm, said they had been waiting for the court's decision before developing a strategy for dealing with the health law.
Called the Patient Protection and Affordable Care Act, the 2010 law set the broad goal of reducing the number of people in the United States who lack health insurance. In Minnesota, that was about 486,000 people in 2011; the state projects the law will cut the number of uninsured residents here by more than 50 percent.
Within that overall projection, there are several moving parts -- including some people who are expected to move into employer-sponsored insurance and others who likely will opt out or be dropped from an employee health plan.
About 75,000 Minnesotans are expected to lose employer-sponsored insurance by 2016 because companies opt to drop coverage, according to an April analysis commissioned by the Minnesota Department of Commerce. The analysis projects that an additional 140,000 people will voluntarily leave employer-sponsored insurance to move into the state-federal Medicaid program for lower-income households or buy subsidized coverage through the state's health exchange.
The exchange is meant to be a new marketplace -- largely online -- for individuals and people covered through small-employer groups to begin purchasing health insurance policies by late 2013.
But an additional 210,000 people will probably join employer-sponsored plans by 2016, according to the Commerce Department report, because the health law imposes a tax on individuals who lack coverage.
In fact, the individual incentive to avoid the tax may be more powerful than the motivation for businesses to save money by dropping coverage and, for larger firms, paying the less-expensive penalty.
"Firms will not generally take up some of the incentives provided by the (health law) to drop coverage," wrote Jonathan Gruber, an MIT economist, in the April report. "The presence of the individual responsibility requirement provides an incentive for individuals to pressure employers to maintain (employer-sponsored) coverage."
Penalties for lacking coverage will begin in 2014. By 2016, people without health insurance will pay a tax penalty that's the greater of either 2.5 percent of household income or $695 per year, up to a maximum of three times that amount ($2,085) per family.
The April report projects that by 2016 employer-sponsored plans in Minnesota still will provide coverage for 3.1 million Minnesotans -- more than half the state's nonelderly population. The figure suggests why the "pay or play" question is such a big deal in Minnesota.
Shortly after the Supreme Court ruled June 28 that the federal health law is constitutional, some predicted
an exodus of employers from the health insurance game. That's because the health law issues a $2,000-per-employee fine against companies with 50 or more employees that don't provide coverage.
The penalty is a lot smaller than the per-employee cost of insurance. But as employers investigate the issue, many will find other costs that will tip the scale in favor of maintaining employer-sponsored plans, predicted Gary Kushner, a human resources consultant in Portage, Mich.
If a typical employer covers 80 percent of a $15,000 annual premium for family coverage, the company might be tempted to drop the health plan, save the $12,000 per worker and simply pay the $2,000-per-worker fine, Kushner said. But employees at such a company would quickly recognize that their wages had effectively been cut, since they would be forced to purchase coverage on the individual insurance market or pay a tax themselves.
In the face of employee complaints, employers might decide they need to make workers whole, Kushner said. That's when the decision to drop coverage gets expensive.
If the employer compensates workers with $12,000 in the form of wages, both the employer and employee would incur additional payroll taxes. By covering the worker's taxes and its own, the employer would have to spend about $3,600 per employee, Kushner said, on top of the $2,000 penalty for not providing insurance.
"What used to cost the employer $12,000 now costs $17,600," said Kushner, who recently spoke on the subject at an annual meeting of the Society for Human Resources Management.
Employers might not face pressure to make workers whole, however, if employees can effectively make up the difference by tapping subsidies on the health exchange.
The law makes available premium credits for families with incomes up to 400 percent of the poverty level -- a figure that in 2012 would translate to $44,680 for an individual and $92,200 for a family of four. Subsidies will be provided according to a sliding scale, with lower-income people receiving bigger premium credits.
Even so, Kushner's analysis makes sense to Roger Feldman, a health insurance expert at the University of Minnesota's School of Public Health. Providing health insurance, Feldman said, is a way for companies to give wages to workers on a tax-free basis.
"Employers will not save wages by dropping health insurance," he predicted. "If they think they will save wages, they will be in for a surprise."
Feldman has conducted research that suggests about 80 percent of employers that currently offer health insurance will still have a financial incentive to do so once the health law kicks in.
Small firms with fewer than 50 employees aren't subject to the pay-or-play penalty, so some of those firms won't have a financial incentive to continue coverage, Feldman said. Companies in industries that pay workers relatively low wages also are more likely to suspend employee health plans, he added, because the structure of the health law is meant to give low-wage individuals access to better deals on state health exchanges or through Medicaid.
"If you work for a low-wage firm or a small one, the incentive for many firms will be to drop insurance," Feldman said.
Mary Setter, an insurance broker with RJF Agencies in Brooklyn Park, predicted that the majority of employers she works with will maintain health insurance benefits. But she acknowledged that employers have reason to be unsure about just how big and costly those health plans could become starting in 2014.
"We do expect there will be additional costs," Setter said.
The Affordable Care Act stipulates that workers are eligible for an employer's health plan if they work at least 30 hours per week -- a lower standard than what's currently in place at some companies.
The requirement is presenting a "significant challenge" for about one-fourth of employers, according to the recent Mercer survey of employers, released Monday, July 9. Companies with large groups of part-timers working between 30 and 40 hours per week either will need to offer coverage to those employees, Mercer says, or alter schedules to make sure they fall below the 30-hour cut-off.
For many years now, employers have handled cost increases in employee health plans by raising deductibles and requiring workers to be responsible for more costs. But the federal health law could limit such moves through two "affordability" requirements, which employers must meet in order to avoid penalties.
The law stipulates that employer plans must cover at least 60 percent of expected annual health plan expenditures. The law also says that an employee's health plan costs should not exceed 9.5 percent of adjusted wages as shown in box 1 on their W-2 statements.
So, how will employers handle health plan cost increases in the future?
One strategy could be to shift costs to workers with dependent coverage, said Angela Mahoney, a Minneapolis-based principal with Mercer's health and benefits business. The government's affordability tests, she noted, will be applied only to the cost of individual -- not family -- coverage.
"You're only having to test your single coverage cost," Mahoney said. "Some employers are going to decide to increase the cost to cover dependents and use those resources to keep single coverage costs below the testing threshold."
The Affordable Care Act stipulates that small groups can't offer plans with deductibles that are greater than $2,000 for individuals and $4,000 for families, said Scott Keefer, vice president of policy and legislative affairs at Blue Cross and Blue Shield of Minnesota. That could present a particular problem for small employers in Minnesota, Keefer said, because many already have higher deductibles and will be forced with the prospect of an extra bump in premium costs to comply with the federal law.
"If the deductible has to be lower, that's going to impact premiums," Keefer said.
The bottom line is that companies will have different answers to the pay-or-play question, said Rick Wald of Deloitte Consulting LLP.
After doing the math, some companies will raise the white flag, drop the employee health plan and let workers buy coverage on the state exchanges, Wald said. Other employers might be reluctant to make such a decision until the exchanges have been running for a while, Wald said, since no one yet knows exactly what coverage through the exchange will look like.
A third group will decide to stick with offering benefits in hopes of "being perceived as an employer of choice," he said.
In other words, employers who don't offer coverage run the risk of losing good workers to their competitors.
"It will vary by size of employer and industry," Wald concluded. "Nothing is an absolute."
Back at Great Clips, Nancy Peyton is one of more than 1,000 franchise owners who operate about 3,100 salons in the United States and Canada. But she's in the minority of franchise owners who offer fairly robust health insurance benefits, said Steve Overholser, chief financial officer in the Great Clips corporate office in Edina.
The take-up rate for coverage in these groups has been pretty low, Overholser said, at about 30 percent. So, franchisees that offer these plans have a great deal of uncertainty about 2014.
"With the Affordable Care Act, they have to assume more workers will sign up because they have to have something," Overholser said. "It scares the heck out of some people -- you could be talking about doubling or tripling the employer costs."
Christopher Snowbeck can be reached at 651-228-5479. Follow him at twitter.com/chrissnowbeck.
AFFORDABLE CARE ACT
This is the first of two reports on the impact of the new federal health law. Today: A look at the issues employers face with the law; Monday: A look at the issues individuals face in buying health coverage under the law.
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