Note from the author: The Patient Protection and Affordable Care Act (PPACA) contains over 2200 pages of rules and regulations. The Department of Health and Human Services is the governing body of interpretation behind this law, and thus far understanding all the ramifications has been a work in progress. This bill is a maze of regulations. I look forward to analyzing it from different perspectives, and this blog is about what I know at this time based on the text of the PPACA and feedback from consultants, advisors, and experts. Some of this will change and I intend to write future blogs as I receive new information and consider the impacts from different vantage points. I look forward to your comments and feedback.
Many provisions of the PPACA, passed in 2009, are scheduled to become law in 2014. Even though many of its health insurance provisions have not been fully defined by the Department of Health and Human Services, the Obama Administration has made clear that as of January 1, 2014, companies will become subject to penalties if they do not meet a number of new requirements. All those who are responsible for employee benefits must begin preparations for its implementation now in order to prevent undue financial stress to your organization.
A quick primer: Under the PPACA, any company with more than 50 employees will have to offer a minimum level of healthcare insurance to all full time employees. This means that for anyone working 30 hours per week (or 130 hours per month) the company must offer access to a healthcare plan. Additionally, beginning on October 1 of this year every company with over 50 employees will be required to notify its employees of the existence of their state’s Healthcare Exchange. In states not offering an Exchange, the Federal government will offer one.
An employee will have the right to compare the company health plan with plans provided by the Exchange. If the employee chooses to buy health insurance from the Exchange rather than from the employer, the company will be subject to penalty assessments from the IRS of $2,000 per year, or $3,000 where the employee is considered indigent. For comparison, according to the Kaiser/HRET Employer Health Benefits Survey the average cost of the employer’s share of a health plan in 2011 was $5,429.
Theoretically, from a financial standpoint, the movement of individuals to an Exchange could actually save employers money where the costs of providing benefits are greater than the amount of the fines.
So here is the billion dollar question: What if companies stopped offering health insurance, and instead encouraged individuals to enroll in the state Exchange?
The employer could provide an allowance for each employee, and would also pay the penalty to the IRS. This alternative does have some potential theoretical appeal. By not offering healthcare:
A company could save administrative time and money administratively and remove the headache of answering healthcare and health plan questions.
By 2018, approximately 90% of all companies will be assessed a 40% excise tax over a predetermined minimum premium level, because their plans, as they currently exist, will be labeled “Cadillac Plans”. So even if we offer our own healthcare plan and avoid the penalties, we will still be assessed a $1500+ per year excise tax on top of premiums. This tax, based on a computation of future healthcare inflation compared to actual inflation, could make it financially disadvantageous for us to provide healthcare. (If it’s not one tax that gets us, it’s another.)
There are, however, some good reasons for companies to continue to offer health insurance. Benefits are used to attract the best recruits, and the lack of a healthcare plan could reduce the competitiveness or an organization. In addition, the penalty for not offering health coverage to full time employees is likely to increase over time, thus shifting the balance sheet in favor of providing benefits.
Another reason for us to provide insurance lies in the provision that employees at up to 400% of the poverty line qualify for subsidies if they buy insurance from the Exchange. The 2012 poverty line for a household of one is $11,170. For a single person making 400% of the poverty line, that number would be $46,000. This means that everyone earning up to $46,000 would be designated as ‘health insurance unaffordable’ and thus be eligible for health stipends or subsidies. To make it more complicated, the poverty line is adjusted for the number of non-spouse dependents. An employee with three kids would have a 100% poverty line level of $23,000. At the 400% level, an employee with three kids would be eligible for a subsidy if they earned up to $92,000!
In this case, the company would probably pay the $3,000 annual penalty for people who cannot afford health insurance. However, these penalties would apply, as near as I can tell, only if a company didn’t offer these employees health insurance. It’s not clear what the policy would be for employees who waive out of an employer-sponsored program. The safe harbor provision is that a company must pay 60% of the total premium in order to avoid the $3,000 penalty.
At this point, it is not clear whether some companies will be financially better off by not providing health insurance coverage to employees. Perhaps it is worth looking at non-financial factors as well, as we try to navigate the choppy waters of the PPACA.
Overall, I think that most companies will continue to offer employer sponsored health insurance, at least until the excise taxes are imposed in 2018.