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Mass. Healthcare Reform Augurs Badly for Obamacare

A new study of the healthcare reform enacted by Massachusetts and its then Gov. Mitt Romney five years ago offers an ominous warning about the likely effects of Obamacare on the nation as a whole.

Researchers at the Beacon Hill Institute (BHI) at Suffolk University in Boston found that the Bay State healthcare reform plan has led to increased healthcare expenditures and private health insurance costs, as well as additional payments for Medicare and Medicaid, for a total of $8.5 billion in new outlays.

In 2006, Massachusetts enacted healthcare reform legislation that promised to extend healthcare coverage to all citizens while significantly lowering costs. The law imposes mandates on residents to obtain health insurance and on employers to provide it if they have 11 or more employees.

It also expands Medicaid coverage, establishes a health insurance subsidy program, and creates an insurance exchange that helps those who are ineligible for Medicaid buy competitively priced health plans.

The BHI report states: “Now that the law has been in effect for more than five years, we can begin to assess its impact on the state of Massachusetts.”

Among the findings:

• State healthcare expenditures have risen by $414 million over the five-year period.

• Private health insurance costs have risen by $4.31 billion.

• The federal government has spent an additional $2.41 billion on Medicaid in Massachusetts.

• Medicare expenditures increased by $1.42 billion.

The total cumulative cost over the period is just over $8.5 billion.

But the state has been able to shift the majority of the costs to the federal government, which continues to absorb a significant part of the cost of healthcare reform through enhanced Medicaid payments and the Medicare program — meaning Americans outside Massachusetts are helping to pay the bills for the healthcare plan.

In analyzing the study’s results, the researchers observe: “Cost‐containment is often a major goal of health reform plans. However, this particular healthcare reform legislation did not provide an effective means for containing costs.

“The promise of cost‐containment rested on a vague hope that the newly insured would seek preventive care, access their primary care physicians earlier in their illness and avoid costly emergency room visits. Yet the number of emergency room visits rose from 2.351 million in 2006 to 2.521 million in 2009, or by 7.2 percent over the period. The total cost of emergency visits has soared by 36 percent over the period, or by $943 million.”

The large number of newly insured residents in the state has increased demands on the primary care system, forcing patients to visit emergency rooms at a rate significantly higher than expected.

The BHI report also states that “by increasing demand for healthcare services without an equal increase in their supply, the universal healthcare law guaranteed that the price of healthcare services and health insurance would increase.”

The researchers point out that the Patient Protection and Affordable Care Act signed by President Barack Obama in March 2010 is “essentially identical” to the Massachusetts law.

Obama claimed the law will lower healthcare costs. But the researchers conclude: “If the federal law is modeled after the Massachusetts law, it stands to reason that Massachusetts’ experience with healthcare reform provides an idea of what is in store for the country under the federal law.”


Healthcare law could leave families with high insurance costs

By Julian Pecquet – 07/21/11 12:43 PM ET

A major provision of the healthcare reform law designed to prevent businesses from dropping coverage for their workers could inadvertently leave families without access to subsidized health insurance.

The problem is a huge headache for the Obama administration and congressional Democrats, because it could leave families unable to buy affordable health insurance when the healthcare law requires that everyone be insured starting in 2014.

Some of the administration’s closest allies on healthcare reform warn this situation could dramatically undercut support for the law, which already is unpopular with many voters and contributed to Democrats losing the House in the 2010 midterm elections.

“It’s going to be a massive problem if it comes out that families have to buy really expensive employer-based coverage,” said Jocelyn Guyer, deputy executive director at Georgetown University’s Center for Children and Families.

“If they don’t fix this — and by ‘they’ I mean either the administration or Congress — we’re going to have middle-class families extremely unhappy with [healthcare] reform in 2014, because they’ll basically be facing financial penalties for not buying coverage when they don’t have access to any affordable options.”

At issue is a so-called “firewall” in the law that denies subsidies to workers whose employers offer quality, affordable coverage.

The firewall applies to plans with premiums that cost less than 9.5 percent of a worker’s income. If a worker has to dole out more than that amount to buy coverage, the employer coverage is considered unaffordable and the worker is eligible for subsidies to buy coverage on the new exchanges.

Initially, advocates thought the threshold also applied to family coverage. If premium costs paid to cover a worker’s family cost 20 percent of a worker’s income, for example, the worker and his or her family should be eligible for subsidies.

But in calculating the bill’s cost last year, Congress’s Joint Committee on Taxation (JCT) took the law to mean that employers and their families aren’t eligible for subsidies as long as the individual plan is affordable — regardless of the price of the family plan.

This means the costs to an employee for covering his or her family could be too high to afford for many working families.

“If you’ve got employer-based coverage that’s affordable for the employee only,” Guyer said, “the family is expected to take the employer coverage even if it“s totally unaffordable and no one in the family is eligible for the exchange subsidies.”

The glitch is causing heartburn for advocates who worry that it could leave thousands of children and spouses uninsured and subject to penalties for not having insurance.

“The JCT read of the language is disturbing and we hope the administration doesn’t read the language that way,” said Bruce Lesley, president of the children’s advocacy group First Focus. “It would put dependent coverage, children and spouses at grave risk.”

The Obama administration is expected to clarify shortly — through Treasury Department regulations — who’s eligible for subsidies.

An administration official told The Hill, “These matters will be considered in future regulations.”

Healthcare reform proponents say they’ve quietly been talking to the administration for months about the issue.

“We’ve talked to them — a lot — about this,” said Judith Solomon, vice president for health policy at the liberal Center on Budget and Policy Priorities. “We’ve made our views known.”

While advocates say changing the policy is a no-brainer, the costs could be a hurdle.

One new study, by the Employment Policies Institute, estimates that changing the policy could cost taxpayers $50 billion per year. But if the administration leaves the policy as is, “millions of families will be stuck in a no-man’s-land without affordable coverage through their employer or the exchange.”

“Whichever interpretation holds,” the study concludes, “the consequences are significant.”

Others dispute those figures. They argue that employers will offer affordable coverage for whole families and point out that many children who aren’t covered by employer family plans are eligible for Medicaid or the Children’s Health Insurance Program.

“It’s really not clear to me how much of an impact it would be [to change the policy],” Solomon said. The $50 billion-per-year figure “seems very high to me.”



June 20: Reports from consulting firms don’t normally make national news.

Then again, most such reports don’t predict the downfall of the American health care system.

Earlier this month, the consulting group McKinsey projected that tens of millions of Americans could find themselves without the health coverage they now get through their employers.

McKinsey is only the latest organization to make a mockery of President Obama’s solemn promise to Americans that “if you like your health care plan, you will be able to keep your health care plan. Period.”

Make no mistake: ObamaCare is behind many employers’ plans to drop their health insurance. At the beginning of the year, McKinsey surveyed more than 1,300 employers from a variety of industries about the effects of the president’s health law. They found that ObamaCare was primed to blow up much of the market for employer-sponsored health insurance.

According to the survey, almost a third of employers say they will “definitely or probably” put a halt to their health coverage by 2014.

Among employers that know the most about Obama’s health law, the number is even higher. More than 60 percent say that they will pursue alternatives to conventional job-based coverage.

McKinsey isn’t the first to sound the death knell of employer-sponsored insurance. The Congressional Budget Office Congress’s official economic scorekeeper estimated that four million individuals would lose their employer-provided health insurance over the next decade thanks to ObamaCare.

And last year, the Urban Institute, a center-left think tank, released a report saying that “droves of employees potentially tens of millions are likely to shift out of employer-provided insurance” because of ObamaCare.

With 156 million Americans currently enrolled in employer-sponsored health insurance, according to the Employee Benefit Research Institute, a mass exodus from employer-coverage would represent a sea change in American health care.

Why are so many employers who currently offer health insurance eyeing the exits? The law makes coverage prohibitively expensive. Indeed, McKinsey says that dropping coverage “will make sense for many companies.”

McKinsey reports that “at least 30 percent” of employers would actually see economic gains from ceasing coverage and that’s even if they provided employees with higher salaries or additional benefits to compensate for the loss.

As the study explains, ObamaCare “imposes several new requirements on employer benefits,” including mandates to cover an employee’s dependents up to age 26 and eliminating caps on annual and lifetime reimbursement limits.

Each of these changes will add to the cost of insurance. Plans that offer the most coverage, meanwhile, will be subject to new taxes. The law attempts to discourage employers from dropping coverage by forcing those who do to pay a penalty. But given ObamaCare’s expensive new mandates, many will find it cheaper to pay the $2,000 per-employee fine and rid themselves of the burden of providing insurance. But that burden won’t vanish entirely. Instead, it will fall to taxpayers.

Most employees who lose their employer-sponsored coverage will be dumped into the new government-run health insurance “exchanges” created for individuals and small businesses by ObamaCare.

These exchanges will offer taxpayer-funded subsidies to families earning up to 400 percent of the federal poverty line currently almost $90,000 a year for a family of four. More people losing their employer-sponsored insurance means more people in the exchanges, and more people in the exchanges means more subsidies.
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New York Times –

June 21: After nearly two weeks of widespread queries and criticisms, McKinsey & Company, the management consulting firm, posted on Monday the questionnaire and methodology of an online survey it had released that was denounced by the White House and others for contending that nearly a third of employers would definitely or probably drop coverage for employees when provisions of the health care law took effect in 2014.

The White House responded on Monday night. “As we learn more, it’s become clear that this one flawed study from McKinsey is truly an outlier,” Nancy-Ann DeParle, an assistant to the president and deputy chief of staff, said in a blog post.

The White House initially pointed to forecasts by the Congressional Budget Office and other experts whose estimates were much smaller in terms of whether employees would lose some or all coverage. For example, an Urban Institute study to be released on Tuesday suggests that employees in small businesses may receive more coverage, not less.

McKinsey also came under fire for not providing access to the survey’s authors, and for not publishing the questions, the types of employers taking part or the survey methodology.

In posting “details regarding the survey” on its Web site Monday, McKinsey acknowledged that its survey was “not comparable” to the studies by the budget office, Urban Institute or others using economic modeling.

Rather, it surveyed business owners using an online panel. McKinsey said it paid for the survey by Ipsos, a French marketing firm, “to capture the attitudes of employers,” large and small.

In addition, McKinsey seemed to be trying to address the criticisms by the White House and others, asserting that its report was not intended to be predictive.

McKinsey’s explanations did not satisfy Senator Max Baucus, chairman of the Senate Finance Committee, and several from the House who have inquired.

“This report is filled with cherry-picked facts and slanted questions,” he said in a statement. “It did not provide employers with enough information for them to make honest choices and fair evaluations. Rather than correct the major deficiencies in their report, McKinsey has chosen to again stand by their faulty analysis and misguided conclusions.”

Several other reports have focused on small businesses, the group having the hardest time dealing with rising medical costs.

The latest, issued on Tuesday, is by the Urban Institute, a Washington research center. Its study, based on analysis of Census Bureau and Department of Health and Human Services surveys, estimates that employer coverage will increase modestly for workers and their dependents in firms with 50 or fewer employees.

By contrast, Douglas Holtz-Eakin, who was an economic and health policy adviser to Senator John McCain’s presidential campaign, predicts that more than 35 million people will lose employer insurance. “We figured they would all end up in the exchanges,” the state-sponsored insurance agencies to be set up under the new law, he said in a telephone interview.

Over all, including all employers, analyses by a number of widely cited researchers predicted little or no change in employer-sponsored insurance in 2014. They include the Congressional Budget Office, RAND, Lewin Associates and Mercer.

John Arensmeyer, a small business advocate who supports the law, the Affordable Care Act, calls it “a big step in the right direction.” But he said a poll by his group, Small Business Majority, found that more than half of respondents did not know what was in the law.

“Once they learn about tax credits and the exchanges option, they are more inclined to participate,” Mr. Arensmeyer said.

Linda J. Blumberg, an Urban Institute researcher, said, “Contrary to a lot of statements that have been made in the press and elsewhere, the impact of the law on small employers is going to be positive in great degree.”

Mr. Holtz-Eakin headed a group of 105 economists who filed a brief supporting the lawsuit by Republican officials from 26 states seeking to have the Affordable Care Act overturned.

But Dr. Blumberg said Virginia and other states with Republican governors were working to set up the exchanges. Republicans prefer state exchanges to the probability of a federal version if they do not act.

Four states, West Virginia, Maryland, California and Colorado, recently passed laws to establish exchanges, and similar bills have been adopted by one house in a number of other states, she said. “There is a division between what the attorneys general are doing and what governors’ offices are doing,” she said.

Gerry Harkins, who owns a small construction company in Atlanta and is a spokesman for the National Federation of Independent Business, said he would try to “figure out a way to game the system.”

“This whole plan is really slanted toward large employers,” he said. Firms with 10 and fewer workers also should benefit. “The burden falls in the middle.” His company, Southern Pan Services, had 1,200 employees before the economic crisis. It now has “under 100,” he said.

He is considering splitting his company into two units to get under 50 employees each and reduce the $3,000 penalty, for each worker, he will face for his current health plan, which is entirely paid for by employees. Joseph R. Antos, a health policy expert at the American Enterprise Institute, criticizes the health law. He says it has “too much central direction and not enough appreciation for our fiscal situation.”

But Mr. Antos said large employers, who cover the majority of American workers, would probably wait several years after 2014 to see how the new system worked before deciding what to do. Those with union contracts will take much longer, he said.

He said the many variables in the law made predictions difficult. “Whatever you assume, is what you get out of it,” he said.


1 in 3 Employers Will Drop Health Benefits After ObamaCare Kicks In, Survey Finds

Thirty percent of employers will definitely or probably stop offering health benefits to their employees once the main provisions of President Obama’s federal health care law go into effect in 2014, a new survey finds.

The research published in the McKinsey Quarterly found that the number rises to 50 percent among employers who are highly aware of the health care law.

McKinsey and Company, which identifies itself as a management consultant that aims to help businesses run more productively and competitively, conducted the survey of more than 1,300 employers earlier this year. It said the survey spanned industries, geographies and employer sizes.

But the White House pushed back against the report.

“This report is at odds with the experts from the Congressional Budget Office, the Rand Corporation, the Urban Institute and history,” a senior administration official told Fox News. “History has shown that reform motivates more businesses to offer insurance.”

“Health reform in Massachusetts uses a similar structure, with an exchange, a personal responsibility requirement and an employer responsibility requirement,” the official said. “And the number of individuals with employer-sponsored insurance in Massachusetts has increased.”

According to the survey, at least 30 percent of employers would reap financial gain from dropping coverage even if they compensated employees for the change through other benefit offerings or higher salaries.

The research notes among the new provisions that could spur employers to drop coverage is a requirement of all employers with more than 50 employees to offer health benefits to every full-timer or pay a penalty of $2,000 per worker. Those benefits must also be equal between highly compensated executives and hourly employees – requirements that will increase medical costs for many companies.

The findings are distinct from a Congressional Budget Office estimate that only about 7 percent of employees who currently get health coverage through their jobs would have to switch to subsidized-exchange polices in 2014.

The group said its variance is so wide because shifting away from employer-sponsored insurance “will be economically rational” given the “law’s incentives.” The law requires employers to make insurance available to low-income or part-time employees that may not otherwise be covered.

The research found that contrary to what many employers feared, most employees — more than 85 percent — would stay at jobs that no longer offered health benefits. But 60 percent of employees would expect higher compensation.


Mckinsey & Company Survey – How US health care reform will affect employee benefits

The shift away from employer-provided health insurance will be vastly greater than expected and will make sense for many companies and lower-income workers alike.

JUNE 2011 • Shubham Singhal, Jeris Stueland, and Drew Ungerman  – McKinsey & Company

Source: Healthcare Payor and Provider Practice

US health care reform sets in motion the largest change in employer-provided health benefits in the post–World War II era. While the pace and timing are difficult to predict, McKinsey research points to a radical restructuring of employer-sponsored health benefits following the 2010 passage of the Affordable Care Act.

Many of the law’s relevant provisions take effect in 2014. Our research suggests that when employers become more aware of the new economic and social incentives embedded in the law and of the option to restructure benefits beyond dropping or keeping them, many will make dramatic changes. The Congressional Budget Office has estimated that only about 7 percent of employees currently covered by employer-sponsored insurance (ESI) will have to switch to subsidized-exchange policies in 2014. However, our early-2011 survey of more than 1,300 employers across industries, geographies, and employer sizes, as well as other proprietary research, found that reform will provoke a much greater response.


  • Overall, 30 percent of employers will definitely or probably stop offering ESI in the years after 2014.


  • Among employers with a high awareness of reform, this proportion increases to more than 50 percent, and upward of 60 percent will pursue some alternative to traditional ESI.


  • At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.


  • Contrary to what many employers assume, more than 85 percent of employees would remain at their jobs even if their employer stopped offering ESI, although about 60 percent would expect increased compensation.

In this new world, employers must quickly examine the implications of health care reform on their benefit and workforce strategies, as well as the opportunities and risks that reform generates. Of course, the type and extent of the changes employers make will vary by industry, collective-bargaining agreements, and other constraints. Most employers, however, will find value-creating options between the extremes of completely dropping employee health coverage and making no changes to the current offering. Even employers that intend to provide benefits similar to those they currently offer can take no-regrets moves, like tailoring plans to maximize what their employees will value most about ESI after 2014. Employers pursuing more radical changes will have to rethink benefit packages for higher-income employees.

And all employers must continue to keep in mind their employees’ health and wellness needs, even as insurance coverage levels evolve. To serve employers, insurers must retool their business models to provide more consultative support during the transition and develop innovative approaches to support employers’ new benefit strategies (see sidebar “Implications for health insurers”). For employers and insurers, success after 2014 will require a better understanding of employee and employer segments, and the development of the right capabilities and partnerships to manage the transition.

A transformed employer market

Health care reform fundamentally alters the social contract inherent in employer-sponsored medical benefits and how employees value health insurance as a form of compensation. The new law guarantees the right to health insurance regardless of an individual’s medical status. In doing so, it minimizes the moral obligation employers may feel to cover the sickest employees, who would otherwise be denied coverage in today’s individual health insurance market. Reform preserves the corporate tax advantages associated with offering health benefits—except for high-premium “Cadillac” insurance plans.

Starting in 2014, people who are not offered affordable health insurance coverage by their employers will receive income-indexed premium and out-of-pocket cost-sharing subsidies. The highest subsidies will be offered to the lowest-income workers. That reduces the social-equity advantage of employer-sponsored insurance, by enabling these workers to obtain coverage they could not afford on today’s individual market. It also significantly increases the availability of substitutes for employer coverage. As a result, whether to offer ESI after 2014 becomes mostly a business decision. Employers will have to balance the need to remain attractive to talented workers with the net economics of providing benefits—taking into consideration all the penalties and tax advantages of offering or not offering any given level of coverage.

What the law says

Health care reform imposes several new requirements on employer health benefits. Some changes will be incremental; for example, annual and lifetime limits on care must be eliminated, and coverage must be offered to dependents through age 26. Plans with premiums above certain levels will be subject to a so-called Cadillac tax.1

Other requirements are game changing and could prompt employers to completely reconsider what benefits they offer to employees. Reform requires all employers with more than 50 employees to offer health benefits to every full-timer or to pay a penalty of $2,000 per worker (less the first 30). The benefits must provide a reasonable level of health coverage, and (except for grandfathered plans) employers will no longer be able to offer better benefits to their highly compensated executives than to their hourly employees. These requirements will increase medical costs for many companies. It’s important to note that the penalty for not offering coverage is set significantly below these costs.

Reform also offers options for workers to obtain affordable insurance outside the workplace. Individuals who are unemployed or whose employers do not offer affordable health coverage, and whose household incomes are less than 400 percent of the federal poverty level,2 are eligible for subsidies toward policies they will be able to purchase on newly created state insurance exchanges. These will offer individual and family policies of set benefit levels (bronze, silver, gold, and platinum) from a variety of payers.

The subsidies will cap the amount lower- and middle-income individuals and families will have to spend on health coverage, to 9.5 percent of household income for those at 400 percent of the federal poverty level and less for those at lower income levels. The subsidies will keep the cost of insurance coverage from the exchanges below what many employees now pay toward employer-sponsored coverage, especially for those whose earnings are less than 200 percent of the federal poverty level.

A bigger effect than expected

As we have seen, a Congressional Budget Office report estimated that only 9 million to 10 million people, or about 7 percent of employees, currently covered by ESI would have to switch to subsidized exchange policies in 2014. Most surveys of employers likewise show relatively low interest in shifting employees from traditional ESI.

Our survey found, however, that 45 to 50 percent of employers say they will definitely or probably pursue alternatives to ESI in the years after 2014. Those alternatives include dropping coverage, offering it through a defined-contribution model, or in effect offering it only to certain employees. More than 30 percent of employers overall, and 28 percent of large ones, say they will definitely or probably drop coverage after 2014.

Our survey shows significantly more interest in alternatives to ESI than other sources do, for several reasons. Interest in these alternatives rises with increasing awareness of reform, and our survey educated respondents about its implications for their companies and employees before they were asked about post-2014 strategies. The propensity of employers to make big changes to ESI increases with awareness largely because shifting away will be economically rational not only for many of them but also for their lower-income employees, given the law’s incentives.

We also asked respondents questions about their philosophy and decision-making process for benefits: the current rationale for providing them, which employee group is considered most when decisions are made about them, their importance in the respondent’s industry, and geography. These questions prompted the respondents to consider all the factors that will influence their post-2014 decisions. Finally, we tested options beyond dropping coverage outright. These alternatives will probably be the most effective ones for delivering a reasonable return on a company’s investment in benefit programs after 2014. We would therefore expect to see a level of interest higher than that generated by surveys asking only about plans to keep or drop ESI.

Estimating the employer impact

As employers consider their post-2014 options, they should take a dynamic view by considering how competitors for talent—other employers—and their own employees will react. Many employers will be shifting from ESI; it is unlikely that only one company in an industry or geography will move away from it.

ESI might also be less valuable than most employers assume. Among employers not likely to drop ESI, three of the top five reasons given (and two of the top three) were concerns about talent attraction, employee satisfaction, and productivity. Among employees, however, McKinsey consumer research found that more than 85 percent—and almost 90 percent of higher-income ones—say they would remain with an employer that dropped ESI. Overall, employees value cash compensation several times more than health coverage. Further, many younger employees also value career-development opportunities and work–life balance more than health benefits.

Making employees whole

To make up for lost medical insurance, most employers that drop ESI will increase employee compensation in other ways, such as salary and other benefits like vacation time, retirement, or health-management programs. Employees think this will happen: 60 percent say they would expect employers to increase compensation if health benefits were dropped, our consumer research shows. Employers will do so to remain competitive for talent. In addition, ensuring some level of employee health, through higher investment in wellness programs or another mechanism, helps to maintain the productivity of workers.

Our research found that even with conservatively low assumptions about eligibility for employee subsidies, at least 30 percent of employers would benefit economically by dropping health coverage even if they make employees 100 percent whole. Employers could do so by paying sufficient additional compensation to help employees purchase coverage with no other out-of-pocket expense (less subsidies for employees with household incomes below 400 percent of the federal poverty level), the additional individual income and payroll taxes levied on the increased compensation, and the $2,000 government penalty.

But we believe that employers will not have to provide 100 percent of the value of the lost insurance. If so, even more employers will benefit economically. In the course of our research, we interviewed executives at Liazon, a defined-contribution-benefit company. They have found that when employees are shifted from coverage selected by their employer to a defined-contribution plan (under which the employer provides a fixed dollar amount and the employee can choose how to allocate it among a variety of benefit options), about 70 percent of employees choose a less expensive health plan.

Higher-income employees, who won’t receive subsidies and would have to pay the entire cost of individual coverage out of pocket, will have a greater need to be made whole. These higher-income employees, however, are also more likely to be satisfied with partial compensation or with tax-advantaged forms of compensation, such as retirement benefits.

The need to make employees whole will decrease over time. Subsidies will be awarded to keep premiums below a fixed percentage of an individual’s household income. As long as income continues to rise at a rate lower than that of medical inflation, even employees who initially have to pay more out of pocket toward an exchange policy than they would toward ESI will have less of a difference to make up each year, and the employer will have to provide less to make employees whole.3

This development should not suggest, however, that employers considering the elimination of ESI are focused exclusively on the bottom line, at the expense of their employees. In fact, because of the subsidies, many low-income employees will be able to obtain better health coverage, for less out of pocket, on an exchange than from their employer.

The range of coverage options for employers

In fact, employers indicating that they will definitely or probably drop (or otherwise shift from) ESI post-2014 are more likely to consider the impact on low-income workers (as opposed to other groups of employees) when making benefit decisions and two to three times more likely to view benefits as important to attracting talent in their industry and geography. These employers are considering shifting from ESI not because they don’t care about their employees but because they recognize that, after 2014, ESI may not be the most efficient way to provide health coverage (see sidebar “The range of coverage options for employers”).

Getting ready for the new world

To prepare for 2014, employers should explore the economics of benefits after reform, maximize the return on investment (ROI) of benefit packages, design them for higher-income employees, and satisfy the health and wellness needs of the whole workforce.

Explore the economics of post reform benefits

Employers must understand, at the microsegment level, the eligibility of employees for subsidies under different scenarios—for example, when the employer provides no coverage at all, coverage defined as “unaffordable” (at a premium above 9.5 percent of the household income) for some employees, or coverage above the Cadillac-plan threshold. Companies must determine the cost of making employees whole, using market research tools to find out how much they value ESI, cash compensation for it, and a variety of other benefits. The importance for workers of a given benefit may not correlate directly with its tax-adjusted cost to the employer.

Maximize the ROI of the benefit package

The discussion to date has largely focused on dropping versus keeping coverage, but for most employers the most value-creating options lie in between. Employers should evaluate the economic impact not only of expanding ESI to every employee (compared with dropping it completely) but also of shifting toward part-time labor, allowing lower-wage employees to qualify for exchange subsidies through setting premiums above 9.5 percent of their household income, or adopting defined-contribution models. These intermediate options will probably be the most effective way to secure a reasonable ROI for benefits after 2014, because they enable employers to provide the best possible result for each segment of employees—ESI for higher-income ones not eligible for subsidies, as well as affordable coverage from a subsidized exchange for lower-income workers.

Even employers that continue to offer ESI—and many will, especially in heavily unionized industries where flexibility may be limited—could make no-regrets moves to maximize the ROI of benefits after 2014. Market research tools could be used to determine the preferences of employees, so that the benefit plan emphasizes what they value most while minimizing other features. Other strategies would involve designing plans and enrollment features to reduce costs, pricing plans to promote responsible use, and ensuring that wellness spending produces a positive return. Retiree medical benefits could be shifted from traditional ESI toward Medicare (the federal government’s health care program for those 65 and older) and Medicare Advantage (the private-sector version of the government plan).

Design benefit packages for higher-income employees

Because lower-income employees will be eligible for exchange subsidies if their employers don’t offer them affordable health coverage, we expect that ESI will shift toward higher-income employees. This group will have more demanding expectations for service levels and convenience, as well as different attitudes toward benefits covered.

Employers should tailor their ESI offering to include navigation tools that make it easier to identify and get appointments with high-quality health care providers and fast access to well-informed people for assistance with billing or coverage issues. These services could be provided through partnerships with enterprises that specialize in explaining medical bills and pricing. Higher-income employees may also value preferred-access or other enhanced-care physician services more than a traditional Cadillac ESI plan. These alternative benefits may be more cost effective for employers once the Cadillac tax comes into effect, in 2018.

Satisfy employee health and wellness needs

Even for an employer that drops ESI for all or some employees, maintaining their health, productivity, and satisfaction will continue to be important. Employers could not only expand or refine wellness programs to focus on elements that have a substantive, positive, and documentable impact on employee health and satisfaction but also provide the right incentives to encourage participation. In addition, employers could establish clinics at work sites, or partnerships with local providers or pharmacies so that employees can easily and affordably receive preventative care, such as flu shots or annual physicals. Another way to keep employees satisfied and avoid disrupting their lives would be to partner with a broker or another enterprise that helps them understand their benefit options and enroll for coverage on insurance exchanges.

Employers should recognize that as the ESI market changes after 2014, the system will react dynamically. If many companies drop health insurance coverage, the government could increase the employer penalty or raise taxes. Employers will need to be aware of actions by participants at any point along the health care value chain and prepare to adapt quickly.

Whether your company is poised to shift from employer-sponsored insurance or will continue to offer the same benefit package it does now, health care reform will change the economics of your workforce and benefits, as well as how your employees value coverage. Understanding these changes at a granular level will enable your company to gain or defend a competitive advantage in the increasingly dynamic market for talent.

About the Authors

Shubham Singhal is a director in McKinsey’s Detroit office, Jeris Stueland is a consultant in the New Jersey office, and Drew Ungerman is a principal in the Dallas office.



The Washington Post –

Apr. 14: President Obama on Thursday signed into law a measure that repeals the unpopular 1099 tax-reporting provision of the national health-care law.

The move marked the first successful effort by Congress to repeal a portion of Obama’s signature health-care legislation. The Senate earlier this month voted 87-to-12 to repeal the 1099 provision. The House passed the measure in March on a bipartisan 314-to-112 vote.

The White House released a statement announcing the Obama had signed the measure, which it said “repeals the expansion in the Affordable Care Act of requirements for businesses to report information to the Internal Revenue Service on payments for goods of $600 or more annually to other businesses and increases the amount of overpayment subject to repayment of premium assistance tax credits for health insurance coverage purchases through the Exchanges established under the Affordable Care Act.”

Obama’s signing of the legislation into law marks the end of a nearly eight-month-long effort by lawmakers to do away with the 1099 tax-reporting provision. Sen. Mike Johanns (R-Neb.) had led the effort in the Senate, but each time repeal seemed close, the parties reached an impasse over how to pay for the repeal, which would result in the loss of an estimated $22 billion over the next decade.

The law signed by Obama on Thursday would pay for repeal by forcing greater repayment of health insurance subsidies for families whose income unexpectedly exceeds certain thresholds.

Johanns lauded the signing in a statement Thursday evening. “Job creators can finally celebrate: the 1099 tax paperwork mandate is officially off the books,” Johanns said.

“Because of the resilience of small business owners everywhere in keeping this issue at the forefront, because of the good judgment of my colleagues in both houses in recognizing the foolishness of this mandate, and now because of the President’s signature, our job creators can go about their business without fear of being hammered by mountains of additional, unnecessary tax paperwork.”


Health law cost still a wild card

By DAVID NATHER | 3/29/11 4:42 AM EDT

Anyone who claims to know how much the health care law will cost is missing one big piece of information: the exact cost of the benefits.

They can’t know it, because the benefits package is still being worked out, and its final shape will determine whether the Congressional Budget Office estimate was in the ballpark or not even close.

Starting in 2014, all health plans offered through the state health insurance exchanges will have to offer the “essential health benefits package” — a set of minimum services all individuals and small businesses are supposed to have in their coverage. That package will have a direct impact on the cost of the law, because people will get subsidies to help them buy coverage if they can’t afford it on their own.

Make the benefits package too stingy, and consumer advocates will say the law failed in its goal of protecting people from big gaps in coverage. Make it too generous, though, and the premiums for those plans will go up — and the federal government will have to spend that much more on the subsidies.

If that happens, the CBO projections that the law will pay for itself — and actually reduce the deficit by $143 billion over 10 years — might underestimate the actual costs. That’s critical, because Democrats are making so much of the CBO’s estimate that the law will reduce the deficit while Republicans suggest it will actually drown the nation in red ink.

Or the higher premiums could just scare people away from buying coverage and make them decide the fines under the individual mandate would be cheaper. In that scenario, there wouldn’t be as many subsidies to pay — but not as many newly insured people, either.

“If you make the benefit package rich, you make the premiums high, and that makes it more likely that people will skip health insurance altogether,” said Mark Pauly, a health care economist at the Wharton School of the University of Pennsylvania. “From my point of view, it’s more important to get takeup.”

The law doesn’t try to spell out the exact package. Instead, it lists several categories of benefits and leaves it to the Department of Health and Human Services to figure out exactly what to cover within those categories and what kind of limits the coverage should have. So the exact cost of the package won’t be known until HHS makes those decisions.

The department is getting some help. The Institute of Medicine, an independent, nonprofit health care analysis group, has put together a committee of health care analysts, consumer advocates and other experts to look at how the package should be designed. They held a conference call to discuss draft recommendations on March 21. The final report is expected in September.

But even though the committee is keeping a tight lid on its deliberations — with strict orders to members not to make even general comments about the trade-offs they face — the institute’s report won’t actually recommend what should be in the package. All it will do is suggest what HHS officials should think about when they design the package.

The committee members are gathering important information to pass along to HHS, though. Jonathan Gruber, an economist at MIT, told the committee that for every 10 percent increase in the cost of the essential benefits package, the cost of the government subsidies would rise by 14.5 percent — or $67 billion over 10 years. It would also cause the number of insured people to fall by 1.5 million, he said.

The law says the benefits package should be roughly equal to the coverage in “a typical employer plan.” HHS would define that, too, though most health economists believe it’s going to be based on what’s covered in typical large employer health plans.

The problem is that there is no good data available on what a typical large employer plan covers and what the limits are, according to Gary Claxton, director of the Henry J. Kaiser Family Foundation’s Health Care Marketplace Project. The law requires that the Department of Labor conduct a survey to find out.

The CBO cost estimate doesn’t actually say how its analysts figured out what the benefit package would cost and how it would affect the federal spending on subsidies. And the budget office wouldn’t make any of its analysts available to talk about its assumptions on the record or even on a not-for-attribution basis.

“It’s a guess, like a lot of things,” said Joseph Antos, a health care analyst at the American Enterprise Institute and a former CBO analyst.

But Kenneth Thorpe, an expert on health care costs at Emory University, said there are plenty of surveys that would have given CBO a key piece of information: the average premiums for large employer plans. For firms with 200 or more employees, the average premiums in 2010 were $5,050 for single coverage and $14,038 for family coverage, according to an annual survey by the Henry J. Kaiser Family Foundation and the Health Research & Educational Trust.

The other issue is that the kind of coverage usually available only at large companies will now be extended to small group and individual coverage — many of which would have to add entire categories of benefits that they haven’t previously offered.

Some of the benefits categories required by the law are fairly standard: doctor visits, emergency care, other hospital coverage and pediatric care. But as CBO pointed out, the law also requires the package to include services that aren’t always covered by individual policies, including prescription drug coverage, maternity care, and mental health and substance abuse services.

And mental health is one of the classic benefits that can be open-ended if an insurance plan doesn’t limit it. Gruber said, however, the package can place limits on certain benefits that could become too costly, for example, capping the number of outpatient mental health visits or physical therapy sessions.

“You’re going to see benefits covered now that typically have not been covered in this market,” said Claxton. “It doesn’t mean they can’t be managed.”

It would be easy for HHS to avoid mandating the kinds of services that would most boost costs, such as chiropractic services and fertility treatments at, according to Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities. Neither one is required under the law, though the law doesn’t restrict HHS from adding other benefits.

“If you sort of found all of these marginal things and pushed them to the max, I suppose you could affect the costs,” Van de Water said. But it’s more likely that HHS would resist those calls, he said, leaving federal officials with “a fairly small range” of benefit decisions to make.

Antos said that even though HHS could affect the cost of the law by throwing too much into the benefit package, the Institute of Medicine probably will advise the department against getting too specific — and HHS probably will take that advice.

“How deep do you go? I think the answer is, not very deep,” Antos said.


Goodbye to Healthcare Benefits?

A recent survey finds about one-third of employers are unsure whether their organizations will offer healthcare benefits to employees in a decade. Indeed, as future elements of the healthcare-reform law kick in, HR and benefits professionals may need to totally rethink what it means to be an employer of choice at a time when employers do not offer healthcare benefits.

By Mark McGraw

A combination of factors — a still-sluggish economy, rising healthcare costs and the projected impact of healthcare reform — have already led many employers to take bold steps to overhaul the design of their current employee-healthcare plans.

If findings from the 16th annual Towers Watson/National Business Group on Health Employer Survey on Purchasing Value in Health Care are any indication, that trend is likely to continue in the future — to the point where they may not be offering healthcare benefits at all.

The survey, which polled HR managers and employee-benefits managers from 588 U.S. companies with 1,000-plus employees, found that only about one-third (38 percent) of respondents are confident their organizations will offer healthcare benefits directly to employees 10 years from now.

That percentage is notably lower than in past surveys conducted by the organizations, says Helen Darling, president and CEO of the Washington, D.C.-based National Business Group on Health, who attributes it to the current business and economic climate.

“[The survey findings] don’t surprise me,” Darling says. “The predominant feeling right now is one of uncertainty.”

It is an uncertainty that is well-founded, says Randall Abbott, senior consultant and North American leader of health and group benefits at New York-based Towers Watson.

“This decline in confidence reflects the convergence of a slow economy, the outlook for continually rising healthcare costs, and the effects — real and perceived — of healthcare reform and its potential impact on business conditions,” Abbott says.

“Given this uncertain environment, it’s not surprising that employers are examining their alternatives while we wait for clarification of many of the details of healthcare reform,” he says.

Historically, HR leaders have taken an incremental approach to plan-design modifications, Abbott says. The post-reform healthcare landscape, however, finds many employers considering sweeping changes to employee-health strategies, and seeking options that move costs outside their organizations.

With an eye on 2012 and beyond, the trend toward consumer-driven benefit plans — which encourage employee engagement and accountability for costs — is bound to continue, and HR professionals are likely to find “the health benefits picture to be very different in years ahead,” says Dallas Salisbury, president and chief executive officer of the Washington-based Employee Benefit Research Institute.

Potentially shaping that picture are the opening of insurance exchanges in 2014, and a possible excise tax on healthcare benefits that is planned to go into effect in 2018.

The proposed insurance exchanges, which are designed to create more competition among providers and subsequently bring down the price of health insurance, would “simply facilitate change and accelerate the pace,” Salisbury says.

“Most of the attributes of health insurance that could be achieved by employers — but were not available in the individual market — would now be available through exchanges,” he says.”And, if and when the tax advantage of employment-based coverage goes away, the acceleration [of employers not offering healthcare benefits] will be even more pronounced.”

Indeed, 70 percent of respondents to the Towers Watson/NBGH survey say the opening of insurance exchanges would have some effect on their active medical programs, and 78 percent say the exchanges would impact their retiree programs.

The implementation of the excise tax is expected to affect both active and retiree medical programs as well, with 24 percent and 20 percent of employers, respectively, anticipating an extensive impact on their benefit offerings.

These potentially significant changes due to healthcare reform will likely impact recruitment and retention efforts — a scenario that HR professionals should prepare for, Darling says.

“Employers feel very strongly that a good benefits package is a competitive asset, and a competitive benefit,” she says. “The recession notwithstanding, we still have a war for talent going on. A talent strategy is foremost in everyone’s mind right now. [Employers] are trying to hang on to people with rare skills and talents.”

The elimination of employer-provided benefits, Abbot says, would require HR leaders and benefits managers to shift their attention to “other elements of total rewards and potentially prompt an evaluation of which rewards programs result in increased levels of attraction, engagement and retention of talent.”

“The elimination of healthcare benefits would likely result in an even more intense focus on workforce health and productivity, as well as focusing efforts more globally,” he says.

As a growing number of companies look to exchanges and other options to defray escalating costs and achieve compliance with new and pending healthcare regulations, an organization’s commitment to the wellness of its workforce should remain the same, Darling says.

“With the evolution of healthcare benefits — or at least the financial side of it — and employers moving on to some other way of providing them, employers will focus on making sure their employees are healthy and productive,” Darling says.

“The importance of ensuring that the organization’s talent is healthy, productive, engaged and able to serve customers is not going to just go away,” she says.

Even before these elements of the reform law become effective, organizations are continuing to refine their healthcare benefits, including redesigning plans to incorporate enhanced point-of-care consumerism, reposition incentives to improve employee engagement, redefine financial commitment to dependent and retiree coverage, and emphasize the use of high-value providers, the survey finds.

For instance, about two-thirds (68 percent) of respondents say their organizations are moving to increase employee contributions for any plans that include dependent coverage.

In addition, 19 percent say they are increasing employee contributions for each new dependent added to a plan, and about one-third (35 percent) of respondents say their organizations are using or planning to implement spousal waivers or surcharges.

One-third of respondents say their companies plan to reward or penalize employees based on biometric outcomes (such as for weight and cholesterol), compared with just 7 percent in 2011 and 6 percent in 2010.

About one-quarter of employers plan to cease employer sponsorship of retiree-medical coverage (26 percent) plan to convert a current subsidy to a retiree-health account (25 percent) or plan to eliminate employer-managed drug coverage for post-65 retirees and rely on Medicare Part D plans (23 percent).

Compared to years past, the survey also finds a significant increase in the adoption of account-based health plans. ABHPs are plans that have deductibles offered together with a personal account (such as a health-savings account or health-reimbursement arrangement) that can be used to pay a portion of the medical expenses that are not paid by the plan.

ABHPs typically include decision-support tools that help consumers better manage their health, healthcare and medical spending.

In 2002, the survey found just 2 percent of all employers offered ABHPs. By 2011, that number had ballooned to 53 percent, and another 13 percent say their organizations plan to add an ABHP by 2012.

March 23, 2011

Copyright 2011© LRP Publications


Warning: Dependent Care Mandate Can Cause Tax Headaches

Christian Schappel

The healthcare reform law’s dependent coverage rule doesn’t extend to health savings accounts (HSAs) – and it’s bound to cause some problems.

The new law changes the definition of a dependent child, resulting in a requirement that group health plans that offer dependent coverage to children allow young adults up to age 26 to remain on their parent’s insurance plan.

The problem: While the new definition of a dependent applies to most employer health coverage, it does not extend to HSAs. HSAs must still operate using the old definitions of a qualifying child or qualifying relative.

Pre-health reform definitions

Under the pre-reform definition, a qualifying child is someone who has not attained age 19 (or age 24 if a full-time student).

And a qualifying relative under the old definition is a child of the employee, other relative or member of the employee’s household, for whom the employee provides over half of the individual’s financial support.

Older children don’t qualify

These definitions now cause a problem when an employee tries to enroll a 25-year-old child in a group health plan that uses an HSA.

Because of the expansion of dependent care under the new reform law, the child is allowed into the plan. But the employee can’t submit the child’s uninsured expenses for reimbursement under the HSA because the child is too old to qualify under the rules of an HSA.

In addition, the child won’t be a qualifying relative if he/she doesn’t depend on the employee for the majority of his/her financial support.

So if the employee takes an HSA distribution to reimburse the child’s expenses, it’ll be taxed and could be subject to the 20% HSA penalty on early withdraws.