Health Care Reform Could Result in Unintended Consequences

Mercer noted that as a result of the new insurance reforms, employers face new pressures to control costs, expand eligibility, comply with new coverage and contribution requirements, absorb new fees and, at the same time, try to avoid paying excise taxes for having a high-cost plan. Mercer assumes that in the near term employers will absorb an additional 4% to 6% increase above current health care cost trends.  

According to the report, this is due to new sources of cost, including:

• Expanded eligibility for groups of employees who are not currently eligible and for dependent children up to age 26;
• Higher contributions for low-income employees who are currently paying more than 9.5% of income for coverage;
• Expanded benefit coverage to eliminate any copayment or coinsurance on preventive care and to eliminate lifetime and annual plan maximums;
• Industry fees on suppliers, manufacturers and health plans that add billions of dollars that are likely to be passed through to employers as part of the cost of materials and administrative expense; and
• Per-participant fees for effectiveness research.

A recent Mercer survey of 791 employers found that the excise tax was their most significant concern (29%), followed by changes to lifetime limits (21%),  and dependent eligibility (20%).  

In addition to these new costs, Mercer says health insurance reform did not address the inequities between provider costs paid by government-sponsored plans and those paid by employer-sponsored plans. Medicare and Medicaid have negotiated extremely favorable payment rates, leaving providers looking to the private sector to make up any insufficiencies or profitability losses.   

Mercer says the legislation assumes that Medicare will make payment cuts in both the basic Medicare program and in Medicare Advantage. However, if the cuts do not materialize (as has been the case with planned cuts to Medicare physician payments), the shortfall will increase the federal deficit and potentially increase taxes and fees for employers and individuals, and if the cuts occur, then providers will turn to employer-sponsored plans and individuals to make up the differences in their payments, Mercer contends.  

The report says employers face not only new sources of cost, but also the risk of continued and more intensive cost shifting from government-sponsored programs. As a result, it is highly likely that the cost trend may increase at a higher rate than expected over a 10-year period.

Health Care Reform Impact on Workforce  

The new report from Mercer suggests the new health care law creates some positive outcomes, some new risks, possible changes in workforce strategy, and some unintended conflicts and consequences.  

For example, Mercer said increased access to coverage creates conflicting outcomes. Increased enrollment in Medicaid, individual, and employer plans will reduce the uninsured population, theoretically benefitting employers that would not be charged the cost for uncompensated care; however, the cost of individual coverage is likely to increase in the short term, making it less attractive to new enrollees unless they are eligible for a significant subsidy.   

The report says the average cost for individuals may be impacted by several factors:

• New enrollees will include people who had previously been denied coverage due to pre-existing conditions. Thus, they come into coverage with health conditions that must be addressed – particularly if they have delayed care due to the lack of coverage. As a result, initial utilization for this group will be high.
• The weak individual mandate increases the risk of adverse selection. The low penalty for not having coverage provides an incentive for individuals to opt in and out of coverage as needed. Individuals who think they have little to no risk of needing coverage may continue to go without it. Including these healthier risks would be very helpful in stabilizing cost and reducing the financial risk of adverse selection.

While many employers place a high value on health plans as a way to drive productivity and retain employees, that view is not universal. Mercer found some employers are looking into the option of eliminating health care benefits and giving some type of contribution to help employees buy coverage. 

In addition, employers that are facing significant cost increases because of the shared responsibility requirements to cover new groups of employees have to weigh all possible alternatives – increase their cost by adding new employees, pay a penalty or evaluate ways to restructure the workforce (for example, contract arrangements, reduced work hours). Thus, rather than expanding access to coverage, the law may result in reducing the number of hours employees are eligible to work, thereby reducing employee income.  

Mercer found a third (34%) of employers would consider changing their workforce strategy so that fewer employees work 30 hours or more per week, and 38% would consider offering only a lower-cost plan for part-timers.