Alice in Healthcareland

Alice: Cheshire-Puss, would you tell me, please, which way I ought to go from here?

Cheshire Cat: That depends a good deal on where you want to get to.

Alice: I don’t much care where.

Cheshire Cat: Then it doesn’t matter which way you go.

Alice: —So long as I get somewhere.

Cheshire Cat: Oh you’re sure to do that if you only walk long enough.

Lewis Carroll, The Adventures of Alice in Wonderland

2013 has arrived and employers now find themselves on the other side of a looking glass facing the surreal world of healthcare reform and a confusion of regulations promulgated by The Accountable Care Act (ACA) and its Queen of Hearts, HHS Secretary Sebelius. Many HR professionals delayed strategic planning for reform until there was absolute certainty arising out of the SCOTUS constitutionality ruling and the subsequent 2012 Presidential election. They are now waking up in ACA Wonderland with little time remaining to digest and react to the changes being imposed. A handful of proactive employers have begun, in earnest, to conduct reform risk assessments and financial modeling to understand the impacts and opportunities presented by reform. Others remain confused on which direction to take – uncertain how coverage and affordability guidelines might impact their costs.

If reform is indeed a thousand mile journey, many remain at the bottom of the rabbit hole – wondering whether 2013 will mark the beginning of the end for employer sponsored healthcare or the dawning of an era of meaningful market based reform in the US. HR and benefit professionals face a confusion of questions from their companions — CFO’s, CEOs, shareholders and analysts.

How will reform impact our business? Will we take a hit to earnings as a result of penalties or the cost of having to expand coverage? Have we reviewed our strategies for modifying our employment practices to mitigate coverage risks? How will we offer benefits in 2014 and beyond? What financial and coverage considerations should guide our ultimate decisions? Do we think we can manage our healthcare costs to low single digit levels of annual medical inflation? Do we have the right funding strategy? What are our competitors likely to do?

It seems that questions only lead to more questions. For many, the future is less certain and for a few doomsayers, ACA is the final chapter in a narrative about a world of entitlements gone mad. Like Alice, benefits decision makers are asking, “Which way should we go?” — to which the historical response for employers has been: “follow the path of least disruption.” Yet, ACA has set a new normal in motion and with it, the historical axioms of “do no harm” will no longer work in benefits management. There is no path to achieve the holy grail of affordability that does not carry some risk of delay, disruption, confusion and/or increased administrative complexity. The decisions one makes for 2013 will have an impact on costs and plan participation in 2014. It’s time to get moving but you’ll need some advice to safely cross Wonderland:

1. Think like a risk manager – Any risk management professional has been trained to first review risks, evaluate risk drivers, eliminate or mitigate the identified risks and find the most advantageous way to finance the risks. The roadmap to ACA compliance requires similar planning. Equipped with payroll, coverage and actuarial plan value estimates, any employer can quickly determine what, if any, penalties they may face associated with offering unaffordable or inadequate benefits to eligible employees. Once the risk is assessed, you can explore safe harbor and limited penalty scenarios as well as financing solutions designed to direct participants toward “win-win” scenarios that achieve savings for the employer while helping lower paid workers become eligible for more generous federal subsidies.

2. Strategy first, structure second – Planning for reform means understanding where you want to go. Do you believe providing healthcare is an essential part of the social contract between you and your employees? Are your business conditions changing – causing you to rethink what you offer to employees and how you pay for their benefits? Are higher per capita healthcare costs requiring you to think differently about providing compensation, benefits and retirement? Your total compensation strategy may require you to think differently about the road ahead. You may want to tie annual medical premiums to profits through a defined contribution approach. Strategy is essential. It dictates your direction and enables speed. Without it, you are merely running through the forest, hoping to find a path.

3. The reform roadmap requires you to either “play” or “pay” – While certain industries such as retail, manufacturers, hospitality and agriculture are already calculating the additional costs associated with reform, other employers are finding that they satisfy many of the requirements dictated under reform.

Most firms over 100 employees generally offer medical coverage that meets or exceeds ACA coverage and affordability requirements for the majority of their employees. They have little exposure to penalties. However, these same firms are plotting the coordinates of how reform may change the way they think about financing and offering medical benefits. If the Y axis of reform is “Play” (some version of employer sponsored healthcare) and the X axis is “Pay” (electing to pay a penalty either as a result of failing to meet affordability or coverage requirements), employers have a continuum of choices that range from Maximum Play (Cover All Eligible Employees) to Minimum Pay (Drop Coverage, Pay Penalties, Don’t Gross Up People For Lost Coverage). Each direction requires careful planning and an eye toward discrimination and coverage regulations dictated prior and post reform. One thing is clear: there is more than one way to navigate the Affordable Care Act.

4. Don’t feel guilty about reviewing pay or play scenarios – Reform gives any employer a rare opportunity to reexamine their employee benefits strategy. Management has a fiduciary responsibility to explore all the alternatives presented when business or public policy changes. There are obvious risks to course corrections that may steer you away from traditional employer sponsored insurance. They include the inability to attract and retain talent, effects on employee morale and one’s public image in the community. While over 85% of employers surveyed by the International Foundation of Employee Benefits confirmed their intent to continue to offer coverage, many are privately considering a different future. In the last two decades, employers have simply failed to rein in healthcare costs and have been stuck in a perpetual rut of health plan renewals that start with double digit increases and end with the shifting of costs to employees in the form of higher contribution requirements, reduced benefits or lower wages that arise out of lower profit margins eroded by health spending. The question remains: have you really tried to change? Reform will either happen for you or to you. It is essential that you openly discuss every alternative and that you have a robust multi-year dashboard that holds all stakeholders accountable to achieving low single digit medical trends.

5. Wellness is vital for any employer who desires to continue to offer sponsored plans: ACA offers expanded wellness incentives to employers who aggressively embrace health management improvement. If an employee chooses not to participate in an incentive based wellness plan, it remains unclear whether the act of having to pay a higher premium would make the employee eligible for a public exchange subsidy. Assuming that those who choose not to participate in wellness incentive plans are more likely to be less engaged employees, it stands to reason any employee that opts into a public exchange to avoid the accountabilities of a wellness based incentive plan could help an employer sponsored plan improve its own risk profile.

6. Understand public exchange benefits: Private insurers participating in heavily regulated public exchanges will be under intense political pressure to keep costs down. States and HHS have publically noted that double digit annual premium increases will be viewed as “egregious.” Most open access PPO plans continue to be plagued by double digit medical trends. It is likely that while community rated public exchange plans may actuarially mirror private plans, they will attempt to incorporate more stringent medical management controls such as mandatory primary care gatekeepers, narrower PPO networks and aggressive preauthorization oversight to limit overconsumption, fraud and abuse. Additionally, community rating will shift more premium cost to younger employees as age/sex rate bands limits exchange insurers ability to spread premium burdens to older participants. To the degree an employer is actively pushing employees toward a public exchange, the employer must understand that cost and coverage will not mirror private plans. The rules governing healthcare in the public exchanges may comes as a shock to previously coddled private insured patients while it will be a relief to the uninsured.

7. Defined contribution (DC) plans are a way to redistribute costs, not a path to improved affordability: If you do entertain the notion of migrating to a more defined contribution approach for employees, be certain to understand your options can range from a cafeteria style plan using a single insurer supported by on-line decision and enrollment support tools to a third party private exchange where employees are offered an annual stipend and a range of insurer choices. Cafeteria plans have been available since the early 1980s. Many of these plans failed because of their inability to simplify complicated administration and the natural adverse selection that arose when younger, healthier employees chose lower priced coverage options and redirected premium that might have helped offset claims into the purchase of alternative benefits. Choice will always help reduce employee heartburn when confronted with rising costs. People tend to value those benefits that they can choose for themselves. In the case of a single carrier defined contribution plan, the employer remains active as plan sponsor but has the ability to fix annual contributions while offering employees a greater range of medical and ancillary benefits choices. In the case of multiple carrier private exchange, the employer allows the group to fragment as insurers compete for participants. In these instances, it is more likely that an employer becomes an even more passive financial sponsor, defining annual subsidies but over time becoming less concerned over issues arising from excessive utilization, lack of engagement or rising costs. In a future dominated by DC plans, affordability becomes the employee’s problem.

DC is a cost shifting strategy. If plan costs grow at historical trends, employees will become increasingly disgruntled at the eroding value of the benefit dollars they receive to purchase benefits in the private exchange. Without active efforts to control costs, private exchanges will experience a similar limited life expectancy to the myriad unsuccessful state and private group purchasing based arrangements that have preceded them. Despite the risks, some industry experts view the move toward defined contribution medical plans as inevitable and a logical migration similar to the path taken by defined benefit pension plans toward the 401k savings plan.

Some firms will be intrigued with the notion of private exchanges as they allow management to refocus their energies on other strategic human capital priorities. There is increased recognition that national insurers are engaged in synchronized swimming with similar networks, unit cost contracts, and administrative services pricing. Some analysts believe that offering the choice of multiple insurers in a private exchange reduces employer leverage, undermines the ability to self insure and leads to the inevitable deconstruction of employer sponsored healthcare.The path through ACA Wonderland will invariably require crossing the bridge separating defined benefit and defined contribution plans.

8. Self-insurance is 20/20 vision– Health reform includes assessments that stakeholders will pass on to commercially insured and self funded plans. The preservation of group fully insured policies are essential to insurers profit models. The opaque practice of pooling fully insured risk often lead to the overcharging of employers. Many fully insured plans already contain inflated margin, administration and reserve charges as well as hide inflated broker remuneration. For employers under 300 lives, many insurers do not divulge paid claim data that might help an employer better direct their health management strategies. Despite ACA capping an insurer’s overall allowed loss ratio at 85% for their entire block of 50+ life insured accounts, any individual client can still run well below an 85% loss ratio and they may never know it. Self-insurance remains the most efficient method of financing healthcare – provided an employer understands its risk tolerance. Self-insurance, if structured correctly, can limit financial risk while maximizing transparency. Transparency leads to increased competition leading to lower costs. We estimate that post reform, an employer that chooses to self fund may avoid as much as 4% to 8% of additional expenses arising out of ACA insured plan fees, state premium taxes, margin loads for increased risk arising from compliance, the cost of complying with state mandated benefits and the lost opportunity cost arising out of one’s inability to understand what one’s true loss ratio is when negotiating a renewal.

Which way? The road through Wonderland will be serpentine and fraught with blind corners, misinformation, and strange characters. The future of employer sponsored healthcare and market based reform hinges on which direction employers choose to move. Those that understand where they are today and move with a blend of caution and resolve have a higher probability for making it through the looking glass. For those who remain behind, irritated by the hassles imposed by reform, the future will be considerably more complex. Will we eventually navigate this upside down world of regulation and change? Oh yes! But you have to first decide if you are looking for a way forward or a way out. How long will it take to arrive?

That will depend on whether you know where you are going…

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 writes at Usturpin’s Blog.

13 replies »

  1. Employers must implement solutions to comply with Healthcare Reform requirements, minimize the financial impact and realize strategic opportunities through thorough planning and preparation. A complementary education regarding this topic can be found at http://www.apexbg.com/resources/health-care-reform.aspx . There’s a series of webinars that employers can participate and learn more about Health Care Strategy and the financial impact for Small and Large Group Employers.

  2. Gentlemen,

    ACA and the elements of change that surround the healthcare reform movement have begun. With this compelling event in the very near future, companies need to ensure that they are doing everything that they can to contain costs in every aspect of their organization.

    Wellness initiatives are great and will reduce costs in the long term. A culture of safety will also reduce workers’ compensation costs. Focusing on coaching for performance and hiring the right people will reduce turnover and unemployment costs. Top grading will help ensure that when owners are spending more on compensation and benefits, it is for people that are productive and add to the bottom line.

    This is total reform for most businesses. Now is the time for employers to recognize that there is much more that they can and should be doing to ensure that the greatest spend within their budget is focused on maintaining assets, not liabilities.

  3. All interesting and provocative comments. As was mentioned, the employer-sponsored healthcare system is the one that we have and it doesn’t seem to be going anywhere. Many employers will focus only on operations, finance and marketing, but will forget that what props up their business is their people. If employers fail to offer good benefits at an affordable price to those employees, morale, and productivity per employeee suffer. The “Best Places To Work” understand this and so should every Vistage CEO.
    One way to distance yourself from the dangers of ACA non-compliance while you’re working on your strategy is to work with a PEO. In that case, you don’t have to put any energy into compliance, because the PEO becomes the administrative employer and is responsible for all Section 125 issues.

  4. Peter1 –

    When my wife and I were in Copenhagen in 2007, a burger and french fries in an ordinary restaurant cost $25-$30 vs. $10-$12 in NYC, itself an expensive city. I don’t know how many restaurants there are per capita in Denmark vs. the U.S. or how many people they employ. I do know that most Europeans accept paying 50% of their income in payroll, income and value added taxes, living in tiny homes or apartments and driving tiny cars in order to pay for their generous social safety net.

    As far as I can tell, middle class Americans are not willing to make the same tradeoffs. I’ve said before that Americans would have to 15-20 percentage points of their income in additional taxes to replace employer coverage and finance coverage for the currently uninsured.

    Even if we had a single payer system in the form of Medicare for everyone, it’s doubtful that it would save much money over the current system. Any savings in administrative costs could easily be offset by more fraud. The high cost of our current system is due mainly to a culture of overtreatment that is partly fear of litigation driven and partly an attempt to respond to often unreasonable patient expectations and the widely perceived notion that more care is better care and more expensive care is better care even though, most of the time, it isn’t. Fear of litigation is much less prevalent in other countries and patient expectations are more reasonable as well.

  5. “In low wage industries like restaurants and bars, retail trade and hospitality, employees may only earn the minimum wage up to $10 or $11 an hour. Comprehensive family health insurance would cost the equivalent of $8 an hour based on a 2,000 hour year and single coverage would cost $2.50-$2.75 per hour on the same basis. It’s not affordable.”

    Only in America is it unaffordable. Other countries also have low wage retail and service jobs yet they get coverage. When in Denmark it was not even customary to tip – yet those employees had coverage.

    Lots on well dressed people driving new cars including BMWs and Audi. Did not see but one person begging. It’s all about priorities and where the power politics get their money.

  6. Nixon’s idea for national health insurance was an employer mandate to provide coverage. It probably would have passed in 1973 or early 1974 if organized labor didn’t prevail upon Senator Kennedy to kill the bill with the expectation that they could ram a single payer system through later and override the veto of a Watergate weakened President Nixon after winning large majorities in Congress from the 1974 election.

    Of course, Nixon resigned in August 1974, a recession set in and there was suddenly no money for a new entitlement program. Democrats wound up with nothing and Kennedy later called his role in killing the bill the biggest regret of his career.

    In 2006, Massachusetts Governor Mitt Romney refused to go along with an employer mandate but agreed to an individual mandate. Obama copied that idea in his bill.

    In low wage industries like restaurants and bars, retail trade and hospitality, employees may only earn the minimum wage up to $10 or $11 an hour. Comprehensive family health insurance would cost the equivalent of $8 an hour based on a 2,000 hour year and single coverage would cost $2.50-$2.75 per hour on the same basis. It’s not affordable.

    If we mandated that all employers provide health insurance, no one competitor in, say, the restaurant industry would be disadvantaged vs. others. However, when the price of something suddenly increases significantly relative to other goods and services that people buy, they will figure out ways to get along with a lot less of the suddenly more expensive goods or services.

    The bottom line is that when it comes to healthcare reform or expanding coverage to the currently uninsured, nothing is simple or easy.

  7. I know it was picked out of thin air, but pizza holds a place dear to me.

    I agree with you completely that health care and employment should be separated. The only reason they were ever combined to begin with is a side effect of government putting wage controls in place during World War II.

    I find it amazing how many things like this have happened over the years where a rule was put in place that created an entirely new set of issues.

  8. Steve, the buck was picked out of thin air. If it were up to me I would detached health care from employment, but that’s not the system.

    I’m afraid it’ll have to be that easy, and your customers, including me, will get used to it. People will still buy pizzas and all pizza restaurants will pay the same so it won’t be a competitive thing. That buck will be a taxable deduction as well.

  9. Peter, I really wish it were that simple. Many years ago I managed 12 pizza restaurants in the southwest and that dollar is a big deal. Especially now when everything is so tight. Yes, there are companies that make a large profit margin, pizza most certainly isn’t one of them. An increase of a dollar on a $10 pizza is 10%. With everyone pushing retail prices lower and lower, increasing your prices to provide benefits simply doesn’t work, you lose too much business and things are even worse than before.

    We did find that when we made the employees more involved in the actually numbers of running the business they had a much better grasp of how things really work. They suddenly understood that when we provided a benefit to them our cost was substantially more than they ever imagined. This is the main reason why I moved to an open book system of running the business back then.

  10. As long as employers (and it seems many other Americans) continue to reject anything except the employer method of coverage they’ll find all coverage responsibility, expenses, and management up to them.

    Add a buck to that pizza and just cover your employees.

  11. I think there is a lot more than most employers, including many large employers, can do regarding employee engagement. Most employees don’t have a clue as to how much their employer is spending on their behalf for health insurance. If they knew and if they currently have broad network PPO coverage, they might be open to an HMO, narrow network or tiered network insurance product if the potential savings are viewed as large enough and would mostly flow back to them in the form of either higher wages or other valued benefit enhancements such as a more generous 401-K match. At the least, it will be interesting to see how employees react once the employer contribution to health insurance starts to show up on W-2 tax forms.