The industry’s bills are already coming due for the new health care law.
Health care reform might have been a key political win for President Obama, but accountants and human resource departments are just now wading into the details, figuring out how the costs of expanded coverage will hit their bottom lines.
The early read is that companies of all sizes will be paying more.
How much more won’t be clear for some time and this kind of general muddiness should continue as officials decide how to apply the new laws, reforms phase in and insurance providers and individuals choose their paths. The plan will dramatically boost benefits for some and costs for others. But the net effect of the sweeping changes is the province of future historians — despite the highly politicized debate in Washington.
Yet even as companies from The Boeing Co. to Deere & Co. to Walgreen Co. take charges of up to $150 million to cover the costs of just one aspect of the new law, advisers are cautioning companies to take a wait-and-see approach. “Don’t get all worked up,” said John Hennessy, senior consultant in Hay Group’s employee benefit practice. “We don’t have all the answers right now.”
Many details are known and, with the total costs estimated at $940 billion over 10 years, somebody is going to have to pay.
Beginning in January, Hennessy said most companies would have to start to provide health insurance for employees’ dependants up to the age of 26 and for dependants who are under 19 and have preexisting medical conditions.
Lifetime total coverage, which commonly maxes out at $2 million, will also be removed, which Hennessy said “could be a little bit of a tricky issue.” He said retailers with a large number of employees are bound to have some who have hit their maximums. Under the reforms, these employees will once again qualify for benefits.
Course corrections will be needed along the way, but Hennessy said most firms already offering group insurance polices would be “grandfathered” into the new regime, easing their way. It is still uncertain, though, what changes to health plans would cause a company to lose that status and force them to start anew. “I’d be very careful when considering plan design changes this year,” he said.
Already, big retailers are feeling the pinch. Walgreen Co. said it plans to take a roughly $40 million charge in its third quarter to account for the reform package’s repeal of the tax benefit related to a Medicare subsidy for retiree benefits.
Credit Suisse analysts estimated companies in the S&P 500 that pay for former employees’ benefits would reduce their deferred tax assets by a total of $4.5 billion — a “big hit to earnings” but small potatoes to overall valuations.
And that’s just the beginning.
By 2014 all legal U.S. residents will be required to have health insurance or pay a tax penalty.
Additionally, employers will be required to provide their workers coverage, a provision which was opposed by the National Retail Federation and the Retail Industry Leaders Association.
Under the employer mandate, retailers with more than 50 full-time employees who don’t offer insurance to their full-time workers will face a $2,000 penalty per full-time employee after the first 30 such workers.
If a company offers “unaffordable” insurance to workers, defined as a plan costing an employee more than 9.5 percent of the individual’s family income, then the employer will be slapped with a $3,000 fine for each such employee. If the cost exceeds 8 percent of the individual employee’s family income, that individual may opt out of the employer’s plan, taking the employer contribution with him.
Neil Trautwein, vice president and employee benefits policy council at the NRF, said a retailer with 100,000 employees could be fined $200 million if it decided not to offer or couldn’t afford the health care insurance. If the same retailer offered an insurance plan but 25,000 workers opted out in favor of a more affordable plan, the fine could be as much as $75 million.
Trautwein and Jon Emling, senior vice president for government affairs at RILA, both expressed concern the long-term effects of the health care reforms could negatively impact retail hiring or act as a potential disincentive for retailers to grow or to offer employee health insurance.
“What we’re hearing from our RILA members is almost universal expectations that costs will increase,” Emling said.
Still, smaller employers might have the trickier task before them as the whole of the health care landscape reacts to the new regime.
“Health reform not only puts new requirements on them as employers, but also requirements on insurance companies,” said Barry Schilmeister, a partner in the health and benefits unit at Mercer, a human resources consulting firm owned by Marsh & McLennan Cos. Inc., an insurance provider. “That’s going to be particularly challenging for smaller companies. Many of the larger companies have already put in plans that meet many of the new coverage requirements.”
Midsize companies and their owners, who typically register the firm’s profits on their personal tax returns, could be particularly hardhit by costs of health reform. Small companies will receive a tax credit of up to 35 percent to help cover the costs of health insurance.
“They defined small businesses as those that have fewer than 25 employees and an annual average wage of less than $40,000 a year,” said Marc Federbush, partner in charge of the apparel and textile services group at New York City accounting firm Anchin, Block & Anchin. “That doesn’t really cover a whole lot of guys here in the city. The government seems to think the entire country is one big pot and they say if you make more than $200,000 of earned income, you’re wealthy.”
By 2018 there will be a 40 percent excise tax on top-tier health insurance policies, dubbed “Cadillac plans.” But it’s not just the types with golden parachutes who have the premium policies — executives at smaller firms might also have coverage that qualifies.
Federbush said owners would ultimately pass the reform package’s higher costs on to their employees.
“My guess is that they’ll try to do more with fewer people,” Federbush said. “It’s just going to continue to make it more difficult for the importers and the wholesalers to stay profitable. I don’t think this will put the nail in the coffin, but it’s just going to continue to make them a little bit weaker.”
Health care reform can be boiled down to how many people have access to or are covered by the new system, how good the care is and how much it costs.
“This seems to have gone for the coverage leg of the three-legged stool, hoping the quality stays there,” said Leon Nicholas, director of retail insights at Kantar Retail. “I don’t see much in the way of real cost control and therefore I don’t see how this doesn’t effectively extend the burden of higher costs to more people. People in general want to see their society be healthier, but whether or not state mandates get you there is another question.”
Still, the reforms could bring benefits that many don’t see now.
Mike Moriarty, partner and head of the retail practice at management consultant A.T. Kearney, said the process would help midsize companies better find coverage by increasing transparency and reduce health care price inflation as fewer people turn to emergency rooms for primary care.
And then there are the roughly 40 million uninsured people who might spend more freely if they had a health care safety net, giving them more disposable income.
“You’re going to see increased velocity of money, people aren’t going to stick money into a mattress in case they get sick or break a leg or something,” Moriarty said. “If in a year or two years’ time, each of those individuals spent 100 bucks, that’s $4 billion. Getting more money flowing into the economy will be a positive influence of the health care bill.”
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