Business2Business Magazines

Obama Care: Now What?

The 2014 impact on business

By Ted Byrne

Maybe the Affordable Health Care Act’s (ACA) employer mandate will kick in during 2014 as company’s roll heath benefit plans into 2015. So? Suppose I was a meteorologist, and you wanted a medium-range prediction. Well, after talking with ACA experts throughout our region and nation there is some benefit-storm-warning that’s increasingly obvious. 


Here’s what Business2Business magazines predicts is most likely to affect employers as they make health benefit decisions this year. Oh yeah, notice that first word maybe up there? It’s not probable, but experts say that with 2014 elections looming, there’s a real chance that the ACA as we know it - and the employer mandate in particular - is all subject to big-time revision and postponement by mid-year which will certainly affect any or all of these projections.

Oh, one more point. Notice that I’ve broken out sections below into digestible bullet points. As the many executives, analysts, and experts I spoke with made clear, it’s not accidental that they think of the consequences of all of this in terms of… Bullets. 

• COSTS: Overall, the costs of 2015 health benefit replacement plans will continue upward as they’re revealed through 2014. Costs, however, are not the same things as rates. Look, suppose that apartment rents rise. As a consequence some renters will choose to move down-market. Yep, they can keep rents constant but at the cost of neighborhoods, school systems, parking, square footage, appliances, plumbing, storage, gyms, pools, views, or whatever. Commuting becomes more expensive along with transport to everything related to a life-style. Perhaps utilities or insurance burdens get heavier. Costs then combine price and benefits.

It is black-letter law (as they say on Law & Order) that employers will not be able to renew their pre ACA plans again for 2015, unless those plans are grandfathered. That means they haven’t changed substantially since the ACA came to be in 2010. “No,” a CEO of a sizeable Capital Region manufacturer concludes that, “regardless of pledges and promises, whether they liked them or not, most employers and their employees who have rolled into any new policies since 2010 will not be able to keep their plans.” “In Fact,” Kelly Lieblein, the regional vice president High Mark Blue Shield concludes that, “by year’s end every employer will be affected.” There are two major components then of health benefit costs which employers and employees can expect to see changing as policies roll throughout this year:

(1) Rates: Forces are at work to inflate 2015 health benefit premiums (prices).

• Analysts expect overall pressure upon premiums to rise under the law next year for most small-group plans because of the way ACA defines “minimal essential coverage” in terms of new fees, taxes and a requirement that 10 essential areas be covered. These include maternity care, substance abuse, mental-health services and prescription-drug coverage, which aren't standard in a large percentage of small employer policies today.

• Jim Schmucker, president of the Lancaster County Business Group on Health explains that the ACA redefines “actuarial value” such that insurers may no longer develop an average risk for an employer based upon the impact of factors that contribute to usage of benefits. Rather rates will have to be age-banded so each worker will be rated based only upon age and smoking habits. “And since,” Jim Schmucker continues, “workers must be rated individually, from here on new hires will affect rates immediately and firms will see their monthly costs vary. At the same time, firms who demand worker contributions will have to recalculate those individual payroll deductions regularly resulting in a considerable planning and bookkeeping challenge particularly to small and/or high turnover firms with fewer than 50 employees with fewer resources to cope.”

• Thiere’s a curious misalignment of forces inherent within the ACA. On the one hand firms with larger percentages of older, sicker, and female workers have faced higher health benefit rates in the past. Those are characteristics associated with higher usage of benefits. Now gender, pre-existing conditions, and health problems may no longer be used by insurers in computing risk. Which means that on the first round of ACA those firms will enjoy the most moderate hikes while the younger and healthier firms will take up the slack.

• But Jim Schmucker explains this all means that, “older workers will become more expensive.” As a result of the new limits upon “actuarial value” younger firms in the future will have advantages come renewal time. So older, sicker, more female firms make out this year, older firms pay in coming years. Tongue-in-cheek, an area analyst mused that the best of all rate experiences could come to the firm with a large percentage of ill and women workers in 2014 who will retire (or can be retired) next year to be replaced by very young workers of any gender going forward into 2016. Old workers will cost more.

• A point here about discrimination. Females tend to use more health benefits than their male counterparts, explaining why their rates were higher. Older workers tend to do the same, explaining why their benefit rates are higher. In markets, people who buy more, spend more. A political decision was made in the ACA to call the costs women paid for their higher usage, discriminatory however the law continues to allow age to determine prices for older workers. Strictly speaking, of course, the law’s definition is correct. Prices are supposed to discriminate. It’s their job to ration scarce resources.

Usage makes things more scarce. As New York City discovered, new middle and lower income apartments disappeared from the market when government set rent control ceilings to stop landlords from discriminating against middle and low income renters.  The price of health care benefits is just as discriminatory upon the older worker as to the female worker – prices are age and gender blind. However, neither political party has yet been charged with a war against the mature, but each is frantic to end the war against women. You’ve got to wonder what politicians will do when they discover short-skirted women feel winter more than long-pants men?

• Title VII of the Civil Rights Act prohibits discrimination in employment based upon race, sex, national origin, or religion. That was expanded by the Age Discrimination Act of 1965 which “prohibits arbitrary age discrimination of older persons.” The Labor Department’s the enforcer. The ACA however specifically permits employers who share the costs of their health benefits with employees to charge older workers as much as three times the rate of younger workers, as a result of the risk rating of individual employees. OOOPS!

A state official told us off the record,  “Watch for President Obama to use his Executive Order pen very soon to clarify this tension between the two laws in favor of discriminating against the older worker’s rates.” Look for law suites against this clarification with the possibility of the employer who chooses to follow either one of these legal mandates caught painfully between their jaws. One wonders if males will have a similar basis for suit based upon the spike in their rates to make up for the decreasing rates for females. And oddly, since employers cannot charge older workers more than 300% of younger worker rates, and since that differential is arbitrary and quite possibly not enough to actually cover their usage – analysts wonder if younger workers in general and males in particular might also sue for age discrimination and gender discrimination since they will be forced to bear those unsupported costs of both older and female workers.

• Since firms will pay a penalty for employing older workers. Will they be less likely to hire and retain them, particularly among low wage and part-time workers who compose their full-time-equivalent workers (see the ACA FAQs sidebar)? Look for financial and human resource managers to model age heavily into their critical path strategies. How will all of this get policed? Quotas? Both the Civil Rights Act and the Age Discrimination Act will buy a lot of orthodontics for the children of lawyers.

• The ACA is designed to increase the use of scarce health resources, which will increase their price. Consequential increases in Medicaid enrollment will add to that demand everywhere but less so here in Pennsylvania unless the Commonwealth joins the 25 states plus DC in Medicaid expansion that’s encouraged short-term by subsidies in the ACA. Changes in the structure of the health industry will continue to contribute to the costs of care as the transition continues among insurers and providers scrambling to create networks (see classification for health car providers on the ACA FAQs side bar). While it’s not clear how business premiums will change for 2015 their costs will be more evenly spread as employers with younger workers bear the impact of the ACA’s rate-compression.

• Look for low-wage employees who receive benefits to feel the impact particularly in the hospitality, retail, business service, and dining industries.

(2) Benefits: As with buyers faced with higher rents, employers will hunt for ways to reduce the premium prices by sharing or passing their burden much as they did with the restructuring of pensions from defined benefits to defined contributions. 

• Employee contributions: At a health benefit seminar I chaired last Fall I asked the panel what percentage of contribution experts projected employees nationally would soon contribute toward the price of their health care premiums. 35% was the rate that employers were working toward. With contributions among private employers in our market still south of 20%, look for employers to find room to shift some significant percentage of the premiums to employees. However, since the ACA specifically demands at least one plan among those offered to be capped at 9.5% of “employee household income,” this rate of sharing will become progressive rather quickly resulting in different employees charged sometimes quite significantly different amounts for their coverage depending upon their incomes.

• BTW, one of the President’s pen strokes resulted in the IRS arbitrarily redefining that word, “household” to personal income. This of course will mean that higher income workers will bear a disproportionate burden of the price at any business that requires employee contributions. It’s also possible, for example, that a low-wage employee might have a high income spouse and consequently a significant household income.  However the employee’s contribution toward an individual or a variant of a family plan can be capped at 9.5% of the worker in that household with the lowest wage.

• At any rate, the employer working to maintain an overall 20% contribution from employees will have to do some elaborate computations based upon the amount levied to the employee as a 9.5% piece of that employee’s wages. Question, what happens if an employee receives a bonus or raise during the term of a policy? Accountants and other consultants-with-calculators are also poised to afford a lot of children’s orthodontics. Suffice it to say that the ability of an employer to blunt the ACA’s burden through employee contribution has become a lot more complex.

• Forget Wellness? In addition to shifting a part of premium cost to employee contributions, employers used to haggle over the actuarial value of their insured. They got the risk down by getting employees healthier. Wellness programs sprung up. Experts now say, “forget wellness”! Under the ACA’s redefinition of “actuarial value” insurers can no longer look at pre existing conditions, gender, or fitness, only age and smoking. “So,.” Jim Schucker wonders, “when it comes to wellness, why bother?” He goes on to add that yes, there is an argument that wellness programs enhance productivity by decreasing absenteeism, and growing both physical and mental dexterity along with the psychic rewards of happier healthier workers.

But a number of CEOs have recently told us that wellness benefits were difficult to measure before insurers encouraged wellness as an actuarial fact they could spread across large numbers of enrollees from many firms. Executives remind us of that the old adage, “What you can’t measure you can’t manage” will be applied to wellness whose benefits are, at the bottom line, un-measurable. But their costs are. Experts predict that enthusiasm for wellness programs will quickly dissipate among top management where support is essential to their success. One way of paying higher premiums will be the re-distribution of wellness costs. “However,” Kelly Lieblein reminds us, “there are still personal incentives built into the ACA with preventative tests part of the ten essential areas of required coverage to encourage healthy life styles and behavior.”

• Beyond price sharing with employees, employers will continue to negotiate lower premiums by shifting the cost of benefit packages in other ways. Ways like higher deductibles and co-pays, reduced services, and skinnier networks composed of least cost providers. A glance at the FAQ sidebar will refresh readers whose eyes glaze from the acronym drone of: HMO, PPO, POS, EPO, FFS, STH, and SHOP. What’s important is that each of these offers employers negotiating room over the costs of their plans by moving their employee furniture around or even dropping some of it out the window entirely. Just as those renters gave up square footage to control rents, many employees will give back in terms of co-pays, deductibles, services, and… it’s redundant to point out that promises to voters about keeping their doctors as a result of the ACA were… well… premature.

• Drop Benefits? As the FAQs make clear, those who employ more than 49 full time equivalent workers will have to offer benefits or pay fines. Will the benefit costs exceed those fines for employers? If they do, will they cut all of their employees loose? Will they instead offer plans that exceed 9.5% of some employees’ wages and pay the fine just for those who flee to the exchanges? Will they offer key employees a bonus large enough to cover what would have been their health insurance costs and send all the others off to the exchanges? Or will they seek out some skinny plan conforming to the letter of the ACA. Yet its high deductibles and/or co-pays and restrictions upon access will be in “affordability” conformance but will drive employees to the exchanges where they will be denied subsidies since they refused a conforming plan? In this case the employer will be faced with no fine since the plan conforms to the ACA even though unacceptable to the employee.

The irony, an SVP for one of Dauphin County’s prominent employers finds in all of this, is that those with the lowest incomes who the ACA was intended to support will find themselves with the most primitive options or facing fine with no coverage at all while increasing the numbers of the uninsured. Firms like UPS and Target have announced radical changes in their health care benefit packages. Throughout 214 those choices will interest employers here in Central Pennsylvania. “I wonder,” Kelly Lieblein of Highmark muses, “when faced with some choices if it will be employers or employees who will flee the field?”

• Prudent Man Lawsuits? Jim Schmucker reminds us that some firms which switched from defined benefit pension programs to defined contribution plans have been sued when the plans they chose to manage employee benefits performed behind the market. It was argued, sometimes successfully, that the employer failed the “prudent man” test for fiduciary responsibility in making the choice. Similarly Jim Schmucker reports on experts who argue that such suits might be brought by employees charging that a chosen health care provider failed to meet some “common” or “prudent” standard of market coverage. Once more orthodontists are smiling.

Many CEOs learned a harsh lesson in 2008 about their ability to carry employees whose wages, and benefits grew too heavy. Many of them were in denial until markets forced draconian decisions as late as last year. Bankruptcy made the decision for many who waited too long. Markets have recovered, but executives who grew up in the frivolous 90s are not the same people. The contraction of 2008 scraped away at decisions that could not be supported by revenues. Recession taught them that they could create only jobs and benefits that buyers supported, and not vice-versa. That memory will explain harsh decisions this year. It already has in terms of cuts in hours, and caution regarding full time hiring. Drilling into the numbers reveals a historically large percentage of employed now in part-time jobs without any benefits.

What are some of the early warnings for health benefit decisions in 2014? As a direct result of the ACA, many employees, probably most, will not keep their health care plans into 2015. Rising premiums will be shared by increased employee contributions. Part time jobs will grow just as health benefits will make low productivity jobs more expensive than automating them away. Wellness plans will lose support. Young employees and the lowest income employees will get the largest immediate bills. Older workers will feel the employment pinch in 2016 and beyond. Employers don’t want to crimp their employees’ life-styles. But networks will reduce provider access. Employers don’t want to squeeze take-home pay or the value of the dollars from that income by detouring it into health care co-pays and deductibles.

The fact is though, that in 2014, many of you… will.