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Employer-sponsored health insurance in flux

The Internal Revenue Service (IRS) declared employer-sponsored health insurance tax exempt in 1943, and ever since health benefits have been an integral part of the American workplace and the greater economy. Today, it is at a crossroads, amid health reform, economic and demographic trends.

Even as benefits are expected and now mandated for most full-time and salaried positions, the inordinate growth of U.S. healthcare costs -- blamed in part for wage stagnation over the past few decades -- may be changing the value proposition.

"If the trend continues over the next five years, employees will be paying as much as their employers are," Aetna CEO Mark Bertolini said at the World Economic Forum recently, forecasting the growth of retail health insurance and exchanges.

In a hyper-competitive, post-recession economy, some employers may be facing real budget challenges in considering whether to continue their existing coverage, end coverage and pay fines, self-insure, offer defined-contribution plans or dig in to keep generous, potentially taxable plans.

To what extent employer-sponsored insurance will change over the next few years under the ACA is an open question. In early February, the Congressional Budget Office (CBO) estimated a growth in employer-coverage from 154 million people covered in 2013 to 164 million in 2020.

At the same time, the CBO predicts, a confluence of market trends and compliance scenarios could see thousands of employers shedding or forgoing worker coverage. In 2010, the CBO estimated that about 3 million people would lose employer-based insurance in the coming years, and recently raised the estimate to 8 million.

"There does seem to be the general desire to continue to offer benefits," said Dave Morgan, a benefits advisor with Morris & Garritano, a Southern California-based insurance services firm. "There's definitely some anxiety about what health insurance will look like in 2014 in terms of difference in rates and potential difference in benefits. With some industries, where there is a high percentage of low-wage workers, there is more of a question mark."

As the California government is forging ahead with ACA implementation, Morgan has been helping employers navigate complex and still evolving regulations. Looking at proposed IRS rules and their potential implications in some markets, he sees some affordability problems for family members of employees who are self-only insured. But he also sees insurers redesigning plan models to adapt to costs.

"There'll be movement at the top end and movement at the low end. I think that over the course of the next couple years, the rich, traditional PPO plans will give way to more of an account-based model. We see that trend already, and products will increasingly evolve to take advantage of ACO opportunities in a region," Morgan said.

"On the low end, there is probably going to be more dramatic movement," he said. "When we look at the small group right now, there is significant utilization of $3,000, $4,000, $5,000 deductibles." In California, he said, "Adapting to 2014 ACA specifications, particularly for the silver level of coverage, may cause some changes under the hood of plans, whether that's using a limited network or a limited drug list."

And across industries, the main challenge will be having minimum coverage and keeping it as affordable as possible. "Account-based plans, particularly with wellness integration, become the sweetener that also allows employees to be happy."

Wellness benefits across corporate and small firms vary from tobacco cessation programs to on-site fitness centers, free produce and commuting perks. For ACA minimum benefits compliance, though, it's still not clear how exactly the affordability test will be measured against wellness incentives, said Paul Houchens, an Indianapolis-based consulting actuary with Milliman.

"Let's say you have a plan that charges $2,000 for single coverage without wellness incentives, but $1,000 if you're a non-smoker. Is that affordability going to be measured based on the $2,000 or that $1,000? Particularly for employers with large wellness incentives in their plans, it's difficult to do a lot of planning without having that information."

More broadly than wellness, Houchens sees employers probing the value of their current sponsored insurance and calculating the costs and benefits of different options, as federal agencies finalize rules for the individual and employer mandate, premium assistance and eligibility.

If all of an employer's workers are above 400 percent of the federal poverty level (FPL), Houchens said, "none of them are going to qualify for premium subsidies and probably in a lot of cases are going to be paying a lot more for health insurance under exchanges than they would under (their) plan." Or "if you have an employer with dominantly low-income employees, maybe some would actually be better off in the exchange versus your employer plan."

While the level and relative affordability of coverage will probably vary by industry and income, Houchens and colleagues think that the cost of dropping coverage is likely to outweigh the savings.

"Even for some of the low-income employers, I think a key point to remember is that your health insurance is a tax-deductible expense, whereas the penalties are not," Houchens said. "That's a huge difference for the for-profit companies. And also, you're being penalized on every full-time employee. You're not just being penalized on the people that would participate on your plans."

A company with 60 percent health plan participation is "really only paying for health insurance for 60 percent of employees," he said. "But with the exception of the 30 employee exemption, you would be paying a penalty on 100 percent of the full-time employees; that's non-tax deductible. We've run the calculations for a number of employers. The math of terminating coverage and trying to make them whole, it simply doesn't add out. So employers are thinking prudently. They're probably going to continue to offer coverage in 2014."

See also: American insurers talk innovation at Davos

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