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Companies Catch Up On Health Reform

In the months since my business ended its company-paid health insurance coverage last October, our employees have been learning to adjust. During that same time, other companies have just been learning.

A recent study published in McKinsey Quarterly found that the number of employers who plan to stop offering employer-sponsored health insurance after 2014 — when the bulk of the Patient Protection and Affordable Care Act (PPACA) comes into effect — is far higher than previously estimated. According to the McKinsey study, 30 percent of employers said they will “probably” or “definitely” end coverage, and 40 to 45 percent said they will “pursue alternatives,” which may or may not involve fully dropping coverage.

The study’s most significant finding, however, may not be the raw numbers, but the correlation between intention to drop coverage and familiarity with the new law’s specific provisions. More than half the employers that reported high awareness of the upcoming changes said they will probably or definitely stop offering employer-sponsored insurance. As 2014 draws closer and more companies investigate their options, we can expect that more of them will reach the same decision.

The study estimated that around 30 percent of companies, the same proportion that already plans to drop coverage, could benefit financially by eliminating health benefits, without financially hurting their employees. The companies and their employees come out ahead, even after considering the law’s $2,000-per-employee penalty imposed on employers with 50 or more employees that do not offer sufficient coverage. (The penalty does not apply to the first 30 uncovered employees.) This is because the government will pick up a large chunk of the insurance costs for low- and middle-income workers through subsidized plans that will be offered on new insurance exchanges.

Even employers that cannot drop coverage and still make employees “whole” could benefit by ending plans, the McKinsey study found, since employees’ perceived value of their health insurance benefits is often lower than employers’ actual after-tax costs.

In my situation, I did not expect to be able to make all my employees whole, but I still found that dropping coverage was the best thing I could do for the firm and for its employees. For years, our health care costs had soared. Because our firm has a low headcount relative to its annual revenue, the situation was less dire for us than for some. Still, I knew we couldn’t keep up with the premium increases forever; I hoped only to be able to wait out the time until the government took some action to rein in health care costs.

When Congress then passed something with the words “affordable care” in its name that did nothing to make care more affordable for my firm, I recognized that there was no longer any point in waiting for relief.

Furthermore, while the new law won’t make care more affordable for my firm or its employees, it will make care more affordable for around 30 million currently uninsured Americans not employed by my firm — at our expense. New taxes will pay for the subsidies included in the act. While I may have been able to hold out against rising premiums a little longer, I am not willing to pay the ever-increasing costs of health care twice — both in premiums for my own staff’s care and in taxes for a host of strangers’ care.

When I stopped paying for the company health plan, I gave everyone at the firm a salary increase. Some people were able to get coverage on parents’ and spouses’ plans for minimal cost and ended up with a net raise. Others, based at our offices in Fort Lauderdale and Atlanta, used the money to buy individual coverage, taking advantage of the new opportunity to pick plans that best suited their needs. After taking their new raises into account, they pretty much broke even.

For those at our Scarsdale, N.Y. office, however, finding individual coverage for the amount of the salary increase was impossible. Because of several state regulations similar to those that will soon be enforced nationally, individual health insurance in New York State is exorbitantly expensive, even for those who are young and healthy.

Primarily for the benefit of the New York staff, the firm continues to offer a group plan. The difference is that, rather than being fully employer-paid, these plans are now fully employee-paid. The New York staff identified a less expensive plan that provided many of the same benefits, so at their request, I switched insurance carriers.

By maintaining our company’s group plan for now, even on an employee-paid basis, we provide a coverage option for anyone who might be unable to obtain individual coverage as a result of a preexisting condition. After 2014, we may be able to eliminate the group plans, because insurers will no longer be able to refuse coverage on the basis of pre-existing conditions and subsidies will be available to some of those who are now unable to find affordable coverage on the individual market.

Our firm’s health care costs have dropped from six figures to practically zero, and, as far as I know, everyone still has some form of coverage. Not everyone has benefited from the change, but no one has left the company, no one has been left uncovered, some employees with other insurance alternatives got a net raise, and I have more money available for salaries, bonuses and profit sharing contributions.

From a larger perspective, however, our firm’s experience and the McKinsey study both point to a significant flaw in the health care act. Estimates of the law’s financial impact have been based on the assumption that only 7 percent of employees currently covered by employer-sponsored insurance will switch to government-subsidized individual plans. However, according to the Kaiser Family Foundation, in 2009 68 percent of the population had earnings lower than 400 percent of the poverty level, the cut-off for insurance subsidies under the new law. If a substantial number of businesses drop coverage, then as the McKinsey study predicts, the portion of people moving from employer-sponsored insurance to government-subsidized insurance will be far higher than 7 percent. The result is going to be a much larger hit than projected for taxpayers — and, inevitably, higher taxes for businesses like mine.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s most recent book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book, Looking Ahead: Life, Family, Wealth and Business After 55.

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