Healthcare Decisions on Hold

The following is derived from an article by Kathleen Hoffelder and published on September 12, 2012.

Despite new guidance from federal agencies, employers face unknowns in deciding their next moves on their employee health-benefit programs. Business leaders waited anxiously this past summer for the Supreme Court’s ruling on the Affordable Care Act (ACA). But months after the law was ruled constitutional, uncertainty still reigns. Companies are still trying to figure what the costs of complying with the ACA will be. Some are studying whether it makes sense to discontinue health benefits and instead pay a penalty.

The law’s “employer shared responsibility” provisions, scheduled to take effect in 2014, include a penalty for companies that do not provide “minimum essential coverage,” to be collected via corporate tax returns. A “large” employer, generally defined in the law as having more than 50 employees, is subject to the penalty if even one full-time employee qualifies for “premium assistance tax credit” (designed to help low- and middle-income individuals and families purchase health insurance). In most cases, the penalty will be $2,000 per year per full-time employee.

The Internal Revenue Service tried to ease some concerns over shared responsibility earlier this month by issuing a safe-harbor notice that should help employers figure out which workers are deemed full-time, and thereby help some to avoid the shared responsibility penalty. Along with the Health and Human Services Department and the Labor Department, the IRS also recently provided guidance about the ACA-mandated maximum 90-day waiting period between new employees’ start date and when their health benefits kick in, also to take effect in 2014. Many employers currently use a longer waiting period, often six months.

Some observers say more clarity is still needed, however. The general air of uncertainty around the ACA is provoking much discussion among business leaders these days. Until fairly recently, most discussions about a company response to the ACA took place at the human-resources level, but now CFOs and their key reports are getting more involved, he notes.

Still, the higher level of discussion on healthcare decisions has not generated much action. Many business leaders are waiting to determine if it makes sense to abandon health care and pay the penalty. From a purely financial standpoint, based on current information doing so could be a wise choice for many employers that offer health benefits, because their per-employee health-care costs are typically several times greater than $2,000 per year, often $10,000 to $15,000. Such a decision will need to consider recruiting and retention concerns.

Some companies plan to structure employee contributions so that low-wage workers would be better off receiving the premium subsidy the federal government will offer for purchasing insurance through the planned state insurance exchanges, which under the ACA must be operational by 2014. As such, a two-tiered approach could develop in which a company could offer an employer-sponsored plan to certain employees while those ineligible would be sent to the exchanges. The company would still be subject to the penalty, but the math could work out to where they feel comfortable with this arrangement.

It is generally believed that many states are unlikely to meet the 2014 time line for exchanges to be operational, but some states are well along the path to meeting the deadline. Among the most advanced is Connecticut, which created its exchange in 2011 and is moving closer to implementation. Other leaders include Maryland, Nevada, Rhode Island, Vermont, and Washington.

Aside from just health-care-exchange decisions, many companies will have to take a look at all facets of their operations because of the cost impacts of the ACA. Pharmaceutical firms, for example, will likely be less dependent on size and scale of their workforce and become more focused on innovation in their business lines. That’s because the costs of ACA compliance will force them to be more competitive.

Other industries will take some direct hits. Medical-device firms, for one, will be hit hard by an ACA provision called the Medical Device Excise Tax. Device manufacturers and importers will have to pay the new tax on their sales starting in 2013.

The ACA is just another factor that adds uncertainties to business leaders in a difficult economic environment. The actual outcome will most likely be decided by the upcoming presidential elections.  Business leaders will need to determine fairly quickly the impact on their company’s operating cash flows and valuations should the ACA remain intact. A Harvest CFO can assist business leaders to determine impacts of the ACA and determine alternative actions to mitigate any potential negative impacts.

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