The Affordable Care Act (ACA) is very experimental and still unfolding. I like to refer to the ACA as healthcare reform version 1.0 because an updated act, version 2.0, is inevitable. One of the key components of the ACA, the employer mandate to provide coverage, has already been delayed a year, meaning we are unlikely to know its full impact for quite some time.
There are three options for midsize companies dealing with the Affordable Care Act: call, raise, or fold.
According to our NCMM 2Q 2013 Middle Market Indicator, healthcare costs have been identified as one of the greatest challenges facing middle market leaders. When the time comes, middle market companies with more than 50 employees will be forced to make a tough decision: to call, raise, or fold on their commitment to providing healthcare coverage for their staff.
In general, the world is moving away from the legacy model of defined benefits toward a model of defined contribution. In this new model, employers give or assign employees a fixed amount of money and allow them to manage their own care rather than define, manage, and administer benefits. Employees, in turn, buy their own healthcare coverage in a new private healthcare exchange marketplace. The Wall Street Journal ran an article recently showing that the projected enrollment in these private exchanges is expected to mushroom from less than 1 million in 2014 to about 40 million by 2018.
These private exchanges are different from the mandated public exchanges, which are designed to handle the individual and small (companies with fewer than 50 people) group market.
Conversely, employers with 1,000 or more employees are largely self-insured, meaning they assume their own underwriting but outsource all of the administrative functions - e.g., benefit management, claims processing - that are critical to actual healthcare delivery. Given their size, it is a relatively easy economic decision.
That leaves midsize companies with more than 50 employees who possess neither the scale of a large employer nor the scant numbers of a small business. How should they approach healthcare reform and, more specifically, the mandate that requires healthcare insurance be provided for all workers?
There are three basic legal options:
- Call. Continue with the existing model of defined benefit - or move to the newer model of defined contribution.
- Raise. Exceed the requirement with innovative approaches that embrace primary and preventative health care coverage and delivery more directly.
- Fold. Simply agree to pay the per-employee penalty (about $2,000) and push employees to the open insurance exchange market.
The second option - exceeding the requirement with innovative approaches - is quickly becoming more attractive and affordable. The model, known loosely as worksite clinics, puts primary and preventative care in close proximity or even on site (in partnership with vendors that provide this solution). I've written about this model before. The model was initially only affordable to large employers, but like the self-insurance model itself, the costs (and savings) make this increasingly more viable and affordable to smaller and smaller companies.
Midsize companies should consider this "raise" model over the "call" or "fold" model as a way to lower a company's healthcare costs, improve access to preventative healthcare services, and increase employee productivity. The fact is it's cheaper because an outsourced company can manage healthcare delivery (and cost) more directly than an employer can themselves. Big companies, including Yahoo and Qualcomm, all realized this years ago. It boils down to a basic calculation.
It's important to note that placing the company bet relative to the employer mandate is tied to at least three distinct variables:
- Nature of the business itself relative to the available labor pool
- Nature of the business relative to competitive pressures around employee attraction and retention
- Geographic location
The first two are pretty well known to most businesses and are based on the actual skills required by company for any given activity. For example, restaurants, retail, and the general service sector economy will have to make their calculation based on individual market conditions, needs, and capacity. For these employers, margins are razor thin and the hourly pay rate is often minimum wage. Recent headlines suggest that many of these companies will either reduce employees to part-time status or elect the "fold" option and pay the per-employee penalty instead of raising or calling.
But what about geographic location? This must be considered because it ties into another key component of the ACA - Medicaid expansion. The Supreme Court decided last year that each state has an option to expand - or not expand - their Medicaid program. According to a study by the Kaiser Family Foundation, as of September 3, 2013, there were 24 states planning to expand Medicaid, 22 states not planning to expand Medicaid, and 4 states still debating their decision. In states that elect not to expand Medicaid coverage, the uninsured will remain a larger financial burden to the healthcare system as a whole, and that financial burden will lead to higher insurance rates overall.
Whatever the individual states finally decide, that still leaves the three basic three options: call, raise, or fold. That's not to suggest this decision is easy - it's not - but your options are clear.
Dan Munro is an NCMM contributor and a regular contributor for Forbes, where he writes on the intersection of healthcare IT, innovation, and policy. You can follow him on Twitter.