Two different reports by reputable consulting firms each conclude that more than half of employers will eliminate or change their existing health care plans. The two reports focus on entirely different reasons for the predicted changes. Because of the combined effects of the two reported challenges, there will be few employer-paid health care plans that will be left unscathed by the time the Patient Protection Affordability and Care Act (“PPACA”) becomes fully effective.
The survey results are actually not surprising once the math is run on the unintended consequences of the PPACA. Particularly for employers with primarily lower-paid employees, employers can save money by curtailing benefits, thereby shifting the cost to the state insurance funds and/or the federal government.
An employer who does not offer required healthcare coverage is penalized $2,000 annually for each full-time employee (excluding the first 30 employees). The employer may not deduct these $2,000 penalties for tax purposes. However, other than the $2,000 penalty per employee, there is nothing that requires an employer to offer the otherwise expensive healthcare insurance mandated by PPACA. Consequently, the business decision faced by employers is whether to pay the $2,000 penalty for not offering health coverage, or pay for significantly more expensive health insurance that is otherwise required.
The government subsidy for many employees is greater than the $2,000 penalty. Consequently, an employer could pay the $2000 penalty, the employee could purchase insurance thorough the government-subsidized plan, and the employer could offer an alternative pay or benefit for the loss of the health insurance. In the correct circumstances, the employee and employer would collectively be as good or better off. Of course, the government will have an additional health insurance and related subsidy cost, but those are the economic motivations and incentives currently established in the PPACA.
The survey described above does not address the additional impact of the penalties on so-called Cadillac health care plans. Employers that offer more expensive health plans (except for union plans that received an exemption) will be penalized for offering better plans. The penalty is a 40% nondeductible penalty on the value of health care plan benefits that exceed $10,200 for single coverage or $27,500 for family coverage in 2018. The effect of the Cadillac plan provisions were addressed in May 2010 by notable benefits consulting firm Towers Watson. In the Towers Watson study, more than 60% of employer-sponsored plans will be classified as a penalty-incurring Cadillac plan once expected cost inflation has its effect by the provision’s 2018 effective date. These Cadillac Rules will cause the majority of remaining plans to be dropped.