Health Care Penalties Cheaper Than Cost of Coverage

Tuesday, May 18, 2010

The Health Care and Education Reconciliation Act of 2010 amended the Patient Protection and Affordable Care Act to increase the employer non-compliance penalty from $750 to $2,000 per employee. In addition, there is a $3,000 per employee penalty if the employer’s sponsored health care plan is deemed “unaffordable” under the Act. Thus, there is growing concern that at approximately 50% to 75% of the cost of individual health care, some employers will be tempted to drop group coverage and simply pay the fine. That being the case, large numbers of previously insured individuals would then be forced out of employer sponsored group plans and required to obtain coverage through the state Exchanges and possibly overwhelm the Exchanges with new members. This would result in two possible outcomes: 1) the Exchanges would be obligated to cover a potentially large and unanticipated number of members with almost certainly negative economic results; even with the collected penalties and premiums, 2) a de facto public plan would be created, which presumably was not the intent of the Act?

In an article posted on May 5, 2010 by the Cable News Network, www.cnnmoney.com, AT&T, Verizon, Caterpillar and Deere reportedly discussed the likelihood of discontinuing employee health care plans for their employees and merely paying the penalty. On April 27, 2010, Mercer, the international consulting firm reported that as many as “A third of employers may be penalized for health coverage deemed 'unaffordable' “. As reported by Rick Foster, the chief actuary of the Centers for Medicare and Medicaid Services (CMS) the new healthcare law could cost $828 billion over the ten years while saving while saving $577 billion. In the same report, the CMS raised warnings about the impact of healthcare reform and the possibility some employers would drop healthcare coverage.  In a May 16, 2010 article by Suzanne Hoholik of The Columbus Dispatch titled Federal Overhaul; Health Penalty Seen As Too Low, reports that the initial analysis by the Congressional Budget Office failed to consider large-scale reductions in the health care plans offered by employers. Faced with the proposition of increasing coverage offered or paying penalties, many organizations are likely to opt for the penalties.

While there are numerous reasons for employers to continue to offer health care based on the competitive nature of business, one comparable is the change over from defined benefit pension plans to defined contribution plans which occurred in the 1980’s and 1990’s. With the advent of defined contribution plans [401(k), 403(b), 457(h)] employers discovered such plans were less costly, easier to administer, and many employees preferred them. Therefore, as competitors switched from one plan type to another, employers could argue they were only matching the actions of the competitive marketplace. The same could be said of health care under the Act, as competitors drop coverage and pay the penalty, it then becomes easier for the next employer to do likewise. Over time, employer sponsored health care plans will go the way of traditional pension plans. Maybe not extinct, but certainly on the endangered list, … i.e., health care on life support.