Why Most Employers Will (and Should) Retain Their Health Care Plan after 2013, Despite Rising Health Care Costs

Some analysts predict that a large number of employers will terminate their health plans in 2014 and simply pay the annual penalty of $2,000 per employee.  After all, they argue, employers’ health plan costs will only continue to rise, and the fines will be relatively modest compared to what it will cost to continue providing coverage.  Additionally, there will be exchanges where insurers must accept everyone, so employers who terminate their plans will not be banishing their less-healthy employees to the ranks of the uninsured.  All of this, they project, will make the prospect of getting out of the health insurance game irresistible to many employers.

What these analysts ignore, however, are other factors that would significantly increase the true costs of terminating coverage.  For instance, an employer would have to increase wages to make up for revoking coverage or risk losing some of its most valuable employees.  The tax consequences of this wage increase and of paying penalties with after-tax dollars would be significant.  Additionally, eliminating this important benefit would breach the psychological contract between an employer and its employees.  Most importantly, terminating coverage would prevent an employer from ever realizing the total value of its workforce’s health.  The true costs of dropping coverage will therefore likely outweigh the benefits.

Employers should decide now whether they plan to retain or drop coverage in 2014, because their decision will have serious, long-term business implications.  The employer that anticipates dropping coverage will not focus on improving its workforce’s health.  Its employees will therefore continue to get sicker and its plan costs will continue to rise.  In 2014, this employer will have no choice but to terminate its unaffordable plan, even if doing so will damage its business.  On the other hand, the employer that anticipates retaining coverage will begin pursuing a long-term health improvement strategy and most likely contain its plan costs by 2014.  This employer will decide to retain its plan because it will be using it to leverage the total value of its workforce’s health, and this will prove to be a significant, long-term competitive advantage.

Most Employers’ Health Plan Costs Will Continue to Increase Indefinitely

The root cause of any employer’s rising health plan costs is the steadily declining health of its insured population.  America’s workforce is getting sicker for a number of reasons.  First, as they age, individuals naturally progress from having few health risks to developing numerous health risks and chronic conditions.  Second, societal changes contribute to deteriorating health.  For example, technological innovations save labor and time, but result in more sedentary work and home lives.  Third, the ever-increasing stress that employees experience leads them to engage in unhealthy behaviors like smoking, drinking, and poor eating habits.  As a result, more people than ever before are now overweight, hypertensive, diabetic, and suffering from one or more chronic health conditions.

Employers try to contain their health plan costs in a number of ways.  Most of their strategies are ineffective, however, because they fail to address their insured population’s declining health.  For instance, shifting more plan costs to employees does not address their health, and it prompts some (usually the healthiest) to simply drop their coverage.  Discouraging use of medical services by imposing large deductibles, co-pays, and/or co-insurance likewise does not address health, and it deters employees from using services that help them maintain or improve their health.  Consumer-directed health plans also do not address health, and they can discourage employees from seeking preventive or even diagnostic care because they do not want to spend “their own” money.  And even most wellness and disease management programs are ineffective because they are primarily reactive, fail to engage enough employees, place too much emphasis on individual -- rather than cultural -- change, and focus primarily on higher-risk employees while largely ignoring lower-risk employees.

The Patient Protection and Affordable Care Act (“PPACA”) will not help contain health plan costs in the near future.  In fact, costs will almost certainly increase at an even higher rate for at least the next five to ten years.  Early changes that will raise costs include expanding coverage for young adults and children, removing lifetime cost and pre-existing condition limitations, and new taxes on pharmaceutical and medical device companies.  The insurance and drug industries will inevitably pass these costs on to consumers.  Health insurers will also likely increase premiums more than necessary while they still can.  Then, when 2014 arrives, over 30 million formerly uninsured people will begin to obtain health insurance coverage, start seeking postponed care, and discover and treat previously undiagnosed conditions.  New fees for health insurers also take effect in 2014.  Healthcare reform will therefore not provide employers any direct cost relief for at least the next decade, if at all.

Despite Increasing Health Plan Costs, the Hard and Soft Costs of Terminating a Health Plan Will Likely Outweigh the Benefits

The cost/benefit analysis for terminating a health plan is not as simple as merely calculating the difference between what a company pays to provide coverage and what it would pay in penalties if it dropped its plan.  That amount is only one factor in the equation.  Reasonably assuming a more competitive labor market by 2014, an employer will have to factor in the cost of keeping its employees financially “whole” in order to retain them.  At a minimum, the employer would have to increase wages enough so employees could purchase coverage from an exchange insurer.  Employers will also have to consider the benefits they derive from retaining their plan, including their workforce’s appreciation, respect and loyalty, and their ability to actively manage their employees’ health.

When you do the math (using the non-partisan Kaiser Family Foundation’s projected premiums for “minimum essential coverage” plans, referencing the PPACA’s premium subsidies based on household income charts, and assuming employers would want to keep their employees financially whole), it is not at all clear that terminating coverage would necessarily save the average employer any money.  To the contrary, after accounting for all the tax implications, an employer will likely save money by continuing to insure a majority of its employees.

Specifically, the average employer will likely save money covering employees with Employee Only contracts if the employees’ household incomes are at least $20,000, covering employees with Employer and Spouse contracts if their household incomes are at least $50,000, and covering employees with Family coverage if their household incomes are at least $70,000.

Interestingly, employers should be able to use the PPACA’s “play or pay” mandates to their advantage by retaining their plan, but modifying its design and subsidize it less.  To start with, employers will only be required to offer minimum essential coverage plans.  Such plans are still undefined, but they are likely to require less than the plans most employers currently offer.  What is more, these plans will only be required to cover 60% of covered plan expenses, whereas most plans currently cover a higher percentage of plan expenses.  On top of this, these plans will be considered “affordable” under the PPACA (and therefore sufficient to avoid the $2,000 per employee penalty) provided employees with household incomes less than 400% of the federal poverty level are not required to pay more than a certain percentage of their household income for coverage.  All of this will allow an employer to design and offer a minimum essential coverage, affordable plan at a strategically-determined, subsidized rate that will cover only those average to higher-paid employees the employer knows it can insure for less than if they obtained coverage themselves and then sought reimbursement from the employer.  As for each lower-paid employee who the employer cannot justify covering, it will simply pay a $3,000 penalty plus the small cost the employee pays for affordable exchange coverage.

But it’s not just about dollars and cents.  Employers will also have to factor in the cost of breaching the psychological contract they have established with their workforce.   Of all the benefits a company offers, employees value health coverage the most.  They also highly value the assistance the employer provides in navigating the complexities of health care services and insurance claims.  Employees would therefore view their employer terminating coverage as a major breach of the psychological contract, demonstrating a lack of concern and severing an important connection.

Healthcare reform in Massachusetts provides an example of the psychological contract in action.  There, reform law mandated that all individuals purchase coverage.  When employees of companies without health plans could not afford coverage in the individual market, they asked their employers to offer coverage.

Most employers did, choosing to honor the psychological contract rather than risk losing employees to competitors with health plans.  As a result, more Massachusetts employers now offer health insurance coverage than before the law took effect.  Many experts predict the same thing will occur under the new federal law.

So what are employers supposed to do if their health plan costs are guaranteed to keep rising, yet the hard and soft costs of terminating their health plan in 2014 will likely outweigh the benefits?  Employers need to do the only thing that works to contain health plan costs – improve their workforce’s health.

Employers Should Retain Their Health Plan and Aggressively Manage Their Workforce’s Health to Contain Costs and Improve Performance

Historically, employer health promotion initiatives were little more than a leap of faith.  Management always knew, intuitively, that a healthy workforce costs less and is more productive, but they did not know where to focus their health promotion efforts.  They were also unable to measure the cost savings or degree of increased productivity that they were achieving in return for their health promotion investment.  Heavily investing in health management was therefore considered risky due to the uncertain return on investment.

Investing in health management is no longer an act of trust.  In fact, many companies literally have health management down to a science.  Using technology, employers now have the ability to accurately predict how much they will spend in future years if they continue doing what they are doing, versus aggressively managing their workforce’s health.  The technology is built upon what underwriters have used for years to rate groups, only it’s better.  These progressive employers do not wait for their next group of large claimants to reveal themselves in the form of shock claims.  Instead, they identify their highest-risk employees and get them the help they need before they actually incur large claims.  Numerous studies and surveys of these employers reveal the significant, positive returns on investment that they realize by actively managing their workforce’s health.  These studies all lead to the same conclusion:  “high-performers” (those with a strong health promotion culture and an aggressive health management process) enjoy significantly lower health plan costs and otherwise outperform their competitors by leveraging the total value of their workforce’s health.

The “total value of health” (“TVH”) to a high-performer is much more than just the value of the medical and pharmaceutical claims costs that it prevents or postpones by keeping its employees healthy.  TVH includes the value of reduced employee time away from work due to sickness, short and long-term disability, and injuries.  TVH also includes the value of decreased “presenteeism” – employees’ unproductive time while at work caused by chronic health conditions.

Studies demonstrate that savings from less absenteeism and presenteeism alone can easily exceed savings from reduced medical and pharmaceutical claims by up to three times!  High-performers also enjoy lower employee recruitment and retention costs, higher average revenue per employee, and higher shareholder returns than competitors with weak health promotion cultures.

As more employers come to appreciate TVH, they will stop focusing on what they think they might be able to save by terminating their health plan.  Instead, they will focus on what they stand to gain by using their plan to unlock their own workforce’s TVH.  They will realize that they need to get more -- not less -- involved in managing their employees’ health.  They will begin creating a strong health promotion culture with an aggressive health management process.  Once they gain control of their plan costs and begin realizing their own TVH, they will choose to maintain that control as opposed to turning their employees over to exchange insurers where nobody will be managing anyone’s health.  As a result, they will enjoy a significant competitive advantage over employers who opt to get out of the game.

Brad Warrick is the managing member of Warrick LLC, which specializes in change leadership and management, reducing health plan costs and improving productivity.  Brad’s specialty is showing companies how to create a strong health promotion culture and aggressively manage their workforce’s health.  Brad can be reached at bawarrick@gmail.com or 434-295-0590.