ObamaCare – You Do The Math

Nice, short article in USA Today by Tom Wilemon of the The Tennessean (h/t Drudge). He interviews several local employers about their decisions around providing healthcare insurance under ObamaCare. The key take away is the difficulty in trying to fit so many different types of small businesses into the regulations (that are as yet unfinished) and the problems that these business owners have in trying to make decisions. There are even strange examples such as the case of the  non-profit that doesn’t pay taxes qualifying for tax credits.

The irony of the ObamaCare regulations is that small business owners have the most difficult decisions to make and not very many resources to help them understand. Under ObamaCare, agent commissions are not included as a qualified administrative expense so the incentive of agents to provide guidance is lessened when they are needed the most. While the one year waiver on employer penalties will give more time, will the small employer ever be able to keep up with their larger competitors or should they just drop healthcare insurance all together and avoid the headache?

Is this an intended or unintended consequence of ObamaCare?

The Part Time Unemployment Rate

Jason Shafrin at the Healthcare Economist blog has a very interesting post up discussing the September jobs report, the jump in part time work that drove the unemployment rate number, and the cost of health insurance. The whole article is worth reading, but the most salient point is that the cost of health insurance may be a driver towards the rise of part time employment even though it is not the most efficient way to employ workers.

High Deductible Health Plans, EBRI Ruins A Good Note

Paul Fronstin, writing the June Note for the Employee Benefit Research Institute (EBRI), presents some interesting survey data about about medication adherence and delays/avoidance of health care distributed by type of health plan and income level.

He breaks down the various plans levels into:

  • traditional – meaning a plan that has a deductible of less than $1,000
  • high deductible (HDHP) – deductible $1,000 or higher without a funded HSA/HRA
  • consumer directed (CDHP) – deductible $1,000 or higher with a funded HSA/HRA

Not surprisingly, there is a statistically significant difference in medication adherence by plan.

Members who had a HDHP plan had a higher incidence of not filling prescriptions or avoiding some medical care than those in a traditional plan, with the CDHP members in between the two groups. These relationships held when the survey data was sorted by those who had a self reported health problem versus those without a health problem. And, again, when the sorting was done by household income of below $50,000 versus $50,000 and above.

Where There High Deductible Options?

One item that the note does not address is whether the individuals and families in each high deductible plan had other options when selecting their plan. I am assuming here that we are talking about employer offered plans in the note since there is discussion about employer contribution to HSA accounts. If someone has the ability to choose between plans, I would be curious how this effects the results reported. A person picking a high deductible plan over a traditional plan because of cost would seem more likely to skimp on prescriptions and other care.

Is There A High Deductible Learning Curve?

A very interesting result reported was the performance of individuals and families in the CDHP plans, those plans with funded HRA/HSA accounts. There is a increase in prescription adherence with members that had their accounts for over three years. This change was not seen in the high deductible only group. Does this indicate that over time as members start to fund their accounts and learn that they can purchase health care items with tax free money? Does it mean that high deductible plans need a savings account to be usefull?

What Constitutes Access?

The one issue that I have with this note is Fronstin’s use of the word ‘access’ to characterize health system usage around prescription adherence.

Prescription adherence is a very common problem, for example see this recent talk on the issue. Cost is only one factor and there is no indication of whether the respondents were given multiple reasons to select for non-adherence.

In addition, access is a politically charged word for what are economic decisions by individuals. I may have only $100 in my pocket for gasoline, but I decide to pay my cable bill instead of buying gas to take a short trip. Do I have an access problem with gasoline?

ACA Employer Tax Incentive – Not Interested

A recent GAO report looked into the employer tax incentive program that was in the ACA to motivate more small employers to offer health insurance. The performance of the program fell short of expectations. Several interesting questions on reading the report:

170k Signed Up Out Of?

When a piece of tax credit legislation is proposed, there has to be an estimate of eligible recipients in order to quantify the budgetary impact. When the employer tax incentive was put into the ACA the estimates of the number of business that this could potentially help was between 1.4m and 4m. We’ll pass over what the extraordinary imprecision of this measurement says about the people framing this program and move onto the actual performance. Depending on what part of the range of eligible you want to highlight is, the take up rate was between 4% to 12%. Why the low level of interest?

How Hard Can It Be, the IRS is Involved?

Part of the GAO report looks at the IRS form and information needed to claim the tax credit. Quoting from the report:

“Any credit that needs a form that takes 25 lines and seven work sheets to build those 25 lines is too complicated” attributed to a tax preparer

Other complaints had to do with how to calculate FTEs and insurance premiums associated with those FTEs. Remember this tax incentive program was focussed on small employers with low wages, traditionally a higher turnover population.

We Get How Much?

Another problem with the employer tax incentive program was the amount of the credit itself and the the extent that it is available. In order that the credit was not used to over buy health insurance, the IRS used a credit cap of the average health insurance premium in each state. Several participants in GAO surveys questioned whether the IRS caps were too low. And finally, the tax credit itself has a phaseout provision, which means that from a planning perspective the small business has to estimate whether it can continue to afford health insurance when the credit expires.

* * *

The way that the employer tax incentive program in the ACA was written and operationalized once again points to the lack of understanding on the Federal level of the problems that small business faces in the health insurance market.

Agent Compensation Decline and Small Employer Health Insurance

One of the most contentious areas of rule making in the ACA was the definition of what was included in the MLR (medical loss ratio) target that health insurers have to meet. In the end, it was decided not to include agent commissions in the allowed claim or quality improvement expense category. This forced insurers to dial back the available level of compensation for the agent. While the independent agent working in the small employer health insurance market was probably an easy political target for the Administration, the down stream effect of this decision will be another reason for small employers to stop offering health insurance as part of their benefit packages.

As anyone who has had to purchase small employer health insurance knows, the agent often becomes an unofficial HR consultant to the employer. Coverage questions and claim problems that employees bring to the employer are facilitated through the agent. Without the assistance of the agent, the employer has to take time away from running their business and deal with employee benefit problems. With the cost of small employer health insurance continuing to rise, and now the non-premium expense increasing, when does the benefit become too expensive?

What evidence do we have that this will be the case? A recent survey by the National Association of Insurance and Financial Advisors (h/t John Goodman) indicates that this will exactly be the case. Most agents have reported a decrease in commission income. For those that are staying in the business, the primary area where they are cutting back is in client service activities.


CBO and the ACA – New Estimates of Costs and Employer Compliance

The CBO this week released a couple of updates to it’s budget scoring for the ACA.

New CBO Cost Estimates

For anyone who is not aware, the standard CBO process of estimating cost and budget impact for any proposed program is to estimate over a 10 year period. That is why there were many provisions in the ACA that started with premium collection in within the initial 10 year period, but did not start paying benefits until after the the initial 10 year period had expired. Using these budget games, the initial bill was scored at costing less than $1 trillion. Needless to say, that number is now over $1 trillion.

Peter Suderman on the Reason.com site has a good write up of the math involved and and where the true end number may end up for a full decade of the ACA. In addition, a quick review of the CBO note does not mention the effect of not implementing the CLASS Act. As we have discussed before, that program seems to have served a budgetary service only, and the refusal of the administration to agree to rescind it keeps it in the budget for now.

New CBO Estimates of Employment Based Health Insurance

The original CBO estimate was that about 3 million people getting insurance through their employer would end up migrating to Medicaid and the insurance exchanges. The CBO now estimates that number at 3 to 5 million. In reading the CBO report however, it is clear that this is all guess work at this point. Another interesting point in the report, is that it estimates that budgetary impact of more people losing their employer based coverage and being potentially subsidized through Medicaid or the insurance exchange is minimal. This is based on the assumption that most employers will raise taxable wages to the extent that they remove premium payments from the employee’s benefit package. That seems to be a rather large assumption. See Avik Roy, for a discussion of this.

More Money For Health Insurance Exchanges

Avik Roy notes yesterday that the administration has raised the budget request by $111b for the insurance exchanges needed in the ACA to provide premium subsidies. You will remember that last summer when the McKinsey report came out predicting that more employers would dump their health insurance plans than assumed in the original budget proposals that the administration attacked this prediction. This additional budget request for the insurance exchanges would seem to give more credence to that expectation.

What might be the drivers for employees dropping health insurance plans leading to increased demand in the exchanges? They come from the ACA itself.

Benefit Requirements in the ACA will Raise Premiums

In order to meet minimum benefit requirements for credit as a qualifying health plan, many small employers will need to purchase  a more expensive health plan than they do now.

Loss of Agent’s Compensation in the MLR

In deciding what was included in the medical loss ratio targets for health plans, agent compensation was not included. This means that agent compensation will begin the decline, leading to less service per client than now from those agents that stay in business. The role of the agent, especially for small businesses, as an unofficial HR consultant has been overlooked by many commentators. In house insurance company service providers cannot provide the level of service that the agent provided to the employer. This will cause the employer to have to deal with with more insurance related problems on a day to day basis.

In the end, the small employer will realize that it is much easier to simply write the penalty check for not offering health insurance than to deal with the inevitable bureaucracy, the higher cost, and the non-business related problems.

As more employers drop their plans, any stigma associated with not offering a health insurance plan to potential employees will fade away.




Free Contraceptives – Paid for by Thee and Me

The ‘compromise’ announced by the administration last week on the contraceptives issue is another example of the politicization of healthcare and health insurance driven by the ACA. The semantic dodge of making all health insurers provide coverage for contraceptives instead of employers needing to provide coverage does nothing to change the effect and actually broadens the expense that all policy holders will have to pay. Regardless of your personal needs or situation, you will now be paying for contraceptives through the premiums in your insurance policy.

The key here is the movement of contraceptives into the category of preventive care.

What will be the effect of this policy on the contraceptives market? As John Cochrane points out in his WSJ editorial,  the secondary effect of this move is that incentives for pharmaceutical companies to develop cheaper versions of birth control has vanished, as well the incentive for male centered non-prescription birth control. In short, the cost of contraceptives will never go down, they will probably go up. So much, for cost savings.

Other questions have been raised about whether or how this policy would be applied to self-funded employer plans, that technically don’t use insurance to cover their health benefit expenses. Since the majority of US employees covered through their employer are in these sort plans, that would put the onus of the expense on individual and small employers that cannot self-insure.

However, the real issue here is the use of the preventive care approach to legislate any number of favored benefits or tests into insurance plans. Every disease interest group will want their special pleading included as a preventive care measure (e.g. testing for autism, dementia, etc.). The cost of the preventive care portion of any insurance policy will necessarily go up.

Just another reason for any small to medium sized employer to get out of providing health insurance benefits to their employees.

Health Insurance, New Taxes for Small Employers

The NFIB (National Federation of Independent Business) has recently published a study, written by Michael J Chow, estimating the effects of the health insurance premium tax included in the ACA on small business employment, (h/t John Goodman). The crux of the argument in the study is that the premium tax will increase health care insurance premiums for employers 2% to 3% above the usual health care inflation driven premium increases. Using their model they contend that the cumulative increase from 2014 when the tax begins to 2020 will be almost $5k per family. This premium increase will fall hardest on small to medium size employers who purchase fully insured health plans, as opposed to larger employers who rely mostly on self insurance plans.

The study then posits that employers have a choice between ‘eating’ these costs or dropping health insurance coverage. The study assumes that employers will opt to retain their health insurance plans. The NFIB utilizes a model called the Business Size Impact Module, (BSIM), to estimate the effect of the tax driven cost increase under this assumption. Using their model, the cost increase will have the effect under various scenarios of reducing private sector employment by 125k to 249k by 2021.

While we don’t have any argument with the effects as modeled, we do disagree with the original assumption that most employers will simply ‘eat’ the extra cost. The increasing cost of offering health insurance for small employers will include not only the usual inflation components and these tax increases, they will also include the significant growing costs in regulatory compliance for employers offering health insurance whether the employer utilizes the exchanges or not. The question is whether employers will compete for employees by offering costly benefit packages or compete for business by remaining price competitive for the goods and services they offer. We believe that ultimately small employers will need stop offering health insurance in order to survive.



Will Employers Drop Health Insurance? McKinsey Part 1

McKinsey & Company has raised a lot of questions about decisions concerning employer sponsored health insurance post implementation of the ACA in 2014. The article appearing in the June 2010 issue of the McKinsey Quarterly was written by Shubham Singhai, Jeris Stueland, and Drew Ungerman and predicts that up to 30% of employers could drop employer sponsored health insurance when the full effects of the ACA start to kick in.

As the results of the survey became available, there was plenty of controversy about the results and questions about the methodology. Today (6/20) McKinsey released the survey questionnaire and results to quell the inevitable complaints of survey bias from ACA supporters. You can read the McKinsey post to understand how the panel selection was done by a third party and were not necessarily McKinsey clients as had been suggested by many people unhappy with the results of the survey. The key point as McKinsey points out was that they were surveying employer attitudes, not predicting behavior.

As most people are aware, the US style of employer sponsored health insurance grew an unintended consequence of WWII wage controls. There is nothing that requires an employer to buy and offer health insurance to employees other than employee expectations, the need for employers to compete for employees, and the tax advantage that employers have over individuals in paying for health insurance. The implementation of the ACA will begin to erode these bases.

Similar to the growth of defined contribution (401k) over defined benefit pensions, the change in employers offering health insurance will probably take effect in newer, smaller employers and gradually work its way through the system to larger employers. As McKinsey points out, 85% of employees indicated that they would remain at their current employer if the employer stopped sponsoring health insurance, with the caveat that 60% would expect increased compensation. Gradually the expectation that the employer needs to offer health insurance as a benefit to attract a quality workforce, when it is available without problems in obtaining coverage through the exchanges, will lessen the need for employers to offer it in the first place.

The other fact that the McKinsey report calls out, is that for employers with a workforce of mostly low wage employees, that both the employer and the employee may be better off by the employer dropping health insurance. This is a function of the amount of the subsidy promised through the exchanges for low wage workers and the amount of the fine on the employer.

In short, there are plenty of reasons to believe that many employers will begin to drop their sponsorship of health insurance plans beginning in 2014.