Thursday, March 25, 2010

An Overview of Health Care Reform and Its Affects

(I promise, if you can make it through the fist section, the second will scare your hair straight.)

As everyone in America now knows, Congress passed and the President signed the PPACA (Patient Protection and Affordable Care Act) late Sunday afternoon. Commonly known as Health Care Reform, the legislation is far reaching and touches almost every aspect of your life and every aspect of your employer’s business.

This post will consist of two parts: 1. What is in the legislation and 2. What is the most likely outcome of the bill. After the first section, I think you’ll see the second is obvious.

What’s in the Legislation:
The following information is based upon reports by SHRM (Society for Human Resource Managers) and The World at Work (A group that focuses on Human Resource issues especially compensation studies etc).

In full disclosure SHRM lobbied congress not to pass the law. Since the group educates millions of HR professionals around the globe, however, on HR law, I believe you can trust their analysis to be impartial. I have no idea what stance The World at Work took before the passing of the legislation.

1. Technically speaking there is no provision that mandates employers provide health insurance for their employees, but effectively the bill accomplishes that very thing. Employers with 50 or more full time employees will, be assessed an additional “penalty” as part of their taxes for failure to provide health insurance to employees. The company will be required to pay the lesser of $750 per employee for every employee in the company or $3,000 per employee on the public exchange (described below). Waiting periods for new employees can be a maximum of 90 days long and employers must pay a penalty during their waiting period. Companies must disclose the value of each employee’s health plan on their W-2 form.
2. Insurance companies pay an excise tax of up to 40% on high end plans costing more than $8,500 for an individual and $23,000 for families.
3. Employees making more than $200,000 ($250,000 per family), will have their FICA taxes increased by 0.9%. (The employee’s portion is increased by that amount not the employer’s.)
4. All legal US residents will be required to purchase health insurance (exceptions are available for financial hardship and religious reasons). Individuals not purchasing insurance will be penalized up to 2% of their income or $750 multiplied by the number of years (up to three years) they haven’t purchased insurance (whichever is greater) as part of their taxes (adjusted for inflation each year). If their employer doesn’t offer coverage or if the coverage offered is deemed too expensive, the employee may purchase coverage through an exchange. These exchanges are insurance companies that take otherwise uninsured individuals. States may deem which companies “may” participate in the exchange. (As of now my understanding is that individuals eligible for participation in an exchange may purchase that insurance at any time as opposed to waiting for an annual “open enrollment”.)
5. Insurance companies can no longer deny coverage of preexisting conditions. The amount that can put in an FSA (Flex Spending Account – also sometimes called a Cafeteria plan) has been reduced to $2,500. FSA and HSA (Health Savings Account) money can now only be used for prescription medications. The penalty for using HSA money for non-approved items is increased to 20%.
6. Employers must offer “Free Choice Vouchers” to employees to purchase insurance if the insurance offered by the employer amounts to more than 8% of the employee’s income (unless their income is more than 400% of the federal poverty level).
7. Anybody who worked at least 1,000 hours (less than 20 hours a week) for a company during the previous plan year, must be eligible for benefits.
8. Maximum lifetime limit on employee benefits are banned.

Part Two: The Results
Let’s put a scenario together for you. The only reason this scenario wouldn’t be the norm for employers is if they are nice and want to prevent employees from being placed on the public exchanges and are willing to pay dearly for it.

In 2014 when the exchanges begins, your finance and human resources department do an analysis. They find that for the average employee, 10% of their wages are health benefit related (that’s a moderate number, many larger firms’ percentages are higher). Let’s then assume that the average employee at that company makes $50,000 annually. That means, on average, the company is paying $5,000 per employee for benefits. Let’s also assume that the company has 200 employees.

For this employer, that means they are paying $1,000,000 annually in benefits (taxes and other benefits raise the amount). In this company that also means that the average employee is eligible for a voucher and to participate in a public exchange (the federal poverty level is somewhere in the mid twenties so for times that makes it between $80k and $100k annually). Let’s say then that only about half of the employees eligible for the public exchange decide to accept coverage outside the employer’s plan. That would mean that somewhere around 55 to 60 employees would be on the plan. The company’s expenses decrease from $1million to $890,000 (55 employees at $3,000, 145 employees at $5,000). At a very minimum the company has an incentive to not increase its “average” worker’s salary. (The math works just as dramatically if your average benefit expense is below $3,000 per employee.)

At this point the company has the option of not offering any benefits to employees and paying the $750 per person penalty for everyone in the company. This makes their total penalty $150,000. As a business owner in a down economy, which do you choose?

So now that everybody in the company has been turned out to the exchange to buy coverage, they also start to evaluate their costs. Let’s assume at our fictitious company that you’re paying as little as $250 a month. Let’s assume that the exchange price you get is just as cheap as the group coverage you were paying for at your employer. That makes your annual bill for insurance $3,000 a year. The maximum tax penalty you can pay is 2% of your income. That means, unless you make more than $150,000 a year you save money by paying the fee penalty.

Now the obvious objection here is; “What if I get sick?” Don’t worry, you can sign up after you’re sick for coverage under the exchange. The insurer that is next in line to take you can not disqualify you because you’re sick, and there’s no maximum amount where they can stop paying the bill.

But wont the insurance companies dissuade people from doing that by making the premium so high for people that wait until they’re sick to sign up that nobody will be able to afford it? Yes. That’s what they’ll try to do. But there are provisions in the bill which prohibit premium discrimination based on health condition except for a few things like tobacco use etc. That means that their rates will have to be at least in the ball park of group plans around the country. Also remember that somebody has to insure you. In the end, you’ll end up getting insurance. (The people that don’t, become the uninsured for tomorrow’s healthcare reform.)

Now look at the insurance companies (those fat cats living off the back of hardworking people). They just lost guaranteed premium from our company. They no longer have maximums or preexisting condition limitations on the companies still offering insurance to their employees, so they have to raise their premiums to cover the additional risk. This further increases the incentive for more companies to take the tax penalty.

At the same time, they are now being asked to take on some of our employees that waited to get coverage until they were sick. They lose money on at least a large share of these individuals (who again drop their insurance coverage as soon as they are healthy again). So they must raise their rates yet again to cover the additional shortfalls.

If you’re an investor at one of these companies, don’t you eventually sell your stock? Don’t you eventually get out? This means that insurance stock prices plummet. At first companies merge to try and win out by eliminating redundancies. When the loses keep coming they go out of business.

At a minimum this means that our “average employee” now has fewer insurers to choose from even in the exchanges. At the worst it means there are no insurance companies left.

When this is complete, the same people that passed this legislation can say, “See, we told you that this half measure wouldn’t work. We need to nationalize healthcare before it goes away.”

That’s where we’re headed. Any questions?

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