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Waiting for 2014 and Beyond

David P. Lind BenchmarkUncertainty remains…we continue to wait.

A Deloitte study was released on July 24 indicating that 9 percent of employers in the U.S. said they may stop offering health insurance in the next three years. Based on numerous study results from last year, this number is not at all surprising. In fact, we surveyed Iowa employers last summer and found that less than 6 percent of employers reported the possibility of dropping health coverage when 2014 arrives (see below).

2011 Iowa Employer Benefits Study 

So what gives? Why do employers feel that they may no longer offer coverage? For one, in 2014 employers with over 50 employees who fail to offer minimum essential coverage will incur a penalty of up to $2,000 annually per employee. In addition, if employees are required to pay more than 9.5 percent of their income for self-only coverage, the employer would be penalized $3,000 per year, per full-time employee who enrolls in the exchange and is eligible for government subsidies…a non-deductible expense to the employer.

Perhaps another more plausible approach employers might take would be to pursue a “defined contribution” strategy whereby the employer provides a defined amount of money to each employee who will then purchase coverage through the exchange. Keep in mind that by 2014, individuals will not have to worry about pre-existing conditions when applying for individual coverage. Employers may find this approach more palatable than offering their own health plan, which takes time and resources to keep the plan in compliance (and remain competitive).

When we asked Iowa employers whether they would terminate their current group medical plan, pay the $2,000 penalty per employee, and increase employee compensation with the money saved from dropping health coverage, less than 1 percent said they were “very likely” to pursue this approach (see below).

 2011 Iowa Employer Benefits Study

There are many studies to draw from when attempting to understand what employers will do in 2014 and beyond. Needless to say, there is still much confusion from the employer community about how the health reform law will impact their health coverage.

Playing a “wait and see” approach may be the most logical strategy for the time being.

Unsustainable Pot of Water

You have no doubt heard of the parable about the boiling frog. The premise is that if you place a frog in a pot of boiling water, it will jump out. However, if it is placed in cold water that is slowly heated, it will not perceive the danger until it is too late – it is cooked to death. This parable illustrates how people should make themselves aware of gradual change before they suffer the catastrophic consequences. So it goes with health insurance premiums (and our health care ‘system’).

This “boiling frog syndrome” can also be found right here in Iowa. Based on the results from our 2011 Iowa Employer Benefits Study©, we found that the average annual family premium paid jointly by both the employer and employee was $13,295! An astounding number!

As concerning as our premiums are in Iowa, they appear tame compared to what they potentially will become in the next ten years. Based on our annual studies, the average premium increase reported by Iowa employers during the last five years was 10.2 percent (prior to making plan design changes to bring their rate increases down). If we trend the Iowa family premium by 10.2 percent annually for the next ten years, the $13,295 premium now becomes (drum roll, please), about $35,000 (or 164 percent higher than today)! Again, we assume that the employer has not made changes to their health plans during the next ten years, which is HIGHLY unlikely.

Quite obviously, Iowa employees will see their take-home pay become severely suppressed. In 2011, the average Iowa household income was approximately $50K, which means the family premium was 27 percent of the income earned by the average Iowan. In 2021 (assuming that income increases an anemic 2 percent annually for the next ten years) the family premium would be almost 60 percent of household income! This truly defines the word, “unsustainable”.

Health reform in this country, however it looks, will need to aggressively address the cost issue – as it remains to be seen how successful the existing health reform law will do this.

Like the frog, we are slowly being cooked. We need to find a way to jump out of that simmering pan of water before it becomes too late.

Exchange Clock

David P. Lind BenchmarkThe Supreme Court has ruled on the constitutionality of the health reform law. Now what? Iowa employers, insurance carriers, health care providers (among others) need to continue the implementation process required under this law. So does the state of Iowa.

For example, will Iowa have its’ own insurance exchange for individuals and small businesses, or will it need to defer to a federal-based exchange? At this point, we don’t really know. We do know that if Iowa wishes to operate a state-based exchange on January 1, 2014, it must submit a completed Exchange Blueprint to the HHS no later than November 16, 2012. This notification deadline will be shortly after the national elections…hmmm.

Meanwhile, the clock is ticking…

To date, the Iowa legislature has not passed legislation to approve its’ own exchange, which is an important part of the process. However, without such legislation, the Governor may issue an Executive Order to establish the exchange. Whether this will happen…and if so, when, is uncertain at this time.

Establishing an exchange requires a great amount of thought and study before implementation. As one can imagine, there will be both intentional and unintentional consequences to the Iowa insurance markets when implementing an exchange. Each state will need to consider key issues prior to establishing their own exchange:

  • Whether insurance companies in Iowa participating in the exchange should be required to offer all health plans sold in the exchange to individuals or small employers purchasing coverage outside the exchange.
  • Whether the individual and small employer markets should be placed entirely inside the exchange.
  • Whether the individual and small employer markets should be standardized inside the exchange or inside and outside the exchange.
  • Whether to merge the individual and small employer markets for rating purposes (how will this affect premiums for both markets?)
  • Whether to increase the size of small employers from an average of at least one but not more than 50 employees to an average of at least one but not more than 100 employees prior to January 1, 2016.
  • How to account for sole proprietors in defining “small employers”.

There are a host of other key (and complicated) questions that Iowa and all other states must decide before pursuing their own insurance exchange. Needless to say, there will be heavy lifting by key stakeholders prior to November 16 of this year. Will Iowa be ready?

The clock continues to tick.