A few weeks ago, the media announced that several large companies (including AT&T, Verizon and John Deere) are considering the implications of dropping healthcare benefits altogether and “paying the penalty” that government plans to impose as a result of healthcare reform (1).
On the surface, it seems like a great deal.
The story reports that companies could save hundreds of millions of dollars by simply dropping healthcare coverage, paying the mandated penalty of $2000 per person and letting employees fend for themselves in the new insurance exchange system. Given that healthcare premiums average close to $10,000 per employee (more for a family), this alternative is a steal.
But of course it is not that simple. On the surface, paying the penalty sounds easy. However, for those already providing insurance, the rules depend on a) the household income of the employee and b) the percent of an employee’s income he or she is paying for premiums. For some low- or middle-income workers (below four-times the poverty level), employers will have to provide a voucher equivalent to the full premium value so that the employee can obtain similar coverage through the exchange system (2, 3). So much for savings.
The rules for high-income workers make dropping coverage SEEM attractive because there appears to be no penalty; they will be on their own to find coverage. But let’s consider what might happen if their employers drop coverage.
Sticker shock
Illustrated by the story in our previous blog, many highly paid workers who get insurance as a benefit often do not realize how much it costs. So, imagine thousands of workers suddenly thrust into a consumer market buying family insurance coverage---at a price of about $15,000 per year. It will be painfully obvious to employees---perhaps for the first time---just how much of their total compensation package has been in the form of healthcare premiums.
Not only will this create difficulty with employee relations, employers may feel pressure to ‘make employees whole’ by paying them for some of the value that was once contained in their insurance policy. Whether employees are fully aware today of the cost of healthcare, when faced with getting insurance on the open market they will quickly become aware. High performers will certainly (and understandably) ask their employers to maintain the same total compensation package. While the government will not mandate a voucher, employees will, in effect, demand its equivalent. Perhaps the most complicated step would be to calculate what that dollar amount is exactly. Consider these issues:
• Because employer-sponsored premiums are paid by pre-tax dollars but self-paid premiums are not, an equivalent policy will cost employers MORE in salary than it did as a benefit (on top of the penalty the employer will pay for not providing insurance). Dollar for dollar, it will cost an employer more to provide money for employee-purchased insurance than it does to provide insurance.
• Single employees whose employers subsidize the cost of family coverage will now be acutely aware that they receive considerably less compensation than their married colleagues who have children. Will they request equal amounts?
• Healthy employees may suddenly realize that they subsidize unhealthy choices made by their colleagues, opening their eyes to the cost of their risk pool.
• Because individual penalties for not having insurance are even smaller than employer penalties, some employees may decide that $10,000 or $15,000 is more valuable in cash and choose to take the penalty and risk of not having coverage.
Hindsight is just that. Seeing what could have been.
If these issues had been apparent to employees all along, maybe we wouldn’t be in this mess. Because employees have been protected from (and kept uninformed about) healthcare costs, they have remained ignorant about what inefficient and unnecessary care costs THEM. The longstanding illusion that “someone else” pays has kept the masses focused only on how much they can get, rather than carefully considering what they require or how care could be purchased and delivered more efficiently.
Healthcare has always been paid for through deductions in wages (or retirement benefits) and through corporate and individual taxes that pay for Medicare and Medicaid. Yet the same workers often believe that money spent on medical services comes from the pockets of government or employers, not their own.
We are left looking backward and wishing that all companies had been completely transparent about the real cost-shifting that occurs: reduced salary in exchange for bloated insurance policies. Instead, companies have protected employees from such issues because they are “too complicated for most employees to understand,” or would cause push-back and complaints.
Some of my economist friends argue that I am underestimating both employees (who really do understand the trade-off of benefits versus salary) and employers (who know full well that they must replace compensation spent on health insurance with greater salaries). My intent is not to insult anyone’s intelligence, but to remark on statements I see and hear. In both cases, when employees and employers give serious thought to these issues, I do not doubt their ability to comprehend what is happening or to make wise choices. However, (as seen in the previous blog), I think many employees remain unaware of the cost of healthcare because they are busy, the employer pays, and there are other issues in life to worry about. I also think that the complexity of reform has produced media stories suggesting that employers might have an “easy way out,” which is always an attention grabber. Thus, this is not about whether people CAN understand this, but whether complete information has been readily available to do so.
Awakening the giant.
All things considered, it appears that few employers would gain from dropping coverage completely (4). But sometimes I find myself wishing they would.. Everyone needs the dose of reality that only comes from hundreds of millions of employees writing checks ourselves or choosing between one product and another. One can’t help but wonder what plans might look like if employees had considered healthcare premiums “their own money” all along.
What will happen instead.
No one knows how the details of reform will shake out. But if employers find no advantage to opting out, they will have to find other ways to tackle cost in the new, tightly-limited environment. Under the premise of “better late than never,” it may be time to reveal to employees the size of the tradeoff employers are making on their behalf; how every dollar spent on healthcare is a dollar not available for other things (salary, bonuses, equipment, training); how much we spend on unnecessary care; how many medical issues are preventable; how systems can be designed to reward those who choose prudently and take care of themselves.
There are no government rules that can have as big an effect as an informed, motivated citizenship. Let’s start by letting people know what the system is costing them.
Why this matters: Sweeping statements and dire warnings in the media suggesting that reform will cause a mass exodus from employer-sponsored care are misleading. Pulling out would have its own signifcant implications. Still, if individuals are forced to purchase their own care, the impact of consumer pressure has the power to positively influence the cost of care in ways that government regulations never will.
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References
1. Tully, S.Documents reveal AT&T, Verizon, others, thought about dropping employer-sponsored benefits. May 6, 2010; (accessed Jul 5, 2010).
2. Hosssain, F. and Quealy, K.How the health care overhaul could affect you: major ways the overhaul will affect those who currently have health insurance and those who do not. Mar 21, 2010; (accessed Jul 5, 2010).
3. Keller Benefit Services.2010 Employer's Guide to Health Care Reform. Apr 8, 2010; (accessed Jul 5, 2010).
4. Geisel, J.Employers weigh costs of keeping, dropping health coverage. Apr 5, 2010; (accessed Jul 5, 2010).
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