Critical Challenges Facing Employers Under Obamacare

As a result of Obamacare, employers must understand, navigate, and adapt to a quickly changing, highly complex, and still uncertain marketplace for health benefits.  Here are some of the critical challenges:

·         Helping Employees, Dependents, and Retirees Understand Obamacare:
Effective internal communications is an essential ingredient for an engaged, productive workforce with low turnover.  This is heightened under the dynamics and complexities of Obamacare. Unfortunately, employees will look to their employer to explain Obamacare (i.e., Affordable Care Act), even if the employer is not changing benefits.  Employees have friends and family who will need help understanding Obamacare.  The airwaves, mail boxes, and street corners will be packed with messaging from all angles and interests – some pro, some con, some partisan, some factually wrong, some even fraudulent, much of it confusing, and all of it mind numbingly complex. This represents an opportunity for employers to beef up their internal communications, demonstrate leadership, and support employees and their families.  This will also serve to boost a company’s external reputation since the help and information provided to employees and retirees will be shared by them with a much wider audience - their parents, children, spouses, siblings, friends, and neighbors. However, when communicating and educating, given the dynamics and contentious nature of Obamacare, employers must also take into consideration the political leanings of most employees and other key stakeholders, such as the board of directors and state and local leaders.  This is not a factor in most employer benefit issues, but Obamacare is entirely different.

·         Making New Decisions on Coverage and Benefits:
Obamacare creates a new set decisions.  Every business has their own starting point – what, if anything, they were already providing, whom they were covering, and how much they were paying for coverage.  For those employers that were not covering full-time workers before, Obamacare creates a new pay-or-play decision for those with more than 50 full-time workers.  For every employer, Obamacare includes strong financial incentives to drop coverage, gradually reduce employer contributions, or move to a defined contribution arrangement.  As far as dropping coverage and letting the employee sign up for coverage under an exchange, there are two problems – only 13 out of the 50 states currently have operating exchanges, which means the employee would have to sign up for the Federal exchange, or sign up for costly private insurance.  Obviously the former would be more attractive from a pricing standpoint, but the Federal website is loaded with enrollment glitches and now there are concerns about the security of the information being entered in to the system.  For employers with less than 500 employees and those with little or no pricing power, this tumultuous environment does not make the ‘should we drop coverage’ decision any easier – at least, not at this point.

·         Sizing Workforce and Hours: Obamacare’s employer mandate requires organizations with more than 50 full-time employees to provide health insurance coverage.  Full-time is defined as over 30 hours a week.  At a minimum, this must include all the essential health benefits, with the employer picking up at least 60% of the premium.  If they don’t, they must pay a penalty to the IRS ($2,000 per worker; $3,000 if the employee receives federally subsidized coverage) starting in 2015.  To avoid paying for a particular employee’s coverage, the employer may reduce the hours of full-time or seasonal workers.  This forces both public and private employers to think about the composition and hours of their workforce and balance the costs of coverage verses the costs of the penalty.

·         Getting Stuck with More: Obamacare requires employers to provide a package of benefits which exceed the packages offered by typical employers.  The good news is that children will get access to dental and vision coverage.  Preventive benefits are also being expanded significantly, with costs passed along to the premium payer.  Also, federal law requires that adult children up to age 26 be covered under their parent’s employer plan, with costs shifted to employer and the parent.  The new regulatory framework for health insurance – with features such as shorter waiting periods for new employees, consumer protections, and adjusted community rating – will benefit many consumers.  But the cost for the extra features will be borne by all.  Under adjusted community ratings, for example, employers with a workforce disproportionately comprised of healthy, younger, and male employees will over time subsidize the cost of employers with workforces made up largely of women, older, or unhealthy staff.

·         Don’t ‘read my lips’: Obamacare imposes a wide range of new taxes and fees.  These include a tax on self-insured employers and health insurers (who will be passing on this cost to employers and to state Medicaid programs).  This will cost employers about $60.1 billion, with the funding used to finance a new reinsurance mechanism designed to help stabilize the health insurance market in 2014-2016.  There is also new 40 percent excise tax on so-called “Cadillac” health insurance plans.  The excise tax, which is expected to raise $32 billion once fully implemented starting in 2018, is targeted at the more generous, low deductible health benefits often provided to senior managers and union members.  Obamacare also eliminates the federal tax deduction for employer-provided retirement prescription drug coverage in coordination with Medicare Part D.  This will increase employer tax bills by about $4.5 billion.  There are also Obamacare taxes that will hit specific industries, most notably medical technology firms.

But there’s more.  Impending State decisions on Medicaid expansion will affect employer costs.  Fewer uninsured would mean less uncompensated care costs; thus, there would be less cost shifting to private insurance.  However, there are further complications.  Obamacare is funded in part by significant Medicare and Medicaid cuts, including a huge reduction in what Medicaid and Medicaid pay hospitals to help cover uncompensated care.  Unless hospitals and other providers are able to lower their cost structures and realize new efficiencies, Obamacare will likely shift some of these revenue losses to employers in the form of cost shifting.  It’s a safe bet that Medicare and Medicaid rate increases will not keep pace with provider cost increases, which will lead to cost shifting. 

·         A Renewed Wellness Push: Obamacare grants new employer options for wellness programs.  This includes allowing employers to use incentives and penalties worth up to 50% of the premiums.  While wellness programs present opportunities to help employees improve their health status, prevent disease, and lower costs over time, they must be designed carefully and education, communication, and engagement to be successful.  Since more and more employers are using biometric testing and other invasive performance criteria, don’t be surprised if there is an employee pushback if this trend continues.

·         Conforming to New IRS Requirements: Employers will be required to meet new reporting requirements.  Information regarding health coverage and funding must be reported to the IRS and to employees on the W-2.  Employers are also required to provide new benefit notices to employees (e.g., SBC).  All this will require both systems changes and education of employees.

·         Keeping the Peace: Health benefit designs and how they are communicated to employees and potential employees will be even more important to a firm’s competitiveness in the ongoing Obamacare labor market. The fact is, keeping your top employees is trickier under Obamacare since the removal of the pre-existing condition (in those states that haven’t already done so) will ultimately make it easier for employees to jump to another firm and move elsewhere in the country.  This presents a turnover risk for employers.  On the other hand, it will make it easier to recruit workers around the country – increasing mobility both ways.  Therefore, it would be extremely helpful for employers to assess the impact of Obamacare on retention, recruitment, and overall labor market competitiveness.

In summary, Obamacare must be segmented and then addressed within the context of an employer’s business, its relationship with employees, and its internal and external communications strategy.