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High Stakes Health Reform – Employers: In or Out?

It’s high noon for private healthcare. Over the last decade, large, medium and small employers that procure and manage over $1T of private healthcare spend for an estimated 180M Americans have been engaged in an expensive game of Texas Hold ‘Em – – wagering with and against a continuum of stakeholders that all seem to possess more powerful hands. As providers consolidate, insurers retrench and the government wrestles with obligations of an uncontrolled fee for service Medicare, the costs of staying at the final table are taking its toll.

To many veteran observers, it appears that employers may be on the brink of folding their cards. As finance and HR professionals consider the table stakes and costs to remain in the game, the Affordable Care Act (ACA) has suddenly provided a potential golden opportunity to step away from a fifty year obligation without incurring onerous near term financial consequences.

As individuals and small business have continued to lapse into the ranks of the uninsured, those small and mid-sized businesses choosing to continue to offer health insurance are coming to the realization that the Affordable Care Act will not result in the moderating of double digit medical trends. In the near term, some contend costs will continue to rise by much as 25-40% before the launch of 2014’s guarantee issue health exchanges.

Larger employers are already cynical to whether reform will actually work for them or against them. Bigger firms and collectively bargained plans are beginning to understand that if small and mid-sized employers drop out of offering private healthcare, the decline of employer plans will leave them as the sole remaining source for private insurance cost shifting. As the cards are turned, the outcomes are far from certain – – and as we have come to discover, business hates uncertainty.

A skilled poker player can recognize the ”tells” of players attempting to buy time or bluff in hopes of seeing another turn of the ACA river card. One can almost hear the private sector thinking: “Do I drop my insurance and pay a penalty that is considerably less than my current financial obligations to provide care?” “Do I keep providing coverage and hope that public policy changes drive improved quality and price controls that will get my costs under control?” “What if the GOP wins in 2012?” “What if Obama gets reelected?” Do I really think the $ 2000 penalty for failure to cover my employees will stay at $2,000 if costs skyrocket?” ”Do I wait and see what others at the table do not wanting to be the first to fold?” “How in the hell did I get into this game in the first place?”

It’s even odds at best when predicting how employers are likely to respond to ACA. What was once considered unthinkable – severing the social contract of providing healthcare to one’s employees – is now not only under serious consideration, but is enabled by a series of intended and unintended consequences resulting from the passage of health reform. Consider some of the emerging fact patterns:

1) The Social Contract of Healthcare Has Changed under ACA– The Accountable Care Act has mandated that insurance offered through exchanges is “guarantee issue” – eliminating the potential for anyone with a pre-existing condition to be denied coverage or be “rated up” for health status. Historically, employers have worked hard to honor the implied social contract that employer sponsored benefits forged with their employees – – a contract that ensured that an individual would be offered guarantee issue coverage as part of a group purchasing arrangement.

The value of guarantee issue employee coverage coupled with the favorable tax treatment of sponsored benefits has maintained a private sector incentive to use healthcare as a tool to attract and retain employees. Employers are stepping back from this assumption as they consider costs, possible changes in tax treatment and the safety net of exchanges. Some may no longer feel the intrinsic value of offering coverage is worth the potential risk of continuing to provide it – particularly if escalating premiums and public to private cost shifting threaten to further erode earnings.

2) The Culture of American Business Has Changed – It seems less and less relevant whether a business is public or private. The nature of the US workforce and the firms that employ them have changed since the grey flannel days of the career employee. Public firms live quarter to quarter and an increasing number of private firms are either owned or operated by those seeking greater returns on private equity. Businesses are struggling to balance a desire to create long-term value and the very real pressures of an uncertain domestic and global economy.

The notion of investing in employee health improvement plans that may not fully yield returns for two to three years is an unattractive proposition for financial professionals dealing with the need for more immediate financial synergies. The burden of healthcare is weighing on employers and they are doing the math. If penalties for dropping coverage create an opportunity to arbitrage the cost of healthcare, firms could see a net windfall of as much $ 2,000 – $5,000 per employee. This savings expressed as additional earnings per share or as a multiple of earnings is too attractive to not consider as employers push for cost savings and higher EBITDA. As the average American now works for eight different employers over the course of one’s professional life, traditional incentives to create longer term employment such as defined benefit pension, plans, retiree medical and rich employee benefit plans are disappearing – – unless explicitly negotiated as part of a collective bargaining agreement. Employers are asking the difficult question– “would employees rather have a job or healthcare?”

3) Small and Mid-Sized Employers Don’t Manage Healthcare As A Business Risk – Employers have spent too much time looking at healthcare as an expense and not as a business risk. Any effective risk management process first focuses on identifying all the factors driving losses. As data reveals unique risk patterns, the risk manager seeks ways to eliminate or mitigate risk, models scenarios for retaining risk and assesses the most cost-effective way to finance their risk. Ultimately, risk transfer in the form of insurance is the last step an employer employs. The more risk an employer retains, the more they seem to understand the correlation between loss control and loss ratios.

Too often, health insurance is managed as an annual marketing (risk transfer) exercise with little time dedicated to the initial steps designed to diagnose and reduce underlying cost drivers. Since 80% of all group healthcare expenses arise from medical claims and at least 60% of these claims are related to modifiable health risks, one would think employers would see the value in employing more resources to impact and understand these major costs. It seems many firms lack the will, resources or energy to intervene in employee and dependent health and lifestyle. The consequences of this failure to intervene are self-evident in the escalating rates of obesity, lack of compliance with basic preventive health programs and a rising rate of chronic illness among the working employed.

4) Human Resource Generalists Often Lack The Resources and C Suite Support To Tackle Tough Change – HR is being asked to more than ever – with fewer resources. Ratios of HR professionals to staff have steadily declined in the last decade while the costs of managing human capital have soared. The historical inclusion of employee benefits and healthcare as part of their universe of HR responsibilities reveals the best and worst in firms. For many public and private employers, healthcare and employee benefits are secondary skill sets to HR generalists who are focused on a range of business and human capital issues.

In these difficult economic times, HR is often focused on limiting disruption to employees – – ensuring broad open access networks, limited medical management oversight and minimal hassle. The system that has resulted is one whose incentives are perversely built around treating chronic illness and not preventing it. HR teams are understaffed and often unable to build the infrastructure required to assess, mitigate and manage employee population health risks. The added burden of regulations such as HIPAA and ADA have spooked employers from wanting to be too prescriptive with employees over lifestyles and chronic conditions that may be borne out of a personal failure to manage health. The C Suite has expressed anger at increases but has generally been unengaged – electing to intervene in the eleventh hour of renewals instead of actively managing and supporting the internal efforts required to rein in their second largest cost beyond payroll. Firms that have shown HR and the C Suite engagement are posting as much as 10% lower annual medical trends according to a recent National Business Group on Health survey.

5) The GOP has not offered a coherent alternative to ACA where employer sponsored benefits would serve as a linchpin to market reforms – It seems clear to most industry insiders that if ACA is left to its current design – replete with its incentives to drop coverage, increase essential benefits, and avoid focus on personal health improvement – it will begin to unravel employer based healthcare. Providers have long since contended that private healthcare has subsidized public care as government cost shifts in an effort to reduce its growing burdens of Medicaid and Medicare.

Without private insurance as a counter balance and reimbursement incubator for more aggressive market based solutions, the current trajectory seems to be pointing us towards a single payer system. As larger numbers of consumers are pushed to purchase through exchanges dominated by a limited number of private commercial insurers, escalating costs and lack of choice may cause consumers to call for a more affordable “public” option beyond private insurance. Some feel the architects of ACA specifically designed the legislation to set these wheels in motion. The GOP has not seemingly connected the dots to articulate to the American people why the private sector should serve as the catalyst for market reforms. Many feel a single payer system within the US is necessary and inevitable given our infinite demands and finite resources. Others argue, the private sector has never really legislatively enabled to fulfill its role as a market force.

A political opportunity exists for an employer advocate to emerge in Washington – offering a blueprint that anchors employer sponsored plans, unleashes true market forces capable of forcing rationalization of oversupply, reducing variability in outcomes, restoring the role of the primary care provider, improving quality and enabling universal transparency.

6) ACA May Incent Employers to Dump Coverage – ACA offers employers a lower healthcare exit cost by pegging incentives to drop coverage well below the true actuarial cost of healthcare. A large percentage of industries will have workers eligible for generous federal subsidies (400% of the FPL). Many will quickly see the logic of dumping coverage and in doing so, immediate improve struggling margins.

Other employers will be hesitant to play first mover but will gratefully follow a competitor who may choose to dump coverage. CBO estimates for coverage dumping are extremely low in the first years of exchanges. The cost estimates of ACA also fail to identify the rising costs of federal subsidies if more workers buy through exchanges. The only real impediment to dumping healthcare is business’ distrust that the current penalty for dropping coverage will remain at $ 2,000. Many believe that future CBO estimates and GAO studies will reveal the need to adjust employer penalties to track with rising medical inflation. Today’s $ 2,000 penalty could morph into tomorrow’s $6,000 cost per exchange covered insured. Burdened by this knowledge, employers are justifiably cynical toward a government that remains $ 38T underfunded in its existing Medicare obligations.

7) Few Employers Seem Willing To Play The Role of Market Force – ACA passed with significantly less resistance from business than the united private sector front thrown against Hillary Care in 1994. In the 16 years since Clinton health reform was defeated, retiree and existing employee medical obligations have swelled along with the average costs of collectively bargained public plans. There is an increasingly emotionless calculus being discussed in private and public board rooms of America.

Do we want to be burdened with trying to save private healthcare? Who should fix it – employers or taxpayers? The omission of business leadership actively arguing in defense of its role to assume the role of market force for change suggests that employers are quietly preparing to get out from underneath their obligations if an opportunity presents itself.

8) Employers Don’t Believe Government Can Fix Fee For Service Medicare – Employers understand healthcare is a zero sum game. As government rations reimbursement to doctors – underpaying for services in Medicare and Medicaid, the private sector is overcharged to compensate for the payment inequities. Most employers are skeptical of the government’s ability to reign in fee for service Medicare obligations leaving one logical path – – Medicare hospital and provider fee cuts getting shifted to the private sector. This only escalates the rising healthcare cost burden – forcing employers to artificially shoulder CMS’s inability to medically manage fee for service Medicare utilization.

Most economists agree that unless we fix a fee for service Medicare, the current entitlements will sink our economy. Employers do not sense that government has the will nor the acumen to tackle their own third rail of entitlements and in doing so, many employers prefer tax payers shoulder the burden of the fix, not shareholders.

9) Smaller and Mid-Sized Employers Are Trapped in One-Size-Fits-All Pools – Individuals and small business have been the initial focus of reform. Historically, most individual and small insurance programs have been fully insured and pooled with groups of a similar size to create an adequate spread of risk to actuarially predict future costs and to minimize premium volatility due to catastrophic losses.

Most small employers have been stuck in a cycle of double-digit increases as costs of care rise and insurers aggressively manage loss ratios across their entire insured pools to protect profits. A small employer often has no access to their own claims information and as such, sees little value in adopting more disruptive plan designs that might improve their own workforce health status. In the final analysis, an engaged smaller employer ends up being blended with less engaged employers and has little ability to impact their own premium increases. As a result, small employers have become conditioned as commodity buyers of insurance and regard efforts to control losses through workforce engagement as a waste of time. Over the last ten years, insurers have benefited by laws that have precluded smaller employers aggregating purchasing power outside of these carrier pools.

Regulations that restrict the formation of multiple employer welfare associations (MEWAs) have limited smaller employers’ ability to establish “ safety groups” of like-minded employers willing to engage in more aggressive designs focused on reducing trend. The myth that self insurance is inappropriate for smaller employers and the nature of commercial insurance –which often steers employers back to insured arrangements, gives small employers few options. The passage of ACA will create similar insured pools in exchanges essentially replicating existing carrier pooling methodologies that have proven ineffective in controlling medical inflation. With the introduction of minimum loss ratio requirements and tighter community rated pricing, profits will be smaller but costs will continue to rise.

10) Unions Plans Have Not Shown A Willingness to Entertain Designs That Could Protect Their Own Long Term Financial Viability – Collectively bargained plans are some of the richest benefit designs in the US. Unfortunately, the most well insured people are often our most over treated, not our healthiest. One might even argue that the absence of incentives to become better consumers conspires to keep collectively bargained plans the most expensive and inflationary programs in the market.

Couple this with a captive, aging workforce that is descending into chronic illness and one can see how employers and local governments could be very tempted to shift this population risk to a public option pool where risks can be more adequately spread across other employers and/or taxpayers. Many municipal and collectively bargained plans are likely to exceed the federal maximum allowable cost thresholds triggering a “Cadillac” tax in 2018 – incurring an excise tax of 40% for plan costs that exceed $10,200 per individual and $ 22,500 per family. The current trajectory of most bargained plans has them eclipsing these exorbitant tax triggers well before 2018. Unions have historically been reticent to adopt more innovative designs that spur their members to change the way they access the healthcare system. These solutions include participating in premium networks that reimburse medical providers based on value – – directing at risk and chronically ill patients to proven centers of excellence, reestablishing primary care gate keepers and creating incentives for employee health engagement that shifts costs to those who are not compliant with choose health compliance guidelines.

In the next two years, the stakes will only climb in the cat and mouse game of healthcare. Those who advocate private sector market reforms are hoping the symptoms of rising employer resignation are temporary and motivated by a changing political and economic climate. Most believe business can play a vital role in reshaping healthcare delivery by demanding transparency, outcomes based reimbursement, personal responsibility, employee engagement and public policy changes that force market reform and better competition.

Changes should include – – all payer legislation to increase the field of competing payers, disclosure laws like Texas HB 2015 which requires insurers to release claims data for employers as small as 100 lives. Without data, smaller private sector employers are unable to focus on their true underlying cost drivers – the state of employee/dependent health and the incentives that do not exist to promote effective prevention.

Most business leaders seem to favor the notion of smaller government, reduced public spending, effective regulation and market based reform. Healthcare is emotionally charged. It impacts every voter and as such, politicians shy away from the difficult decisions around changing behavior. The real question for the private sector is whether it is willing to step up and assume its role as a catalyst for change or whether we have passed a critical tipping point as a society where our near term profit focus and increasing agnosticism to how we achieve those profits sets in motion an irreversible change that dismantles the last predominantly private system left in the industrialized world.

By playing the right cards, employers may still be able to preserve the best parts of private healthcare and begin to lead a process reelection hungry politicians do not have the will to take on. In winning this poker game of private healthcare, business can redirect government to follow its lead and focus on fixing fee for service Medicare and Medicaid.

America needs its businesses to remain in the healthcare game. The question remains unanswered whether employers will rise to the call – – or fold their hand.

Michael Turpin is frequent speaker, writer and practicing benefits consultant across a 27 year career that spanned assignments in the US and in Europe. He served as the northeast regional CEO for United Healthcare and Oxford Health from 2005-2008 and is currently Executive Vice President for Benefits for the New York based broker, USI insurance Services. He blogs regularly at Usturpin’s Blog.

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Wendell MurrayPeterGary LevinMGPaolo Recent comment authors
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Wendell Murray
Guest

“Gang, most of the arguments I see here urging a single payer or dismantling employer based healthcare are based on a faulty premise that the government can run a plan superior to an employer.” This point is not the issue. The point on single-payer models is that they make sense from every perspective. Good health is a classic social good with positive externalities. Ergo it is a classic governmental function. The heretofore medical services payment system in the USA has always been the equivalent of trying to repeatedly force a round peg into a square hole. It does not and,… Read more »

Peter
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Peter

“Gang, most of the arguments I see here urging a single payer or dismantling employer based healthcare are based on a faulty premise that the government can run a plan superior to an employer.” The faster employer plans are dismantled the faster we’ll get closer to real cost controls and that means slashing provider prices. Look around the world Michael, all government run/managed/controlled/or single-pay do it better, cheaper and with more access (but maybe not for the rich) for less. When you look at the total of American healthcare, not just employer based, other countries provide a lot more access… Read more »

John Ballard
Guest

For anyone still following the comments thread, here is a relevant link, a blog carnival focusing on health care from a business perspective. http://www.seefirstblog.com/2010/12/06/the-benefits-package-is-here/ There you will find a dozen or so links to a variety of bloggers with opinions and subjects all over the place. No, I haven’t red them all but I recognize several names (Dr. Michael Kirsch, David Williams, David Harlow). Conspicuous in their absence are John Halamka and Joe Paduda, both of whom I think have been occasional contributors to this blog. Paduda is the Oprah Winfrey of managed care and the go-to guy for all… Read more »

Nate Ogden
Guest
Nate Ogden

“My experience has been that private insurance is much more likely to deny valid care.” Not even close, Medicare denies more claims then anyone. http://www.ncpa.org/sub/dpd/index.php?Article_ID=18523 That doesn’t account that Private insurance also denied for termed, swithced plans, not primary, and other issues Medicare doesn’t have to deal with. “Rationing in that case is done by insurance limits,” John this is half an argument at best. Insurance limits are only reached becuase provider billing is so absurd. If our hospitals billed anywhere close to the rest of the world or Medicaid the 5 million private insurance max would only be meet… Read more »

Gary Levin
Guest

Mike, This was a well written piece. Whether one agrees, disagrees, or otherwise it is educational and elaborates on the incredible complexity of our health insurance and care industry. It emphasizes how the ‘butterfly effect’ operates. Long term plans in this setting do not have expected outcomes. What is interesting is that normal market rules still apply. Employee based health insurance will die because the environment has been created where the employer can and may be compelled’let go’ of this ‘benefit’. The question is how or if the government is up to the challenge to administrate it all, or whether… Read more »

MG
Guest
MG

You know the system that really needs to figure out how to get a manageable handle on their healthcare expenses – It is the DOD. Already the DOD spends nearly 10% of its budget on healthcare and this is set to really ramp up as the nearly 1.65M veterans of the Iraq and Afghanistan wars come home and are eligible for veteran healthcare benefits.
In short order, the DOD is going to have to start deciding if they want to keep their spending on new military sytems or on healthcare spending.

MG
Guest
MG

I generally agree with some of your points but after having spent a ton of time looking over the financials at two very large payment integrity firms this statement is complete BS – “Employer sponsored benefits are delivered with 1/10th the fraud of government plans.” Nobody at either one of these companies would begin to make these kind of crazy assertions. There is more but not nearly on that type of scale from the figues I have seen.

Paolo
Guest
Paolo

Michael – I’m not an advocate of single payer. Neither is the AEI nor the RAND corporation nor the Heritage foundation. Neither is John McCain nor Paul Ryan nor Bob Bennett. Every time a bright employee decides not to leave a large employer to start a new idea because of health insurance concerns the economy as a whole suffers. Imagine we had a system where the only safe and reliable way to obtain a basic need (e.g., food or pension) is through a large employer. Most people would think of this as crazy. Yet this is what we have with… Read more »

Barry Carol
Guest
Barry Carol

Michael – There is some value based plan design innovation going on in Massachusetts. Starting January 1, 2011, BCBSMA will introduce an insurance plan that requires members to pay a significantly higher copayment if they seek non-emergency care at any of 15 hospitals that are high cost because of their market power and not their care quality. These 15 include Massachusetts General and Brigham and Women’s, both part of Partners Healthcare. The additional copayment ranges from $1,000 for inpatient and outpatient surgery to $450 for advanced imaging to $35 for labs and PT. In addition, the Beth Israel Deaconess Physician… Read more »

John Ballard
Guest

“I am not sure how you exorcise the profit motive out of healthcare. Our best and brightest seek out careers in medicine and expect to build wealth.” I’ll repeat what I said: Professional compensation is NOT the same as profit. Building wealth requires both earnings and good stewardship of those earnings. But the medical professional whose stewardship relies on FFS more than outcomes is participating in what some politely call a “moral hazard.” ~~~~~~~~~~~~~~~~~~~ “Access is rationed based on what many feel are realistic parameters that might be clinically sound but perhaps anathema to today’s US consumer.” The patient facing… Read more »

Michael Turpin
Guest

Gang, most of the arguments I see here urging a single payer or dismantling employer based healthcare are based on a faulty premise that the government can run a plan superior to an employer. The quality, level of overall health and personal health engagement of employees in some of America’s best run benefit plans simply dwarfs any public plan attempting to measure health indices. However, when you mix in individual and small group plans who have no leverage, cost shifting from federal and state plans and couple it with larger less engaged employers, the private sector has hardly covered itself… Read more »

steve
Guest
steve

“Employer sponsored plans offer more options and better service on average.” They vary widely. he mini-med programs certainly do not give better coverage. As to the rest, any data? My experience has been that private insurance is much more likely to deny valid care. “Employer plans are quicker to innovate and respond to changing times, when did Medicare add Rx coverage?” Makes sense as it looks as thought private insurance is the cost driver in the system. “Name one country with a socialized, single payor, or other system of healthcare that beats us in business” What time period? We certainly… Read more »

Nate Ogden
Guest
Nate Ogden

“There are lots of (generally good) arguments on THCB against this proposition. Have you got any arguments in favor?” Employer sponsored benefits are delivered with 1/10th the fraud of government plans. Employer sponsored plans offer more options and better service on average. Employer plans are quicker to innovate and respond to changing times, when did Medicare add Rx coverage? Employer based system will never bankrupt a country or State. How many would you like? “We are in a hyper-competitive global environment” Name one country with a socialized, single payor, or other system of healthcare that beats us in business. We… Read more »

John Ballard
Guest

Sorry to post twice, but this is my main hobby horse. So many words, so few remedies… As an old guy, a layman, who has been following healthcare discussions for the last three years, here are my three inputs. ►As long as healthcare is treated as a commodity the price will always be high and the outcomes variable. Commodity prices rise and fall with supply and demand. Healthcare should not be priced the same way as wheat, pork bellies or orange juice. ►The roles of providers and insurers are routinely misunderstood. The mission of providers at all levels is to… Read more »

John Ballard
Guest

The time for uncoupling employment with health insurance was long ago, when American companies had to compete in a global marketplace with trans-national competitors from countries with government-provided or subsidized care.
It’s not a new idea.
Nor it is particularly Left.
This is from the AEI with a sterling Conservative reputation.
http://www.aei.org/outlook/21921
Notice the date: five years ago.