Part II: “Reports of My Death Have Been Greatly Exaggerated”: Why Employer-sponsored Insurance Is Likely to Be Around for a Long Time
What major decisions do employers have to make today about health reform? It is tempting to sit back and wait in the face of the uncertainty of the Supreme Court ruling next summer and the Presidential election a few months later. But since I cannot find an expert I trust willing to handicap either of those events, it’s worth modeling the scenario that would most impact employers--- in which the Court rules in favor of reform and the Democrats keep the White House.
In this case, employers need to answer two questions:
#1: Should I Stay or Should I Go?
The health care law creates insurance exchanges that will be open to individuals and small employers in 2014 and to large employers in 2017. It also offers subsidies to make insurance more affordable for those accessing the exchanges. Finally, the statute establishes what’s called a play-or-pay for employers: either cover health benefits for your employees (play) or get fined for sending them to the exchanges (pay). The fine would be no greater than $3000 per employee per year.
For the many employers who already question why they are in the business of directly managing their health care spend, which is so far from their core commercial expertise, this set of events represents a potential “exit strategy”.
At first look, it seems like a no-brainer: if an employer is paying over $10K annually per employee for health care, the fine for not covering them is no greater than $3K, andthe government is going to subsidize individuals to make health insurance affordable, how difficult can the decision be to ‘exit’ the direct sponsorship of benefits and instead direct their employees to the exchanges?
The answer is: more difficult than you think. Remember, in the U.S. health care system, nothing is ever as clear as it seems. Two factors make the decision far from a no-brainer:First: the loss of the tax deductibility matters a lot. It is only when employees are making less than $45K that the ‘no brainer’ of shifting employees to the health care exchanges makes economic sense.
Second: The “catch” in the law is that employers cannot send just the lower paid wage bands to the health exchanges; if one employee goes, then all have to go, including the highly paid. While it is not clear yet what the offerings in the exchanges will look like, I was a member of the National Academy of Sciences committee that made non-binding recommendations to the Secretary of HHS about what the essential benefit design should look like and our conclusion was that the package should resemble what a small employer---and not large employers like the members of Equity Healthcare--- offers.
Bottom line---the package will not be as rich as what employees currently have and I find it unlikely that companies will be willing to decrease their coverage according to the government’s design.
#2: If I Stay, How Do I Control Costs?
The above reasoning leads me to conclude that employers are likely to continue to sponsor health benefits. Which leads back to the critical question of how to control costs. There is no simple answer, as we all know. But experts agree that at least 30% of what employers pay is unnecessary: it’s for services either not backed by scientific evidence or as a result of inefficiencies in the health system. And since employers are good at reducing variation and driving out waste in all other parts of their business, I am optimistic that there is much more that we can do.
While what works and doesn’t work in managing these unnecessary costs will be discussed in future postings, it is clear that CEOs have to make three big strategic decisions to be seriously in the game:
- C-suite ownership of the cost challenge---the CFO has to be held accountable
- Managing health costs has to be seen as a business strategy and not just a part of compensation
- Health cost management has to be approached with the same rigor and resources as all other major supply chain expenses