Public Health Care Could Be Saddled with Sick Employees

Friday, December 02, 2011

It goes without saying that employers are struggling with the high cost of health care for their employees and covered dependents.  Every open enrollment season brings a new round of cost shifting, plan changes, and strategies designed to control utilization and lower expenses, for both employers and employees.  Yet, year after year, the total cost of health care plans continues to climb at rates of several multiples of the current Consumer Price Index, eating deeper into most organizations’ and their employees’ earnings.

With the passage of the Patient Protection and Affordable Care Act (PPACA), some have speculated that employers would exit the health care market entirely or attempt to unload their sickest employees and dependents onto public health care plans.  If the later were to take place, over time these public plans would experience a death spiral of escalating costs that would make them all but unaffordable, even by the deep pockets of a federal government.

Amy Monahan and Daniel Schwarcz weave a Gordian Knot of the pros and cons as well as various scenarios of how employers might undertake the spin-off of their highest risk employees by shifting them to government sponsored exchange-based health care plans. Writing in the March 2011 Virginia Law Review, Monahan and Schwarcz construct a roadmap of how employers might accomplish such an achievement they claim is permissible under the PPACA and possible strategies which could avert or dampen such efforts. The authors’ premise, other than subverting the spirit of the law, is that such actions would benefit employers, especially larger employers, by lowering their overall health care costs.

Fundamental to health care utilization is the Pareto Principle or more commonly known as the 80-20 Rule, which simply states that 80% of a health care plan’s expenses are incurred by 20% of the participants.  While not totally restricted to health care plans, the Pareto Principle holds true that the overwhelming majority of costs are incurred by the sickest, i.e., the highest risk members within the plan.  Thus, if those high-risk, high-cost employees and their dependents were to be removed from the employer’s plan onto a government sponsored exchange-based health care plan, an employer could see a significant reduction in their ongoing health care cost.  The counter-point would be increased health care expenses and consequentially higher premiums for all exchange-based members, as well as the potential that exchange-based health care plans would not be self-sustaining.  There are numerous regulatory and systemic barriers to prevent employers from merely “dumping” high-risk employees onto exchange-based health care plans; only time will tell if large numbers of employers actually take such actions.

One possible model might shed some light on the prospective future of employer sponsored health care plans is the fate of the traditional defined benefit pension plan. With the large scale introduction of defined contribution plans beginning in the 1980’s, many employers eliminated, scaled back or redefined their defined benefit pension plans.  While this migration away from defined benefit to defined contribution plans has occurred over two decades and weathered several court tests, it has left the defined contribution plan as the major source of retirement income for most Americans.  Since employers are highly sensive to competitive pressures, including compensation and benefit practices, many employers simply followed their peers away from defined benefit to defined contribution plans.   Such could be the future of employer sponsored health care plans.