As nearly everyone in the United States is now aware, beginning in 2014 individuals will be required to obtain health insurance. But how they acquire insurance depends largely on decisions made by employers.
Proposed rules released by the IRS explain how large employers will be assessed if they fail to provide affordable health insurance coverage to their full-time employees and dependents. Understanding the definitions for these terms is key to what the rules do. A “large employer” has more than 50 full-time employees. “Full-time employees” work at least 30 hours per week, but two employees who each work 15 hours per week equal one full-time employee for purposes of the calculation. “Affordable coverage” depends on the employee’s income and the benefits offered, which should exceed an as-yet undefined level of minimum essential coverage. And the benefits must be offered to dependents.
If the “large” employer misses the mark, there is a tax to pay. It is called the “shared responsibility excise tax” and it is assessed if the company’s health insurance plan falls short of the minimum coverage requirements or if the plan costs the employee too much for what is offered. The regulations give employers and the IRS slightly more leeway than a literal interpretation of the Affordable Care Act (ACA) might allow by offering safe harbor shelter in definitions of household income. If an employer is assessed the shared responsibility payment, which can be either $3,000 or $2,000 (the higher amount applies if minimum coverage is not “affordable”), the tax is determined for each employee. That means employers will be obliged to report a broad range of insurance information—e.g., coverage levels, value, affordability, dependents covered—for every individual employee. IRS auditors will at some point have to review the data.
The decision to drop insurance coverage and pay the penalty or continue to play is complicated. It involves calculations and predictions about how to treat higher and lower income workers, the impact of plan design on attracting and retaining a skilled workforce, future overall health insurance costs, and possible changes to the shared responsibility penalties. Estimates of what companies will do vary wildly. In June 2011, a McKinsey survey revealed that 30 percent of respondents said their companies would “definitely” or “probably” drop coverage when the ACA goes into effect in 2014. Around the same time, a survey by the International Foundation of Employee Benefit Plans found only 1 to 3 percent of companies were likely to eliminate healthcare benefits.
As the reality of implementation and the consequences of making major changes in coverage have come into focus, emotion has given way to analysis. The Congressional Budget Office and the staff of the Joint Committee on Taxation have run simulations of nearly every conceivable alternative in an effort to estimate the ultimate budgetary costs of the ACA. Their review examined likely responses by employers and individuals to the mandates to provide and obtain insurance. They modeled the many changes in opportunities and incentives facing employers and employees under the ACA and concluded that implementation would lead to only “a small reduction in employment-based health insurance” by 2019. From the employee’s perspective, it’s easy to see why workers currently receiving health insurance through their employers would prefer to retain that option.
As Figures 1 and 2 show, the CBO projects that 78 million people currently receiving employment-based coverage would not be eligible for subsidies in 2016. Moreover, the cost of exchange coverage for workers with incomes over 400 percent of the poverty level would likely exceed that of employer-provided coverage. The current system is a better deal for workers whose employers foot most of the bill for insurance.
Many benefits advisory companies have calculators for evaluating different cost scenarios associated with dropping coverage and paying the shared responsibility penalty. Truven Health Analytics, for example, has simulated possible outcomes for several options that employers might consider in lieu of continuing to offer health insurance. The scenarios include:
- Incentives for employees to select exchange-based coverage without imposing additional costs on the company;
- Elimination of healthcare benefits, some compensation for employees, and a 20 percent savings for the employer; and
- Elimination of all healthcare benefits, thereby forcing employees into the exchanges.
The conclusion: savings from shifting employees to the exchanges are an illusion. The excise tax would be a minor consideration compared with the real costs to employers stemming from the need to pay higher compensation to attract the same workforce. The penalty for being a first mover in this case would be onerous.
There may be a third way—a choice between living with the existing system and assuming the risk that abandoning the role as health insurance provider entails. Private benefits exchanges may offer an alternative that can reduce costs and transfer risk to insurers. Conceptually, the approach is not dissimilar from the transformation brought about by the move from defined benefits pensions to defined contribution 401(k) plans. For large companies (more than 100 employees) that moved to health reimbursement accounts only to find them off-limits under the ACA for all but retiree programs, private exchanges such as the one Sears and Darden Restaurants (subscription required) recently joined may be a solution. The key question will be whether an exchange will be deemed a “qualified health plan,” and if it is, whether in the long run the “empowered employee” model really is robust enough to rein in healthcare costs.