Will The Patient Protection and Affordable Care Act Cause Employers to Drop Employee Health Care Plans?

Friday, May, 11 2012

Employee health care is expensive to locate, implement, and maintain. The May 2012 edition of the Health Care Costs A Primer, published by The Henry J. Kaiser Family Foundation reported the total average employer and employee 2011 cost for family health care was over $15,000. The employer’s average portion of that cost is typically over $11,000 or about 70%. Under the Patient Protection and Affordable Care Act, the penalty for an employer not offering health care is $2,000 per employee per year. On the face it seems like a straight forward question and answer. An employer can pay $11,000 for health care or $2,000 in taxes and save $9,000.

Why wouldn’t an employer drop employee health care and just pay the additional tax? Employer sponsored health is a hassle. Employers under about 1,000 employees usually buy fully insured health care from a carrier such as Aetna, Blue Cross Blue Shield, CIGNA, Humana or UnitedHealthcare. Employees have to enroll, payroll deductions have to be taken, deductions have to be reconciled, and deductions have to be paid to the carrier. There are significant federal rules which govern per-tax health care deductions by which employers and employees must abide. Carriers generally only guarantee premiums for one policy year. At the end of the policy year, carriers review paid claims and premiums almost always go up. If the rates go up enough, the employer may “shop the market” for cheaper rates. Whereupon, the payroll; enrollment-deduction cycle starts all over.

Employers often must maintain staff with training in human resources, compensation, benefits, taxation, and/or payroll processing. There are reports which must be filed with the Internal Revenue Services. There is an alphabet soup of notices, SPDs, SMMs, SARs, and with health care reform SBCs. Fines and penalties for failure to provide notices, are often assessed on a per event per day basis. While the employer may outsource some or all of their filings and notice distributions, employers are still legally, financially, and in some cases personally liable for their failure to meet compliance requirements.

Faced with additional administrative burdens, it is conceivable that small businesses would elect to drop health care for their employees and pay the $2,000 tax. It is easy to see how an employer with 50 employees could decide to allow its employees to purchase private health through a state exchange, which will be operational in 2014, rather than spend over a half million dollars (50 X $11,000) to maintain health care. By paying the $2,000, the employer saves $450,000 that could be used to expand business, upgrade equipment, or even hire more employees.

Other than some altruistic reason, why might a small employer maintain health care coverage for their employees? Competition, even small businesses are sensitive to what their competitors are doing. Rather than chance losing their employees to a competitor who does offer health care, a small business may continue to offer health care. It will take several years after 2014 before a trend can be seen as to whether small businesses drop coverage and send their employees to a state exchange or retain employer sponsored health care.