Money and Stethoscope

Employers have moved beyond the “wait and see” phase of the Patient Protection and Affordable Care Act and are figuring out how to implement the new provisions into their organizations.

Navigating health reform

The Financial Impact of Health Care Reform on Employers

  • Anita Baker
  • 9/6/2012

Update: 7/8/2013
In July 2013, the Obama administration announced the employer mandate provision of the ACA would be delayed one year and not take effect until January 1, 2015.

The Financial Impact of Health Care Reform on Employers

Employers have moved beyond the “wait and see” phase of the Patient Protection and Affordable Care Act (PPACA), and are figuring out how to implement the new provisions into their organizations, according to a recent survey conducted by the International Society of Certified Employee Benefit Specialists.

The survey found about 50 percent of employers have analyzed how the health care reform law will impact their 2014 health care costs. Although most employers are seeking ways to reduce costs, nearly half of the responding organizations reported that they will continue to provide health care coverage for all full-time employees in 2014 when “play or pay” provisions become effective.

As an employer, it is important to thoroughly understand the employer mandates under the PPACA, and how they affect your business. You should also determine what impact the PPACA will have on your bottom line, whether you currently provide health insurance coverage or not.

Employer mandates

In 2014, the employer shared responsibility provisions, as added by the PPACA, provide that a large employer (i.e., one with 50 or more full-time equivalent employees (FTEs)) could be subject to two potential penalties: the no coverage penalty and the unaffordable coverage penalty. These penalties are sometimes referred to as the employer mandate, because they require employers to offer coverage or pay a penalty if they have full time employees who would qualify for premium tax credits and other cost sharing assistance established by PPACA.

No coverage penalty (pay or play)

An employer is subject to a $2,000 per full-time employee penalty (excluding the first 30 full-time employees) if all of the following conditions are met:

  • An employer does not offer its full-time employees the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan. According to the Congressional Research Service, 98 percent of employers offer a plan with this minimum value;
  • At least one full-time employee enrolls in a health insurance plan via a state or federally-established health insurance exchange (HIX; see below for more information); and
  • The full-time employee receives government subsidies to pay the premiums for the HIX coverage.

A full-time employee is defined in this section of PPACA as an employee who works an average of 30 or more hours per week. Therefore, when calculating full-time equivalents, to determine if you are an employer to which the penalties apply, you will need to add up all of the employee hours worked in a month and divide by 120. The resulting number is your FTEs.

Unaffordable coverage penalty

This penalty applies if an employer offers its full-time employees the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that either is unaffordable relative to an employee's household income, or does not provide minimum value. A plan is unaffordable if the full-time employee’s premium payments for self-only insurance coverage are more than 9.5 percent of their household income (though proposed rules issued in August 2011 suggest the IRS may use an employee’s W-2 wages for this calculation). If at least one full-time employee enrolls in the HIX and is certified to receive a government subsidy, the employer is subject to a penalty of $3,000 per full-time employee that enrolls in the HIX. The government subsidies are available for individuals whose household income is 133 percent to 400 percent above the federal poverty level (FPL), which is currently $92,200 for a family of four. Full-time employees whose household income is below 133 percent of the FPL will be covered by Medicaid, unless the states opt out of this provision of the PPACA.

Health insurance exchanges

Health insurance exchanges (HIX) — whether state-established or federal — are an important component of the PPACA. HIXs are new organizations that will be set up to create a more organized and competitive market for buying health insurance. They will offer a choice of different health plans, certify plans that participate, and provide information to help consumers better understand their options. They are designed to provide a one-stop shop for millions of individuals and small businesses to access and compare insurance plans with a standard set of benefits. HIXs are also the central location for determining if individuals are eligible for Medicaid or premium tax credits to assist in purchasing health insurance coverage.

Though projections show HIX enrollment could grow to 20 million individuals nationally, aggressive planning from states will be necessary to meet implementation timelines — state-established HIXs must be fully operational by January 1, 2014, and the Department of Health and Human Services will begin certifying HIX readiness by January 2013.

Beginning in 2014, HIXs will primarily serve individuals buying insurance on their own and small businesses with up to 100 employees, though states can choose to include larger employers in the future. States are expected to create HIXs — which can be a government agency or a non-profit organization — but the federal government will step in if a state does not set them up. States can create multiple HIXs, so long as only one serves each geographic area. They can also work together to form regional HIXs. The federal government will offer technical assistance to help states set up HIXs.

Health insurance and penalty calculator

CliftonLarsonAllen (CLA) can help employers weigh their options of continuing to offer health coverage, discontinuing coverage, or minimizing the financial impact by changing the plan’s cost-sharing provisions or design. The financial impact of health reform depends on the specific demographic information of the employer, which includes:

  • Number of employees, both full-time and part-time
  • Hours worked by each employee
  • Number of employees waiving coverage
  • Premium cost sharing arrangement between the employer and employee
  • Amount of premiums paid
  • Number and type of plan(s)

The financial impact of health reform varies depending on the employer’s industry. The chart below shows how results may vary due to the type of industry and number of employees, based on three scenarios:

Pre-reform 2014 costs: The current year’s employer sponsored insurance (ESI) premium cost, increased by projected annual premium growth and health care utilization (volume growth) before health reform implementation.

Post-reform with ESI cost: The 2014 ESI insurance premium cost, including growth in premium costs and health reform impacts (e.g., penalties).

Post-reform no ESI cost: The 2014 scenario where an employer either does not offer health insurance to its employees or selects to discontinue offering health insurance coverage.

Industry # of FTEs Pre-reform 2014 costs Post-reform with ESI cost Post-reform no ESI cost
Dealerships  165 $1 million $1.2 million $255,000
Financial institution  927 $2.1 million $3.1 million $1.7 million
College  160 $2.2 million $2.7 million $160,000
City  132 $900,000 $1.3 million $190,000
Health care facility  284 $1.4 million $1 million $500,000

This may result in employees purchasing insurance through the HIX. Not all employers will pay more under these provisions and results vary dramatically within each industry. Therefore, it is important for a business to understand the effects of reform on its specific business. The goal of the employer is to remain profitable while attracting and retaining a competitive work force. The goal of the employee is to have adequate and affordable health insurance coverage.