Healthcare reform is over the horizon—and employers are battening down the hatches.
By Russ Banham
With landmark healthcare legislation now firmly in place, the complexities and compliance issues surrounding the phased-in regulations have employers fidgeting. And that means consultancies are starting to realize a fast-expanding market.
While predicated on providing health insurance to more Americans, the Patient Protection and Affordable Care Act (PPACA) signed March 23rd is anticipated to provide a windfall to consulting firms, as employers seek counsel on the law’s administrative nuances and costs, regulatory recording and disclosure requirements, and benefits from a talent recruitment and retention standpoint. The thicket of rules also is expected to boost income at outsourcing firms, as employers seek to shed non-core administrative and transactional functions to services providers.
“We’re starting to hear some serious buzz among employers seeking guidance from consulting and outsourcing providers with practices devoted to health benefits,” says Derek Smith, HR consulting and services lead at Kennedy Consulting, a research and advisory firm that follows the consulting industry. “Employers are not taking a ‘wait and see’ attitude—they’re actively turning to consultants for information to interpret what the law means for them. And, since many of the new regulations will be phased-in over time, we believe health benefits consulting will continue to have legs for some time.”
Smith is not alone in this view. Gordon Perchthold, co-author of the book, Extract Value from Consultants, predicts a substantial spike in business for consulting and outsourcing firms in the wake of the new law. “Like Sarbanes-Oxley, the legislation will give the industry a periodic boost,” Perchthold says. “This is complex law, and the complexity is on multiple dimensions. Many stakeholders are involved, from the government to providers like hospitals and physicians to individual users. The rules also change with the years, causing difficulties in defining the real objectives and understanding regulatory disclosure and compliance. All of this promises a ‘gold rush’ for consultancies.”
Wheat and Chaff
It also promises additional costs for employers. Three provisions in particular virtually guarantee that healthcare expenses will rise for companies—expanding coverage to dependent children up to 26 years of age; a new definition of fulltime workers (for health benefit purposes) as someone working a minimum of 30 hours a week; and a so-called “Cadillac” excise tax on high-end healthcare plans. “Given these changes, employers need advice on whether it makes sense to change their benefit plans now—for example, reassessing the employer-employee contribution ratio,” Smith says.
A survey by Mercer indicates that the “Cadillac” excise tax alone will affect 20 percent of employers by 2013, forcing two-thirds to reduce their health benefits to avoid the tax in an effort to control costs. Another Mercer survey of nearly 800 employers projects that the cost impact of the new health benefit mandates will range from “moderate” to “severe” in 2011, with one-fourth of respondents predicting at least a 3-percent increase in their healthcare benefit expenses. One in 10 predicted an additional 5-percent cost increase, while 42 percent predicted a 2-percent increase.
The disparity in expectations is a consequence of the law’s complexity. Sifting through the morass of the legislation (See Sidebar: Change after Change) is not a job for the weak-kneed. “Many employers are concerned about the unintended consequences of the reforms, primarily around what ‘grandfather status’ means,” says Steven Kraus, a principal in the human capital practice at Deloitte Consulting.
A grandfathered healthcare plan is one in which an employee was enrolled at the time the law was enacted. While grandfathered plans are exempt from most new insurance reforms under the act, they’re subject to other requirements coming due at different dates. “There’s a lot of minutiae around what ‘grandfather status’ means,” Kraus adds.
“Employers are confronted with the question, ‘Should I just assume that my plan is not grandfathered since I’ll have to comply with all these things sooner or later anyway?’ ” says Tracy Watts, a partner in the health and benefits consulting practice at Mercer.
“They’re coming to us wanting to have conversations about the future to set the right tone early on. This is the busiest I’ve been that I can ever remember, and I stay very busy.”
She elaborates that the firm’s webcasts typically draw an average of a couple hundred attendees. A recent webcast on the new law, by contrast, drew thousands of participants, “to the point where it nearly blew up the system,” Watts says.
The high attendance is not particularly surprising, given the law’s perplexities and its phased-in nature. For example, the mandate that employers must provide healthcare coverage to individuals working 30 hours or more a week, with a maximum waiting period of no more than 90 days, has led to confusion in certain industry sectors such as retail, hospitality, gaming, and medical care, which rely on part-time workers. Such employers must consider changing the future composition of their workforces to address what will surely be higher benefit costs.
Then, too, onerous penalties loom for those not complying with the new regulations. Kraus notes that employers in 2014 can be penalized if they “fail to provide coverage, don’t provide enough coverage, or provide too much coverage”—the latter a reference to the “Cadillac” excise tax. “Employers are looking to us for a strategy map—minimum standards to test their plans.”
Deloitte and Mercer aren’t the only firms where the phones are ringing off the hook. “Before the law was enacted, we had an explosion of calls from employers that were very passionate about what they were reading,” says Sara Taylor, health and welfare strategy leader at Hewitt Associates. “This tapered off after the reforms became law, but we expect a much higher volume of inquiries this fall during the benefits enrollment season.”
Taylor says the first surge in inquiries was related to the potential financial cost of the legislation, due to the different impacts on different industry sectors and different-sized companies. “Many provisions will compel employers to change their benefit plan design,” she predicts. “For example, employers offering prescription drug benefits to retirees today receive a tax-free 28-percent subsidy from the government; this will no longer be tax-free in 2013. Obviously, this raises serious questions about the possible need to restructure benefits to lessen the financial impact. It might make sense to forego the subsidy and contract with an insurance company to receive it instead. These are tough questions to answer.”
Another tough question regards dependent coverage. The law provides coverage to children up to age 26. At present, employees typically contribute the same amount toward their plans for family coverage, whether they have one dependent or 10. “Going forward, many employers likely will require employees to pay a cost per dependent, to reflect more of the true cost of covering these people,” Taylor says. “Figuring all this out—the strategy and cost pieces—requires help from firms that do this for a living.”
Consulting and outsourcing firms “can share trends, model the financial impact, do side-by-side analyses, and share client experiences,” she explains. “While it’s still too soon to draw best practices, the employers in the forefront of this will be better off than those waiting on the sidelines for the dust to settle.”
Another strategic issue employers must digest has to do with the original purpose of healthcare benefits—employee recruitment and retention. U.S. corporations first offered free health insurance coverage as an employee benefit during World War II. At the time, wage and price controls mandated by the National War Labor Board (NWLB) froze salaries, making them an ineffective employee recruitment tool. Offsetting this was the board’s decision not to count employer contributions to health, life, disability, and other insurance programs as wages, making them a compelling adjunct to salaries for recruitment purposes. The icing on the cake was the ruling by the Internal Revenue Service that the cost of these benefits could be deducted from corporate taxes.
Ever since, healthcare benefits have been a key component in talent recruitment (though not on a par with salary). “Most organizations want to be competitive in their pay and benefit packages, otherwise the talent will go to the competition,” says Taylor. “While everyone is running the numbers right now on the reforms, they’re also cognizant of the role healthcare benefits play to attract and retain the best and the brightest.”
Smith agrees, to a point. “Employers have to strike the right balance between managing costs and retaining and attracting employees,” he says. “Obviously, a substandard benefits package—one predicated primarily on keeping costs low—doesn’t exactly help you attract and retain key talent. But, benefits are not the big draw—salary is. For now, most organizations are seeking consulting on the cost and complexity issues first.”
Add to that communications. Aside from providing assistance to employers about how to manage costs and compliance issues, consultants are being retained to inform employees about current and eventual changes to their benefit plans. “The law’s myriad complexities require an enhanced communications strategy, and consultancies are experts at providing that communication,” Smith says.
Passing the Buck
Another offshoot of healthcare reforms is the strong likelihood that employers will shed the transactional elements to outsourcing providers. “The first wave of activity we’re seeing is companies seeking advice from consultancies, but I see the second wave as the development of systems to support compliance,” says Perchthold. “In this context, outsourcing makes a lot of sense for handling the administrative transactional activities, but companies will want to keep control of policy setting. Outsourcing providers also can handle the electronic interfaces that will be required for compliance, since the government is moving to electronic submissions across the board.”
Watts predicts “keener interest” in outsourcing. “The more complex the requirements get, the more attractive it is to outsource to an organization for which this is a core competency. As more compliance issues are introduced, it will drive greater fear of running afoul, which in turn drives a greater need for outsourcing.”
Smith agrees that health plan enrollment and administration are prime opportunities for outsourcing providers, in addition to managing other types of employee benefits such as wellness programs. “One must also take into account the need for benchmarking data, so employers know their health plan is attractive from a talent recruitment perspective but not overly costly when compared to peers, or vice versa,” he explains. “It’s just another area where consultants and outsourcers can provide service.”
Kraus from Deloitte, which does not provide outsourcing services, sums up the prognosis for outsourcing providers. “The administrative complexities, the invasive recording requirements, the disclosure requirements, and the fact that so much is phased-in over so many years, has employers putting their heads in their hands and saying ‘Omigosh, a whole other thing to think about!’ ” he says. “The message to the outsourcing world is that there is certainly the potential for a lot of companies moving toward their services.”
Change After Change
Deciphering the Patient Protection and Affordable Care Act is a difficult exercise, given the many complex provisions presented—hence the expected bonanza for consulting firms that interpret the law. Below are but a few changes afoot for employers, and the date of their phase-in:
• Dependent children will be permitted to remain on their parents’ insurance plan until their 26th birthday (effective Sept. 23, 2010);
• Companies which provide early retiree benefits for individuals aged 55–64 are eligible to participate in a temporary program which reduces premium costs (effective Sept. 23, 2010);
• Insurers’ abilities to enforce annual spending caps are prohibited (effective Jan. 1, 2014);
• Insurers are prohibited from discriminating against any individuals based on pre-existing medical conditions (effective Jan. 1, 2014;
• A $2000 per employee tax penalty will be imposed on employers with over 50 employees who do not offer health insurance to their full-time workers, defined as employees working 30 hours or more per week (effective Jan. 1, 2014);
• Health insurance exchanges subsidizing the insurance premiums of individuals within 400 percent of the poverty line will be created (effective Jan. 1, 2014);
• Employed individuals who pay more than 9.5% of their income on health insurance premiums will be permitted to purchase insurance policies from a state-controlled health insurance option (effective Jan. 1, 2014);
• All existing health insurance plans must cover approved preventive care and checkups without co-payment (effective by 2018);
• A new 40% excise tax on high cost (“Cadillac”) insurance plans is imposed (effective by 2018).