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The Bumpy Road To Healthcare Reform
Frank Audia, Group Managing Partner
Plante & Moran, PLLC
By David and Margaret Baker
"But we have to pass the bill so that you can find out what is in it." Nancy Pelosi, in a speech to NACo, March 9, 2010
The road to healthcare reform has been bumpy. Rancorous debate shook our country from mid-2009 through Q1 of 2010. On March 23, President Obama finally signed the controversial Patient Protection and Affordable Care Act into law.
Then on March 30, he signed into law the hotly contested budget reconciliation bill called the Health Care and Education Reconciliation Act of 2010.
Together, the two laws make up what we refer to as the health care reform legislation of 2010. And now that the law has been passed, we are all still trying find out what is in it.
The legislation is massive: almost 2,500 pages in length incurring over $1 trillion in total costs over the next 10 years (according to most recent CBO estimates). The sheer magnitude of the law has prompted many to consider it the most significant piece of legislation of the past 30 years. Some aspects of the law apply immediately, while other facets of the law do not come into effect for another eight years.
While economists, legal scholars, and policy analysts are grappling with the law’s impact on the U.S. economy and health system, our interests here are more pragmatic: What does this legislation mean for small and medium-sized businesses? What should companies do in the short term to minimize costs and maximize tax credits available through the law? And what can be done to prepare for the longer term implications of the legislation when its implementation and ramifications are still uncertain?
Don’t Just Do Something – Stand There
Much of the impact of the legislation is still undeveloped. Consequently, in many ways executives will simply need to stand and watch to see how the implementation shakes out.
Frank Audia, Group Managing Partner at Plante & Moran, PLLC, recognizes this phase of a new law. Audia specializes in auditing, tax, and consulting for commercial and governmental organizations. “As with any legislation of this nature,” Audia notes in a recent webinar, “we’re all waiting to see how these regulations will look as they are drafted by the federal government. [As things develop], we’ll gain more insight on how key provisions will be implemented and administered.”
Nevertheless, Audia emphasizes, it is important that executives begin now to gain the best understanding possible of how the legislation will impact your business. “While we wait for more details, we think it’s important to continue to provide our viewpoint based on what we know today.”
Colleague Ed Murphy agrees, adding that increased health insurance costs to employers are inevitable. Murphy is President of Plante Moran Group Benefit Advisors, LLC. With more than 30 years of benefit consulting experience, Murphy’s expertise includes the evaluation, design/redesign, and implementation of benefit plans including rate negotiation, pricing, vendor selection and direct participation in labor negotiations with employer groups.
“The impact to small and mid-sized groups,” notes Murphy, “will be varied as it largely depends on what the firm currently does with its benefit plan strategy. However, while it may sound like a statement of the obvious, overall businesses are likely to absorb more costs if they do not currently provide coverage for their employers.”
The Law is Upon Us
Why are employer costs expected to increase? A Plante Moran presentation lists six new insurance mandates that will increase costs for employers in 2010:
- Non‐discrimination "non‐grandfathered” insured plans
- Adult children must be covered through age 26
- Clauses addressing pre-existing conditions will be barred
- Lifetime limits will be prohibited, with certain annual limits allowed
- Preventative care mandated to be without charge
- Elimination of reimbursement for over the counter drugs for employee medical savings accounts
Accompanying increased insurance costs are complex tax issues. In some cases, new credits are offered. In other cases, transactions with previously justified tax advantages may be deemed no longer applicable, although the specifics of the test or when the test would apply are not yet clearly defined. Key tax areas for 2010 include:
- Tax credits for small employers
- Therapeutic discovery research credit
- Adoption credit increased
- Economic substance doctrine codified
- Rebate for seniors
While many employers will absorb the added costs, Murphy notes that some minority of businesses may react by withdrawing group insurance packages. “On the other side of the spectrum, some employers may decide it is more cost effective for them to exit the employee benefit market altogether by paying penalties in lieu of continuing any form of employer subsidized health benefit plans.”
Participant polling during a Plante Moran webinar last month further demonstrated that increased employer costs are predicted. Participants were asked their expectations of health care costs and an overwhelming 97% stated that they thought costs would “substantially increase” or “slightly increase” over the short run.
As for how businesses expect to respond to this anticipated rise in healthcare costs, 71% of the participants polled said they would restructure total compensation to remain about the same (i.e. drop wages in proportion to increased healthcare costs). And, as Murphy mentioned, a full 6% said they would stop offering health insurance and simply pay the associated penalties for not offering coverage to employees.
Don’t Just Stand There – Take a Step
So what should you do? The first step for executives, says Murphy, is to carefully weigh options as the law’s ramifications become clearer. “The degree to which it impacts each employer will need careful analysis that includes current benefit subsidies for active and part-time staff, comparisons with mandated minimum essential benefits, decisions to maintain or out-source staffing, tax effectiveness, desire to maintain an employer-provided plan, etc.”
“Companies should conduct an early analysis of the existing plan strategy and a comparison of what is required under a Reform environment. As noted earlier, it may involve consideration of alternative approaches to delivering benefits including sifting to or from full-time or part-time staffing, using government exchanges for small employers, being willing to consider exiting the employer health delivery market in favor of penalties, etc.”
Some companies have already begun considering how the law might impact employee benefits. Sheri Teodoru, CEO of CFI Group, is one such executive preparing for these changes. CFI Group is an Ann Arbor-based consulting firm specializing in customer satisfaction rooted in the American Customer Satisfaction Index (ACSI) methodology.
CFI Group provides generous health benefits to its roughly 150 full-time employees. Increased insurance costs, however, will likely make it difficult to offer the generous benefits to which some of our employees are accustomed. “We expect that the increase in health insurance costs will precipitate adjustments to the plans our employees choose,” exclaims Teodoru. “Our initial analysis indicates that the new penalties for ‘Cadillac’ plans will likely make them cost prohibitive, but we remain committed to our employees and offering health insurance options through our firm.”
How would Plante Morgan advise your company? “Without an understanding of the relevant facts,” says Murphy, “it does not make sense to speculate. We do suggest, however, that following a particular carrier’s recommendation may not consider all the variables for the employer. From the carrier’s perspective, the recommendations may be perfectly fine. But companies need to consider two key questions:
- Are the recommendations made by the carrier in the best interest of the client?
- Have the carrier’s recommendations considered all the options available to the client?”
“We suggest that waiting until the last minute to implement any required changes as may be required by Health Care Reform is a sub-optimal method of compliance. While it is certainly possible to simply wait until just prior to the required effective date to implement certain provisions of the law, doing so is likely to result in greater costs to the firm and/or staff, and dissatisfaction with the resulting plan/benefits/costs. Since much of the Reform requirements are not going to be implemented for some time, sometimes as much as eight to 10 years, we believe firms would be well advised to:
- Seek assistance from qualified advisors.
- Recognize that qualified advisors may require extending the breadth of typically used advisors to include insurance agents, benefit consultants, legal counsel, tax advisors, and payroll and human resources specialists, to name a few.
- Don’t operate in a ‘quick decision’ based mode. The regulations will require additional regulatory guidance that has yet to be completely written. As such, ‘best practice strategies’ are not likely to be available for some time.”
Frank Audia: “There’s not yet perfect clarity in the law or in the regulations. But there are still many things that you can do as employers to begin taking action to prepare for health care reform. The effective dates for a lot of these changes are going to be on us very soon. The good news is that there is still time to plan and react to this legislation.”
Sheri Teodoru: “As a mid-sized business operating in a highly competitive market, we recognize that our employees are our most valuable asset. At this point, our management team plans to listen to advice from our insurance provider and benefits specialists, and then make the best choices we can to balance employee benefits with competitive market pressures.”
Ed Murphy: “Reform is complex involving multiple dimensions; benefits, tax, legal, staffing, etc. Seek external guidance early and often. And realize the road we are traveling is being paved as we drive.”