Health Care Calculation for Businesses: Coverage Versus Paying the Penalty

photo by Eric Tadsen

Large and mid-sized businesses have some calculating to do regarding the recently enacted Patient Protection and Affordable Care Act, the federal health care law, but that calculation will not be entirely monetary, according to Dr. Craig Samitt.

Samitt, president and CEO of Dean Health System in Madison, said the comparison small and mid-sized businesses must begin to make is the respective cost of providing insurance versus the cost in penalties for not providing it. That final decision does not have to be made until January of 2014, but provisions clearly prescribe that employers will have this choice themselves. (Qualified small businesses would be able to purchase insurance for their employees through state-based Small Business Health Options Programs or SHOPs.)

Since the law goes into effect in stages, Samitt believes affected businesses should map out a strategy to take advantage of the various changes that occur each year leading up to full implementation. There is the immediate benefit of small business tax credits that are retroactive to Jan. 1, 2010, and then there is the aforementioned coverage question.

Large and mid-sized employers that fail to offer what the law calls “minimum essential coverage” would be liable for an additional tax. That penalty would equal the product of the applicable payment amount (with respect to any month, 1/12 of $2,000) and the number of full-time employees employed by the employer during such month.

The penalty would apply to employers with 50 or more workers, but would subtract the first 30 workers from the payment calculation. In a hypothetical example, a company with 51 full-time employees that does not offer the still-to-be-determined “minimum essential coverage” would pay an amount equal to 51 minus 30 (or 21) times the applicable per employee payment amount up to $2,000 per full-time employee. (Businesses with fewer than 50 employees would be exempt from any employer responsibility.)

If employer-provided insurance exceeds 9.5 percent of the employee’s household income, or the employer plan has an actuarial value of less than 60 percent, the coverage will not qualify as minimum essential coverage.

So the question becomes, “Do you provide coverage to employees, or do you pay penalties and have [individual] employees enter into an exchange,” Samitt noted. “Obviously, this will be a challenging call for employers because it’s not just about cost.”

More immediately, the Act provides a temporary, sliding-scale tax credit to help small employers offset the cost of employer-provided coverage. For the purpose of the credit, a small employer generally is defined as one with fewer than 25 employees and average annual wages of less than $40,000. From 2011 through 2013, eligible employers may qualify for a tax credit for up to 35 percent of their contribution toward the employee’s health insurance premium.

In 2014 and beyond, eligible employers who purchase coverage through a state exchange may qualify for a credit for two years of up to 50 percent of their contribution. (Employers with 10 or fewer employees and average annual wages of less than $20,000 would be eligible for the full credit.)

If a business belongs to an industry where the provision of health benefits is a competitive advantage, enabling them to attract and retain quality employees, Samitt believes it may be in the businesses’ best interest to provide health insurance even if it costs more than paying the penalty. “Those are the things that small employers are going to have to start thinking about in terms of options regarding reform,” he stated.

In general, Samitt regards the Act as good law for small businesses and for people who want to start a business but can’t due to their concerns about health insurance affordability. “Businesses have his had challenge of affordability as it pertains to health care,” he noted. “With these tax credits in short term, and with exchanges in longer term, smaller businesses have an opportunity to insure their employees like large businesses do.”

Reform Measures

The Act tried to accomplish three things which are important to reform: broadening access to coverage, where it scores more highly in Samitt’s view; and improving quality and affordability, where the jury is still out. According to Samitt, the bill’s strengths are really more on the coverage side, but there is much less detail and only references pertaining to quality and cost. “At this point, it’s hard to predict the impact on insurance premiums in the short- or long-term,” he opined. “It’s in an area where there is a lot more detail that needs to be worked out in terms of what will actually be covered, and in terms of changes in the payment system.”

There is a ripe area for cost control, however. Historically, Samitt said the health care reimbursement model has been more based upon the quantity of care rather than the quality of care; because quantity of care has been rewarded, costs have continued to rise. “There are references in this bill to rewarding the quality of care, not just the quantity of care,” he noted, “and if reimbursement changes to reward value, this should bend the cost curve and the premium curve.”

Citing information from the Organization for Economic Cooperation and Development (OECD) Samitt said the cost curve must inevitably be bent downward. The OECD notes that U.S. health care expenditures as a percentage of gross domestic product rose from about 5% in 1960 to a projected 18% in 2010. By 2018, health care expenditures are projected to grow to 20% of GDP.

“The cost of health care is rising at an exponential rate, and rising faster than inflation, so when we look at how much we, as a society, are spending for health care, that trend is unsustainable,” Samitt opined. “We will have no choice but to find a way to bend the cost curve while improving quality at the same time.”

Health Care a la Carte

Ideally, Samitt said health insurance should be structured with preventive care, regular check ups, pharmacy, and catastrophic coverage. Asked if individual consumers, in order to hold down costs, should be able to pick and choose the rest, paying a la carte for things like mental health coverage, Samitt said that would be problematic and weaken universal coverage principles.

“The cost of broader insurance coverage can only be managed if the risk is adequately spread among the population,” he explained. “Allowing people to shop a la carte can work for items that are truly non-necessities, like cosmetic surgery and items like that. But mental health care is not a luxury. It’s a real health care concern that must be part of the ‘must-haves’ like preventive care, regular check ups, and catastrophic care.”

“You can’t have people just pay a la carte when they get sick because it’s not how current coverage works,” he continued. “That would be equivalent of deciding to buy auto insurance only after accidents happen.”

Samitt Summit

Dr. Samitt commented on a number of topics, including the following:

On whether the bill is structured, as critics contend, to drive private insurers out of business and health care consumers into the government’s arms? “The bill is not intended to drive private insurers out of business. I don’t think it’s designed to nationalize health care. There is no public plan in the bill. What the bill does do, though, is bring more accountability to the insurance world. The ultimate goal of the bill is to provide more citizens with better care at a lower cost.

“On the health care delivery and insurance side, this will mean the need for more integration and coordination where physicians, hospitals, and insurance plans are all working together with patients at the center, and with a focus on managing quality and cost. So that accountability is critical and the pressure to integrate is essential. What’s great about Wisconsin is there are so many integrated systems like Dean-St. Mary’s that are already practicing these integrated models. But that level of integration is absent in many of the greatest population areas of the nation. In most other markets, what you see more often are independent, non-aligned entities, which may drive up health care costs while not necessarily delivering higher quality care.”

On whether he has any issues with the Act’s requirement for insurers to use at least 80% of premiums for care services rather than administrative costs or profit taking? “In my view, the more dollars that can be directed to heath services, the better off we’ll be. What we see in many integrated systems like those in Wisconsin, is those administrative costs are already on the lower side. So if there are health plans that can deliver a high quality product and spend less on administrative services and reduce waste, then why can’t all health plans achieve that same level of reduction in administrative costs? So yes, that is a good provision. We should be spending more on clinical services than less.”

On whether the federal government will be back to address health care reform: “Whenever you can provide more coverage, that’s good. The insurance provisions in the bill are the right things to do. They make sense. However, the concern everyone has is how are we going to pay for this? That’s why a big part of reforming health care will require us to think more about prevention, wellness, the appropriateness of hospitalization, and the appropriateness of getting care in the doctors’ office rather than the emergency room. Those are the parts of reform that actually have to happen that are not well-specified in the bill.”

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