HR. Payroll. Benefits. Employer Challenges Go Beyond Health Care Reform

Transcription

1 HR. Payroll. Benefits. Employer Challenges Go Beyond Health Care Reform

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3 Contents Introduction 4 Plan Design Flexibility Will Decrease 7 Exchanges Changing The Paradigm 11 Shared Responsibility Managing Compliance 17 Conclusion 21 About ADP 22 By John A. Haslinger ADP Vice President, Product Management - Benefits and Health Care 3

4 Introduction Employee benefits, as we know them today, came into existence following the Great Depression. The Great Depression, by wiping out personal savings and throwing almost 13 million people out of work, vividly demonstrated the need for government and industry to provide protection against at least some of the risks associated with illness and loss of earnings. Labor unions gained momentum following the Great Depression, as well, and bargained for better wages, working conditions, and eventually, benefits. By the end of World War II, labor unions were firmly established. And by 1949, they had the ability to bargain for pension and insurance benefits. While unions spearheaded the initial expansion of employee benefits, management also recognized the value of providing such benefits as part of a comprehensive compensation package. In addition, employers quickly realized that providing such benefits could also result in increased productivity and improvements in worker morale what we today refer to as employee engagement. The benefits plan designs which emerged in the 1950s and 1960s (and which we still have with us today in 2012) were (and are) concerned with two major issues: Income replacement in the event of retirement, disability, or death Medical coverage to keep the worker, and later the worker s family, healthy and productive In almost all cases, these plans were designed as Defined Benefit plans with the employer paying all of the costs initially. Over time, employee contributions became the norm but with the employer still liable for the vast majority of any benefit costs as well as the risk of costs exceeding projected levels in any given year. Employee reaction to improved benefits was favorable, the government provided tax incentives (and increasingly regulatory restrictions), and the post-war economy was booming. The predictable result was a rapid and continuous growth in the number and cost of employee benefits especially health care benefits. The cost of health care has now risen to the point where it accounts for over 18% of the entire U.S. economy, and is expected to account for 20% by Source: 1 Centers For Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, U.S. Department of Commerce, Bureau of Economic Analysis 4

5 Nationally, health care has been a major topic of discussion since at least the Clinton Administration. In part this has been driven by the fact that health care spending has risen far faster than the rate of inflation. The cost of health care has now risen to the point where it accounts for over 18% of the entire U.S. economy, and is expected to account for 20% by The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together known as Health Care Reform ) have refocused the national dialogue about health care, and has also dominated the employersponsored benefit plan landscape since 2009 and will continue to impact strategic and administrative considerations for the next decade and beyond. However, it is critical for benefits professionals to address the requirements of Health Care Reform in the strategic context of employee benefits and the role that benefits play as part of total compensation. Rapidly rising benefits costs especially health care are dramatically focusing the attention of management at the same time that significant changes in the demographics of the workforce are resulting in a measurable decline in the level of employee satisfaction. Especially in the area of health care benefits, employers are paying more and getting less less in employee appreciation, less in employee satisfaction, and less in a competitive edge. Fig 1. Average Cost of Employer-Provided Health Care Average annual cost of employer-provided health care rose an average of 8% annually between 1999 and Employee only coverage exceeds $5,000 in Family coverage exceeds $15,000 in $16,000 $15,073 $14,000 $13,770 $13,375 $12,000 $10,000 $9,950 $12,680 $12,106 $11,480 $10,880 $9,068 $8,000 $8,003 $6,000 $4,000 $2,000 $7,061 $6,438 $5,791 $2,471 $2,689 $3,083 $3,383 $2,196 $3,695 $4,024 $4,242 $4,479 $4,704 $4,824 $5,049 $5,429 $ Source: 2 Kaiser Family Foundation, 2011 Employer Health Benefits Survey Family Individual 5

6 In part, this situation can be traced to the fact that most employers have not applied the same strategic planning process to employer-sponsored benefits as they have to other parts of their business. The basic problem stems from the historical dichotomy between the way benefits and compensation are viewed. On the one hand there has been traditional compensation (pay, bonuses, non-qualified deferred compensation, restricted stock, stock options, etc.), which provided management with direct control of costs as well as the ability to integrate these expenses with specific business objectives. On the other hand, there have been employee benefits plans (especially health care). These benefits plans are generally not integrated into the broader strategic direction of the employer, beyond the generic goal of attracting, retaining, and motivating employees and generally are not tied to any metrics showing that they succeed in the standard generic goals. Equally important, benefits costs often bear no relationship to any specific business objectives in fact, they are driven to a significant degree by forces outside of the control of the employer: inflation, utilization, and government mandates. Health Care Reform is the most significant government mandate impacting employersponsored benefits plans since the passage of the Employee Retirement Income Security Act of 1974, as amended (ERISA). It imposes new administrative, communication, reporting, compliance, tax, and plan design requirements impacting every employer-sponsored health care plan. Viewed strategically, it also offers an opportunity for employers to re-think how health care benefits should be designed and delivered. In fact, the participant and service experience (i.e., Web, call center, mobile apps, decision support tools, carrier / vendor interfaces, payroll / HR integration, etc.) will become the key differentiator among employer plans, rather than plan design as a result of Health Care Reform. Rather than present an overview of the various requirements under Health Care Reform, the balance of this article will focus on employer considerations in addressing three key areas impacted by Health Care Reform: Plan Design less flexibility and differentiation among employers Exchanges both public and private Shared Responsibility Requirements managing the part-time labor force 6

7 Plan Design Flexibility Will Decrease Health Care Reform will require significant re-thinking around benefits design as a result of both coverage mandates and the nondeductible 40% excise tax (the tax on high-cost health coverage) that will go into effect in The result of these two provisions will be a narrowing of differences among employer-sponsored health care plans in fact, it is likely over the next 5 to 10 years that employer sponsored plans will begin to look more and more alike. For more than 50 years, annual average per capita health care spending has increased at more than twice the rate of inflation, as measured by the Consumer Price Index (CPI). In fact, there has not been a single year during the last 50 years when the increase in per capita health care spending was equal to or less than the rate of increase in the CPI it has exceeded the rate of growth in the CPI every single year. Fig 2. Percent Change in Health Care Costs Compared to Costs for All Items (percent increase from prior year) Every Year Since Medical CPI has risen faster than general CPI - Percent change in per capita health care expenditures has been higher than change in medical CPI 15% 14% 13% 12% 11% 11.6% 13.1% 14.2% 13.5% Short-term impact of HMOs 10.6% 10% 9% 8% 7.7% 9.1% 8.4% 7% 6% 5% 4% 3% 2% 1.6% 5.7% 3.6% 5.4% 4.5% 2.8% 6.1% 5.7% 3.4% 3.4% 4.2% 1.6% 6.2% PROJECTED Change In CPI not yet available for % 0% Per Capita NHE 3 CPI All Items 4 Sources: 3 Per Capita National Health Expenditures (NHE) - Centers For Medicare and Medicaid Services, National Health Statistics Group, U.S. Department of Commerce, Bureau of Economic Analysis 4 Percent Change in CPI (All Items and Medical Care) - U.S. Dept of Labor, Bureau of Labor Statistics 7

8 Looking at it another way, the annual per capita U.S. Gross Domestic Product (GDP) grew on average 3.3% between 1999 and During the same period of time, annual per capita health care spending grew on average 5.8%. 5 The result being that health care spending accounted for an ever-increasing share of the entire GDP. Fig 3. National Health Expenditures of GDP Health care represents a larger portion of the GDP almost every year since accounting for over 18% of GDP in % 20% 18.0% 20.0% 15% 10% Medicare enacted 7.2% 9.1% 10.3% 10.5% 12.5% 13.9% 13.8% 16.0% PROJECTED 5% 5.8% 0.9% 0.8% 1.0% 0% Source: Centers For Medicare and Medical Services, Office of the Actuary, National Health Statistics Group, U.S. Department of Commerce, Bureau of Economic Analysis Health Care Reform includes a range of insurance market reforms aimed at lowering premium growth, improving health benefits, and ensuring near-universal coverage in the U.S. These include a set of affordable insurance options available through new state insurance exchanges, rules limiting insurance administrative costs and profits as a share of premiums, and review of excessive insurance premium increases. In addition, the law contains payment and health care system reforms that seek to slow the growth in costs. However, at least in the short-run (the next 3 to 5 years), Health Care Reform appears to do little to slow the anticipated rate of increase in health care spending, especially for employer-sponsored plans. In fact, some analysts have argued that covering the uninsured (estimated at between 30 and 50 million), expanding coverage to meet new mandates, and the potential for new benefits to be added to the current mandates as part of the ongoing political process, could actually accelerate the rate of cost increases over the next decade. Not surprisingly, health care spending is projected to annually increase 6.1% between 2009 and 2016 according to the Centers for Medicare & Medicaid Services (CMS). 6 Actual claim increases reported by employers have generally been in excess of this estimate. 8

9 For example, Buck Consultants, LCC conducts a national survey of insurers to determine the rate of increase in employersponsored plans and found that costs rose faster than 10% in 2009, 2010, and Other consulting firms found similar results with Segal reporting cost increases above 10% for 2010 and 2011, PwC reporting 9.9% for 2010 (followed by 9.5% in 2011), and Towers Watson reporting a range of 9.5%- 10.9% for 2010 (8.5% in 2011). 8 AonHewitt reported cost increases of approximately 10% for both 2010 and Keep in mind that in 2009 the CPI declined by 0.4% and in 2010 it rose by 1.6%. 10 During this same time, CMS projected more than a 6% increase in health care spending and employers reported an increase in excess of 9%. At the same time, Health Care Reform places a cost cap on how high benefit spending can go before it is subject to a nondeductible 40% excise tax. Beginning in 2018, the cost of health care benefits that exceeds $10,200 for individual coverage or $27,500 for family coverage will be taxed at a 40% rate. As a result, most employers will not want plan costs to exceed these monetary levels. However, as shown in chart (fig. 1), average plan costs are approaching these levels already with individual coverage totaling almost $5,500 and family coverage exceeding $15,000 in And these are average national costs. Costs in high-cost markets such as Boston, New York, Chicago, and Los Angeles are already significantly above these national averages. If we rely on the projected level of cost increases of 6.1% put forth by CMS, the U.S. average cost of $15,073 in 2011 will be $22,814 in 2018 with plans in high-cost areas (say family costs of $18,500 in 2011) potentially exceeding $28,000 in 2018 triggering the 40% excise tax on the amount over $27,500. If costs increase at the current actual rate of 9% or more, the U.S. average family health care premium will likely exceed $27,500 in 2018 impacting virtually all employers across the U.S. not just those in traditionally high-cost areas. Rising health care costs, hitting a cap above which will be a 40% excise tax, will make it difficult for plan sponsors to use plan design to differentiate their benefits offerings. If costs increase at the current actual rate of 9% or more, the U.S. average family health care premium will likely exceed $27,500 in Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis; and U.S. Bureau of the Census, 6 Centers for Medicare & Medicaid Services, National Health Expenditures, NHE Fact Sheet, 7 Buck Consultants 22nd National Health Care Trend Survey, 8 Benefit Informatics, 2010 Employer Healthcare Cost Survey Data, 9 AonHewitt 2011 Health Care Trend Survey, 10 U.S. Department of Labor, Bureau of Labor Statistics, All Urban Consumers, U.S. City Average, All Items, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt 9

10 Fig 4. Health Care Reform Impact on Employer-Sponsored Plans Government-mandated coverage coupled with ongoing health care inflation will reduce employers ability to design health care plans that act as a differentiating component of total compensation and will increase likelihood of employers: - Potentially eliminating / reducing coverage - Focusing on consumer-based solutions HDHPs HRAs, HSAs Wellness - Potentially moving some employees to exchanges for coverage 40% Excise Tax On Value Of Benefits Above Limit $10,200 for Individual Cadillac Tax $27,500 for Family Strategic Benefits Plan Design Note: Medical inflation continues to rise at 2 to 3 times the rate of overall inflation - and has done so for more that 50 years Medical Inflation Provider Lobbying The value of strategic benefits design is likely to shrink over time due to Health Care Reform Mandated Requirements Since plan design will likely become less of a differentiator among employers and since more employers may likely move toward a Defined Contribution strategy the value proposition for employer-sponsored health care plans will likely shift to such things as: Improving the ability to control costs for both the employer and the employee - Engaging the employee as a consumer at both the moment of plan selection and at the moment of service being provided - Implementing consumer driven health plans - Moving to a Defined Contribution model for employer-sponsored health care plans Ensuring an employer-branded, consistent, and high-quality participant benefits experience 10

11 Exchanges Changing The Paradigm An exchange is a relatively simple concept an online shopping mall where buyers can compare plans and select the one that best meets their individual needs in terms of cost and other key preferences, such as out-ofnetwork care, the need for a referral to see a specialist, etc. Today virtually all employers offer coverage through what is effectively an exchange although a limited exchange. For example, most employers hold an annual enrollment during which their employees can pick a coverage option (e.g., PPO option, HMO option) under a health care plan from among those that are offered and in most cases, several vendors / carriers are involved. A typical plan sponsor may offer a choice of one or more coverage options through an insurance company like United, Aetna, or Blue Cross- along with one or more HMOs. Employees can compare plan provisions, network coverage, and price and may even be provided with decision support tools (at a minimum, some sort of coverage options comparison capability) to assist them in picking the coverage options that is best suited to meet their needs. Fig 5. Public & Private Overview Employer s Existing Health Care Strategy (Limited Exchange) Current model: Multiple choices offered to employees in the cafeteria model. Has many features in common with an exchange. Likely to survive in some states even if ppaca is struck down. Subject to variation jurisdiction by jurisdiction as a result state exchanges may not meet the needs of multistate employers. Federal exchanges should provide consistency across states, but will only apply to states without their own exchanges. Public Exchange Private Exchange Individual Exchange Group Exchange Employers provide a dollar amount and a gateway to a private exchange. Members are independent purchasers of health insurance on the private exchange. Employer stays active and leverages employee support tools such as Web, mobile, call center and customer service. Contracting is done by an aggregator who offers administrative support required to operate the exchange like benefits administration, spending accounts, decision support tools and ancillary services. Likely to utilize insured products. Similar to the individual exchange described above except that employer may self-insure some offerings, thereby preserving the ERISA preemption and direct control of plan provisions. Employer may also be responsible for at least some of the vendor aggregation. May include insured and self-insured products. Evolution of current model. Becoming synonymous with Defined Contribution Health Plan. Expect rapid growth in this area, whether PPACA survives or not. 11

12 These plans are Defined Benefit in nature, with employees paying a relatively small share of the total estimated cost, and employers funding the balance, regardless of how expensive the actual cost turns out to be. With this in mind there are really three types of exchanges for employers to consider: 1. Limited Exchange: Traditional employer-sponsored plans generally limited to 3 to 6 health care plan choices, and still primarily Defined Benefit in design 2. Private Exchange: A variety of plan choices aggregated by a provider or an outsourcer with employer input as to which ones are offered, with the ability for employers to rapidly embrace a Defined Contribution strategy utilizing a qualified funding vehicle (i.e., 501(c)(9) Trust / VEBA, HSA / HRA or for public-sector employers an Integral Part Trust, etc.) 3. Public Exchange: The state exchanges required under Health Care Reform (will vary by jurisdiction in terms of coverage, quality, and participant support / experience). Beginning in 2014, small employers will be able to participate in the public exchanges through the Small Business Health Options Program (SHOP). In 2017, larger employers may be permitted to participate in the public exchanges, however, this will vary by state. Public and private exchanges offer many similar advantages for employers to consider and what may be right for any employer will depend on a number of different variables including each employer s specific employee demographics. The following chart summarizes some of the key aspects of each type of exchange. 12

13 Beginning in 2014 Limited Private Public Offered By Individual Employer Plan Aggregator State or Federal Government Rating Basis Individual Employer Experience Individual Employer Experience General Population Experience Plan Type Defined Benefit Defined Contribution Defined Contribution or Defined Benefit (at employer discretion) Employer Contributions Employee Contributions Pretax Pretax Pretax or Post-tax (at employer discretion) Pretax Pretax Pretax or Post-tax (at employer discretion) Funding Approaches Combination of direct employer contributions, contributions to HSA and / or FSA, plus pretax employee contributions Employer contributions to an HSA / HRA, VEBA, or other qualified vehicle plus pretax employee contributions Combination of direct employer contributions, contributions to HSA / HRA and / or FSA, plus pretax employee contributions Who Selects Vendors / Carriers To Be included Individual Employer Plan Aggregator and / or Individual Employer State or Federal Government Who Selects Plans To Be Included Individual Employer Plan Aggregator and / or Individual Employer State or Federal Government Number of Plans Offered Generally limited to 3 to 6 Determined by Employer in conjunction with the Plan Aggregator. Number of options will vary Determined by State or Federal Regulators. Number of plans will vary by exchange Participant Experience Consistent across the country Employer-branded Portal / Web Call Center Online support Mobile Apps Consistent across the country (best practice) Employer-branded Portal / Web Call Center Online support Mobile Apps Private exchanges could vary state by state based on regulations or employer preference Will vary widely in terms of look and feel, content, and quality at both state and federal levels Not Employer-branded Portal / Web Call Center Online support Mobile Apps 13

14 The Private Exchange combines many of the best aspects of the current Limited Employer- Sponsored approach and the new Public Exchanges that will become effective in A Private Exchange enables an employer to continue to leverage the value of an employer- sponsored health plan with a significant reduction in the current effort (in some cases the total elimination of some employer requirements). In addition, the value to the employer and the employee is not based on individual plan design, but rather on lower costs and high-quality service. Lower costs are achieved by: Reducing or even eliminating the effort and cost spent on designing and updating health care plans annually - The employer could eliminate the need to design the plans offered through the exchange Moving to a Defined Contribution approach - Possibly utilizing an HSA / HRA or a VEBA (Integral Part Trust for publicsector employers) as the employer funding vehicle along with pretax contributions made by employees - Employer costs could be designed to track the Consumer Price Index (CPI) or some other benchmark Reducing or even eliminating most of the government reporting and communication requirements - The only plan maintained by the employer could be an HSA used as a funding vehicle from which the employee could pay premiums, along with a Section 125 Premium Only Plan (and possibly a limited purpose FSA) Employers don t design the mutual funds offered in a 401(k) plan under a robust private health care exchange, they would no longer design the health plans offered, but would retain control over vendors and specific plans to be offered - This would reduce the effort associated with such things as Form 5500 filings, Summary Plan Descriptions (SPDs), Summary of Material Modifications (SMMs), and other mandated reporting and communication requirements Basing rates on specific employer experience rather than that of the general population, as would likely be the case in a public exchange (assuming that regulations do not prohibit this). Involving participants, as informed consumers, at both the point of purchase of the plan and at the point of purchase of health care services Providing employees with a far wider array of choices than a single plan sponsor could offer thereby permitting employees to pick a plan that best meets their needs, in terms of plan provisions and plan cost 14

15 Fig 6. Private Exchange Overview Private exchanges have become synonymous with Defined Contribution insurance plans Private denotes employer-sponsored vs. the public exchanges managed by governments Gets the employer out of selecting benefits for employees; limits role to financing & facilitating Employer Funding Vehicle Funding Level Benefits Options Employer s role is limited to deciding how much funding to provide and which benefits options / carriers are available Web portal has educational tools, as well as a questionnaire, that help employees understand options and make selections Employee selects among a wide range of health insurance and other benefits; could have $ remaining or require payroll deductions Employee Funding Vehicle Funding Level Employee has a funded vehicle from which to purchase benefits Eligibility System Status Position Dependents Decisioning Tools Education Health issues Priorities Risk appetite Product Marketplace Health insurance Dental, life, disability insurance Other ancillaries Benefits Administration (Employer-Branded) Eligibility & enrollment / Participant support Account plan recordkeeping & payroll deduction Premium aggregation & money movement Insurer Insurer Exchange could source one or multiple carriers Coverage can be group or individual (community-rated starting 2014 in public exchange) 15

16 High-quality service and ongoing employee engagement is achieved by: Employer branding of all tools and communications (Web, print, call support, etc.) - As a result, the employer: Retains the benefit of offering coverage and Has control over which vendors and plans will be offered from among a group that has been previously vetted and priced by an aggregator Service-level agreements that ensure - Portal experience that is consistent across the country - Call center quality that is consistent across the country - 24/7 Web availability and online support - Common mobile applications - Common decision support tools and applications - Advocacy (and other specialized service) support that is consistent across all vendors and the entire country Compliant administration based on Federal and applicable state requirements - Automated processes to ensure consistent administration Carrier / vendor Interfaces similar to what is done under traditional employer- sponsored plans Money movement Payroll / HR Integration Flexible reporting and management dashboards 16

17 Shared Responsibility Managing Compliance Health Care Reform does not require employers to provide health coverage to their full-time employees. However, it does impose a potential penalty on those employers (with at least 50 employees) who fail to do so. Beginning in 2014, employers must meet the requirements described below, or be subject to a potential penalty: Offer full-time employees the opportunity to enroll in minimum essential coverage under an employer plan (Code Sec. 4980H(a)); This minimum essential coverage, among other things, must be affordable (i.e., no more than 9.5% of the employee s W-2 earnings with the employer). If the employer fails to do the above, AND the employee purchases coverage through a Public Exchange, AND the employee is eligible for and receives a Federal Tax Credit in order to subsidize the cost of their coverage, THEN the employer will be subject to a penalty. It is important to keep in mind that employees with household income up to 400% of the Federal Poverty Level (FPL) will be eligible to receive the Federal Tax Credit. For 2011, the FPL was $22,350 for a family of four meaning that an employee with a family of four earning less than $88,200 would be eligible for a Federal Tax Credit if they enrolled in a Public Exchange. (Note: the FPL is indexed for inflation and will likely be higher in 2014). This could be a significant issue for employers with hourly employees regularly scheduled to work less than 30 hours per week many of whom are likely to have both W-2 wages and household income that will be less than 400% of the FPL. An employee with a family of four earning less than $88,200 would be eligible for a Federal Tax Credit if they enrolled in a Public Exchange. 17

18 Fig 7. Employees May Qualify for Federal Subsidies at Fairly High Income Levels 2011 Income Levels For 400% of FPL (Indexed For Inflation) No. Persons In Family Federal Poverty Level: Contiguous States 48 Contiguous States / DC Alaska Hawaii 1 $10,890 $43,320 $54,120 $49,840 2 $14,710 $58,280 $72,840 $67,040 3 $18,530 $73,240 $91,560 $84,240 4 $22,350 $88,200 $110,280 $101,440 5 $26,170 $103,160 $129,000 $118,640 6 $29,990 $118,120 $147,720 $135,840 7 $33,810 $133,080 $166,440 $153,040 8 $37,630 $148,040 $185,160 $170,240 Source: Federal Register 4200, January 23, 2009, Of particular importance for many employers is how Health Care Reform defines part-time and full-time employees for purposes of determining this potential penalty. In simplest terms, a full-time employee is any employee who works, on average, 30 hours or more per week in any month. Employers can use 130 hours of service per calendar month in making this determination (see IRS Notice for specific details). Generally speaking, seasonal employees who work less than 120 days per year are not counted. The proposed guidance provides another administrative wrinkle a look-back period and a coverage / stability period. Using the look-back period approach, an employer would determine if an employee is full-time by looking at a period of 3 to 12 months (the measurement period is at the discretion of the employer and will generally be 3, 6, 9, or 12 months) to determine whether the employee averaged at least 30 hours of work per week or at least 130 hours of service per calendar month during that period. 18