As reported by CNN, large corporations such as Verizon, AT&T, Caterpillar, and surely many others are going to be facing a difficult and far-reaching business decision in the next few years. Namely, should they continue offering health benefits to employees, or stop offering the benefits altogether and pay the penalty required by the Patient Protection and Affordable Care Act (PPACA)?
These same companies have already reported billion-dollar charge-offs required by the new law due to changes in the way retiree benefits are taxed. Now, they are weighing their options on dumping health plans altogether. When the health exchanges open in 2014, hundreds of thousands of employees will be able to choose any health insurance policy that is offered. Currently, many of those people would not be able to obtain their own health insurance.
So the million dollar question (or in this case, several billion dollars question) becomes…do they want to continue offering health benefits, an ever-increasing burden on the company, or dump the plans and (likely) give employees a substantial raise (as would be required in a competitive market)? Verizon’s average expenditure was over $8,000 per employee last year. By the time 2014 rolls around, that number may become $10k, $12k, or maybe $14k, or higher. If they simply get rid of health benefits and offer employees a raise, that is a fixed cost that the company has control of at all times, and may make for a very tempting consideration. The tax penalty these large corporations would pay for not offering health benefits is $2,000 per employee (another fixed cost, versus an escalating cost), or somewhere in the range of 15-30% of what most corporations currently pay for employee health benefits.
Pay particular attention to the following items noted by CNN:
“Both Caterpillar (CAT, Fortune 500) and Verizon believe the requirement to allow dependents to remain on their parents' policies until age 26 will prove costly. Caterpillar puts the added expense at $20 million a year.”
Now that children are allowed to stay on parents’ policies until age 26, the parents in many scenarios will face no extra cost to keep all of their children on the plan. A common example would be a parent with three children, let’s say ages 5, 15, and 24. Under a group plan, a “family” can have one child, five children, or fifteen children and pay the same rate. Since the parents would continue to pay for the youngest child for many more years, they have no reason not to drop the other children (again, the cost is the same). This drives up claims rates for group plans as more services are utilized, in turn costing the company and the employees more money.
“What does it mean for health care reform if the employer-sponsored regime collapses? By Fortune's reckoning, each person who's dropped would cost the government an average of around $2,100 after deducting the extra taxes collected on their additional pay. So if 50% of people covered by company plans get dumped, federal health care costs will rise by $160 billion a year in 2016, in addition to the $93 billion in subsidies already forecast by the CBO.”
Recipe for disaster? You bet.
