What Your Employer Is Secretly Thinking As Obamacare Goes Live

Employers face a multitude of challenges under the Affordable Care Act (ACA).  The ACA fundamentally changes the landscape for employer sponsored health insurance, forcing businesses to understand, navigate, and adapt to a quickly changing, highly complex, and still uncertain marketplace for health benefits.  To illustrate this, here are 10 pain points employers face in dealing with Obamacare:

1.  Explaining ACA to Employees, Dependents, and Retirees:
Effective internal communications is a strong indicator of a firm’s financial performance.  Indeed, internal communications is an essential ingredient for an engaged, productive workforce with low turnover.  This is all the more important under the dynamics and complexities of the ACA.

Every employer must be prepared to explain the ACA.  Like it or not, employees will look to their employer to explain the Affordable Care Act, even if the employer is not changing benefits.  Employees have friends and family who will need help understanding Obamacare.  The airwaves, mail boxes, and street corners will be packed with messaging from all angles and interests – some pro, some con, some partisan, some factually wrong, some even fraudulent, much of it confusing, and all of it mind numbingly complex.

This is an enormous new opportunity for employers to beef up their internal communications, demonstrate leadership, and support employees and their families.  This will also serve to boost a company’s external reputation since the help and information provided to employees and retirees will be shared by them with a much wider audience – their parents, children, spouses, siblings, friends, and neighbors.

However, when communicating and educating, given the dynamics and contentious nature of Obamacare, employers must also take into consideration the political leanings of most employees and other key stakeholders, such as the board of directors and state and local leaders.  This is not a factor in most employer benefit issues but the ACA is entirely different.

2.  Making Tough Decisions on Coverage and Benefits:
While making tough decisions on benefits is nothing new for employers, the ACA presents a new set of decision points.  Every business has their own starting point – what, if anything, they were already offering, who they were covering, and how much they were contributing financially to the cost of coverage.

For those employers that were not providing full-time workers with health coverage before, the ACA creates a new pay-or-play decision for those with more than 50 full-time workers.  For every employer, the ACA creates a strong financial incentive to either drop coverage, dial-down employer contributions, or move to defined contribution.

Since there will be a new, highly regulated, taxpayer subsidized marketplace individuals may use to buy coverage, there is a place for employees to go when and if an employer drops coverage.  For many employers, especially those with less than 500 employees and those with little or no pricing power, this fact will make the decision easier.

Also, by eliminating the federal deduction for employer cost of providing retiree drug coverage, many employers are expected to reduce retiree drug coverage, thereby shifting costs to taxpayers through the Medicare Part D prescription drug benefit.

3.  Making Decisions on Workforce and Hours:
The ACA employer mandate requires organizations with more than 50 full-time employees to provide health insurance coverage.  At a minimum, this must include all the essential health benefits, with employer picking up at least 60% of the premium.  If they don’t, they must pay a penalty to the IRS ($2,000 per worker; $3,000 if the employee receives federally subsidized coverage) starting in 2015.  Full-time is defined as over 30 hours a week.  To avoid paying for a particular employee’s coverage, the employer may reduce the hours of full-time or seasonal workers to the less considered part-time under the IRS’ Obamacare rules.  The bottom line is the ACA forces many employers – public and private – to think about the composition and hours of their workforce and balance the costs of coverage verses the costs of the penalty.

4.  Role as a Health Care Purchaser:
Related to these tough designs about health benefits and hours is a more strategic decision employers face – what is our role, if any, as a health care purchaser?  Should we buy coverage from risk-based health plans or be self-insured?  Should we use the new public Health Insurance Exchange / Marketplace (in most states, employers with 100 or fewer employees may do so for 2014; larger employers may do so starting in 2017)?  Should we buy coverage or manage a defined contribution model through one of the new private exchanges?  If we do decide to be (or remain) a health care purchaser, what should we do to leverage my buying power to improve the quality and efficiency of care my employees and their dependents receive from physicians, hospitals, and other providers?

5.  Higher Costs Plus ACA Taxes:
Whether you agree or disagree with the policies, the Affordable Care Act is collectivist in its political underpinnings.  Therefore, many aspects of ACA are redistributional by design – shifting costs from one group to another, thereby creating winners and losers among individuals and employers.  To adapt to life under Obamacare, employers must understand this and make decisions accordingly.

The ACA requires employers to provide a package of benefits which, in some respects, exceed the package offered by a typical employers.  Now there are positives to this – for example, children will get access to dental and vision coverage often now available under an employer-sponsored plan.  Preventive benefits are also being expanded significantly, with costs passed along to the premium payor.  Also, federal law requires that adult children up to age 26 be covered under their parent’s employer plan, with costs shifted to employer and the parent.  The new, radically different regulatory framework for health insurance – with features such as short waiting periods for new employees, consumer protections, and adjusted community rating – will benefit many consumers but they come at a cost that someone must pay.  Under adjusted community rating, for example, employers with a workforce disproportionately comprised of healthy, younger, and male employees will over time subsidize the cost of employers with workforces made up largely of women, older, or unhealthy staff.

Meanwhile, in addition to penalties under the employer mandate, the ACA imposes a wide range of new taxes and fees.  These include a tax on self-insured employers and health insurers (who will be passing on this cost to employers and to state Medicaid programs).  This will cost employers about $60.1 billion, with the funding used to finance a new reinsurance mechanism designed to help stabilize the health insurance market in 2014-2016.  There is also new 40 percent excise tax on so-called “Cadillac” health insurance plans.  The excise tax, which is expected to raise $32 billion once fully implemented starting in 2018, will tend to hit the more generous, low deductible health benefits often provided to senior managers and union members.  As noted above, the ACA eliminates the federal tax deduction for employer-provided retirement prescription drug coverage in coordination with Medicare Part D.  This will increase employer tax bills by about $4.5 billion.  There are also ACA taxes that will hit specific industries, most notably medical technology firms.

There are also the cost shifting implications of Obamacare that employers should understand.  State decisions on Medicaid expansion, whether through the ACA option or through s. 1115 waivers, will affect employer costs.  This is because, at least in theory, fewer uninsured would mean less uncompensated care costs and so less cost shifting to private insurance.  However, there are further complications.  The ACA is funded in part by significant Medicare and Medicaid cuts, including a huge reduction in what Medicaid and Medicaid pay hospitals to help cover uncompensated care.  Unless hospitals and other providers are able to lower their cost structures and become far more efficient, the ACA will likely shift some of these revenue losses to employers in the form of cost shifting.  Also, it’s virtually certain that Medicare and Medicaid rate increases will not keep up with provider cost increases, creating the prospect of cost shifting.  These are just some of the complex economic interactions created both by the ACA and transformation of the marketplace.

6.  Wellness Program Design, Incentives, and Penalties:
The Affordable Care Act significantly expands employer options for wellness programs.  This includes allowing employers to use incentives and penalties worth up to 50% of the premiums.  While wellness programs present opportunities to help employees improve their health status, prevent disease, and lower costs over time, they must be designed carefully and education, communication, and engagement to be successful.

7.  Ensuring Employee Access to Care Post-ACA:
If fully successful as designed, the ACA is expected to reduce the number of uninsured by up to 45% or so.  Fewer uninsured is certainly good but these newly insured individuals will seek care.  In fact, there is likely a pent-up demand for care, particularly by childless adults, that will increase overall use of physicians, clinics, hospitals, pharmacies, imaging centers, surgical centers, you name it.  The current system, especially primary care providers, lacks the capacity to take on the big influx of patients.  Delays in care are inevitable, although they will likely vary widely across the country.  Therefore, employers need to keep a close eye on how the ACA affects the ability of employees and their dependents to get appointments and receive care.

8.  Complying with New IRS Requirements:
Under the ACA, employers will be required to meet several new IRS requirements.  In addition the employer mandate and the complexities and decisions surrounding that, there are new reporting requirements.  Information regarding health coverage and spending must be reported to the IRS and to employees on the W-2.  Employers are also required to provide new benefit and ACA related notices to employees.  All this will require both systems changes and education of employees.

9.  Retaining Employees, Being Competitive in Labor Market:
Health benefit designs and how they are communicated to employees and potential employees will be even more important to a firm’s competitiveness in the post-ACA labor market.  What’s more, retention of your best employees may become harder, or at least trickier, under Obamacare.

Today, many employees are tied to a particular employer by health insurance coverage and the fear of not having coverage – for pre-existing conditions in the family, for example – should they take on a new job or move.  In several respects, by making it easier for individuals and families to obtain coverage and by requiring coverage of pre-existing conditions, Obamacare will make it easier for employees to jump ship to another firm and move elsewhere in the country.  This presents a turnover risk for employers while also making it easier to recruit workers around the country.

Therefore, employers must take care to assess the impact of ACA on retention, recruitment, and overall labor market competitiveness.

10.  Company Reputation as Decisions are Made:
Finally, there is how ACA related decisions a company makes as an employer affects its reputation and image among customers, business partners, investors, the community, and other stakeholders.  This must be considered both in absolute terms – how the company is perceived compared to its pre-ACA reputation – and in relative terms – how well the organization looks compared to its competitors.

Concluding Thoughts on Obamacare and Employers:
These are certainly not all the things employers must deal with as a result of the Affordable Care Act.  Also, while all of this is complex and highly situational, it is not entirely negative or positive for employers.  In developing an appropriate strategy, making key decisions, and communicating with employees and other stakeholders, the ACA must be dealt with as a whole and in its component parts within the context of an employer’s business, its relationship with employees, and its internal and external communications strategy.

Perhaps the greatest pain point for employers is the fact that ACA requires decision making in an environment that combines:

  • Uncertainty (something companies and investors abhor).
  • Complexity (something that increases risk).
  • High risk – financial, competitive, and reputational (something not appreciated by increasingly risk adverse business culture).
  • Government health programs and policy (something poorly understand by most private sector executives).
  • Partisan palaver (something that can be simply maddening for most human beings).

So hang on.  It’ll be a bumpy – and fascinating – ride.

Kip Piper, MA, FACHE is a top authority on Medicare, Medicaid, and health reform, and has advised top health care companies in the U.S. and Europe, Fortune 100 firms, federal officials, governors, members of Congress, foundations, and foreign leaders. This piece originally appeared in The Piper Report, the blog of his personal website.

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  4. A very comprehensive article and predominantly spot on. I do have a few alternative views.

    Employers Are Waiting to See If Public Exchanges Are Viable Alternatives – As a consultant who works with employers every day, the universe of employer sentiments is varied. The preponderance of public exchange options with be narrow network, lower level reimbursement plans that will not be like for like equivalents to employer sponsored open access PPO plans. With low individual mandate penalties and higher costs for younger exchange enrollees due to 3:1 community rate banding, there is concern that the first enrollees will select against the plans and not be offset by younger, healthier participants who will balk at the prospects of higher premiums.

    Self Insurance will be highly prevalent – the average employer can save as much as 6% by self funding their insured benefits. It is true they take on higher liability but the first 6% is essentially playing with house money because the employer will not pay taxes on insured benefits or insured PPACA taxes. Employers, especially those with young healthy employees, would be better served self insuring to avoid community rate cost old to young shifting and insured premium taxes. Younger consumers use fewer benefits. Average year over year medical trends will likely be low single digits — much lower than the likely community rated increases tendered the first year in the exchanges.

    Private Exchanges Will Gain Some Traction – The IBM decision is only for retiree medical benefits. Walgreens is the first major retailer to adopt a private exchange for actives. A private exchange is to health plans what the 401k was to defined benefit pension plans. A true private exchange pits multiple insurers against one another in a Cost Co type private market where individual enrollees are given an annual stipend to buy benefits. Each enrollee can choose between a range of plans and insurers. The premise is that insurers will cannibalize each others pricing — not unlike a retail store, and in doing so, drive pricing below what employer sponsored plans have been able to achieve as single purchasers. The current private exchange market is very limited in terms of employers choosing to force active employees to buy on a defined contribution basis. It is appealing for employers who want to cap their annual liabilities by merely cost shifting to employees. Employees tend to be less fussy about having less purchasing power if they have lots of health plan options to choose from — versus the usual two to three options available from their employer. There are risks. Many employees tend to buy down, purchasing high deductible plans to achieve more affordable monthly premiums. As premium dollars reduce with each cheap plan selection, there are fewer dollars to offset the cost of claimants. This was the demise of cafeteria plans in the 1990s when young, healthy employees opted for cheaper coverage and contributed fewer dollars to the employers plan. High utilizers continued to incur the same amount of claims but now had fewer plan dollars to offset losses. Loss ratios spiked and plan options disappeared because they became too expensive.

    Private exchanges are more a Trojan Horse opportunity for employers to cost shift to employees without overtly dropping coverage. Most of the initial private exchange players will be low wage workforces and low margin businesses — retail, hospitality and agriculture. White and gray collar firms will wait and see what choices prove best for their strategy.

    Expect Employers to Drop Spousal Coverage for Working Spouses – expect changes to plans with aggressive wellness, smoker premium differentials, a greater prevalence of high deductible plans, penalties for non compliance with biometric testing, carve outs of bundled high margin insurer programs like RX and a more aggressive enforcement of a bi-lateral contract of health: we provide your healthcare and you take personal responsibility to ensure you are not assymptomatically ill ( get an annual physical ), close gaps in care ( be compliant with chronic care treatment regimen ), improve consumerism with cost comparison tools for ambulatory services( don’t get a $3,000 MRI when you can get one for $800 ) and reduce access to outlier providers who charge higher costs for similar outcomes.

    It’s going to be a wild time as providers become insurers, insurers become providers, consulting firms begin to see products and a group purchasing market fragments into a variety of consumer based procurement models. There will be lots of misinformation. Employers will bear the brunt of the responsibility for educating an irritable, insured and uninsured employee population that does not like the idea of being the first generation to leave the safety of open access PPO, co-pay island to enter the primordial world of medical homes, captivated care and tightly managed medical oversight.

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  6. I was confused by your math skills until I researched and found that coyotes have only 4 toes on each foot http://library.thinkquest.org/05aug/00260/facts/pawprints.html
    Just kidding.

    Please note you are mistaken on the MLR for small group, it is 80%.

    Please also note that 1/3 of 13.2% to 11.4% equals 4.4% to 3.8% in commissions. I understand some carriers reduced commission percentages, but not as much as you are claiming. But it sounds good to the uninformed and better yet it is a great excuse or rationalization to the public for carriers to cut commissions. Let’s not worry about parallel cuts in service. Of course all of this PPACA business really requires no more service or expertise to explain or get problems resolved. Good plan.

  7. And a huge chunk of those administrative expenses, by some estimates around one-third, were paid out commissions to insurance brokers who placed their business with small employers and individuals. When ACA announced caps on MLR (e.g. gross margins) at 80% for individual and 85% for small group policies, brokers were the first casualties, seeing their fees cut by as much as half in the first renewal cycle.

  8. Ms. Cindy. Readers of your posts need to ask themselves what value they are getting from you fictional and erroneous statements.

    * From 2007 through 2010, the annual portion of total private health insurance company revenues paid out in healthcare benefits for customers ranged from 86.8% to 88.6%.[403] [404] The remainder went to profits, taxes on premiums, and administrative expenses such as employee salaries and benefits, office space and furniture, computers, utilities, property taxes and insurance, sales commissions, advertising, legal fees, and audit fees.[405] [406] [407]


    I guess your solution is to cut out the middleman and insert the government. Are we not men…DEVO!!!

  9. Thanks, Mr. Piper.

    I’m curious about the same issue as John above.

    I’m overgeneralizing, but getting health insurance through an employer is currently an expectation for many employees, and it’s in high demand (as evidenced by employers offering it). That’s in large part because the individual marketplace has been hostile to potentially unhealthy individuals, so ESI has been an insurance against the risk of needing to purchase individual marketplace insurance.

    But the exchanges change that, of course. I tend to expect ESI to be significantly reduced in five years, as the marketplace grows to understand and accept the exchanges. What do you think?

  10. Approximately 30 cents of every health care dollar handled through a private insurer are spent on “administrative costs.” That’s about twice as much as other comparable nations.

    Americans need to ask, what value are they and their health care providers getting for that 30%? Go look at the salaries of some of the CEOs of these massive health insurance companies.

    The ACA was an attempt to cast the first die of reform. But if we are going to ever do this right, we have to rid ourselves of Ezekiel Emanuel’s bizarre dream of universal, private insurance for all, and demand a system that erases the gap between service provider and patient.

    Cut out the middle man. Everyone else is doing it in every other industry.

  11. “I am curious about Mr. Piper’s view on whether the ACA might provoke many small employers to self-insure, which effectively removes from their shoulders many of the administrative and policy burdens of the ACA? Doing so would also limit their consumer protection obligations, which could leave employees at significant financial risk in the event that a business collapses.”

    Well, me too, Vik. If a company “self-insures” do they have to reserve against projected losses? How astute is the actuarial modeling? (probably sux) We just saw how that worked out in the financial sector, where the combination of leveraged ops and grossly inadequate reserves nearly blew up the entire world economy. I have to confess, I am not up on the regulations regarding employer “self insuring” of health (or any) risk. But, if it’s anything like other economic sectors (e.g., “unfunded liabilities”), it’s probably WAY under-regulated.

  12. On point number 10. Interesting. I agree. I think ..

    My guess is that a lot of people to waiting to see what kind of blowback there is for the companies that are taking the Walgreens/IBM road and moving their employees to the exchanges. Have you heard any initial reports on how those experiments are going?

  13. Interesting post. I am curious about Mr. Piper’s view on whether the ACA might provoke many small employers to self-insure, which effectively removes from their shoulders many of the administrative and policy burdens of the ACA? Doing so would also limit their consumer protection obligations, which could leave employees at significant financial risk in the event that a business collapses. The worry about small businesses (many of which have younger, healthier employees) doing this is such that there are moves afoot in both Congress and state legislatures to limit their ability to do so.

    Second, the ACA does indeed promote wellness, and as Al Lewis and I have written extensively here at THCB, the wellness provisions are based on a lie (the Safeway “success” fable). Conventional workplace wellness program are going to save no one any money anytime soon because they are a propellant for having people seek care they don’t need for ailments that they don’t have. The last thing that any employer should be doing is following the ACA’s wellness directives.