Health Reform

Business Crunches the Health-Care Numbers


Proposed health-care legislation issued by House and Senate committees this week call would require companies to offer insurance benefits to their employees or pay a fine. This so-called pay-or-play option is strongly opposed by most business groups, on the grounds that companies will cut staff rather than absorb mandatory health-care costs. Or, they say, employers might choose to pay the fine and get out of offering insurance altogether, letting employees take their chance in the open market.

But several analyses, including one from the Congressional Budget Office, or CBO, estimate that there will be little to no negative impact on employment levels. And while the various health-care reform proposals coming out of Washington all contain mandates that would raise the cost of benefits offered by employers, there could be some long-term savings if Congress puts in place measures that would eventually reduce the burden.

Of course, that doesn't help individual business owners, who have to crunch the numbers on whether they can afford to offer insurance, or whether additional staff will be affordable with the new mandates. The cost calculation to any one company "will really depend on the kind of workforce you have," says Michael Thompson, principal of global human resources at PricewaterhouseCoopers. "Companies with higher-paid workforces will absorb the costs and continue to offer benefits." But the requirements could make the marginal cost of adding a low-paid staffer too high to justify, he says.

Might Limit New Hires Take Paul Dandurand, 51, the CEO of PIEmatrix, a software-as-as-service firm in Burlington, Vt. He pays slightly less than half of the health-care insurance premiums for his 10 skilled employees, but he would have to pay a larger share—72.5%—under the House of Representatives plan. For a three-year-old tech company that's trying to reinvest money into innovation and expansion, that could be a burden. "How does a small company with a team of 10 employees get through this economy?" asks Dandurand. "Every penny counts."

"You can't go to the employee and say, 'We're going to lower your salary'" in order to contribute more to health premiums," he says. "The first thing that would happen, if you're kind of on the cusp of $250K [the payroll threshold at which fines kick in], you might question yourself as to whether or not you want to hire that extra employee."

The House bill issued on July 14, titled "America's Affordable Health Choices Act of 2009," calls for an 8% payroll tax on companies that do not offer health benefits, with exemptions for small businesses. A reform bill out of the Senate Health, Education, Labor, and Pensions (HELP) Committee on July 15 would levy an annual penalty of $750 for each full-time worker without health insurance, and $375 for part-time workers, on companies with 25 or more employees.

Fines Not Seen as Onerous The Chamber of Commerce denounced what it calls "a job-killing employer mandate" and says the government-designed essential benefits package "will limit flexibility and force a one-size-fits-all approach to health benefits." As health benefits consultant Robert Laszewski, president of Health Policy & Strategy Associates, says, "Employers are worried that the government will dictate what they can offer and then hand them the bill."

Despite these concerns, economists and benefits specialists doubt that a pay-or-play requirement would lead to wholesale job killing or loss of benefits. About 99% of large employers, and 68% of companies with 200 or fewer employees, already offer benefits. The average cost of an employer-based health-care policy is $5,000 for individual coverage and $12,000 for family coverage. But many companies consider health coverage a potent recruiting tool; for them the penalties are less important than the cost of eliminating employee coverage.

Susan Nash, an attorney with McDermott Will & Emery who specializes in employee benefits, says companies may find it more attractive to pay fines for part-time employees, who are typically not offered benefits now, rather than incur the cost of insuring them. But when it comes to full-time workers, "there is a hugely paternalistic culture among employers in this country when it comes to health benefits," she says, noting that the vast majority of companies with 50 or more employees already offer benefits. Companies with 25 or fewer are exempt from the fines. "That's ironic, since the bulk of the uninsured are in those small companies," says Nash.

A Moral Obligation Bernie Wilker, 66, the owner of an AlphaGraphics printing franchise in Paramus, N.J., said he considers providing health coverage to be a moral obligation. He pays the full premium for individual coverage for his five full-time and one part-time employee, about $250 per month each. (Employees who want additional family coverage can buy it themselves.) He estimates medical insurance is about 7% to 8% of his total payroll. "I am a believer that a businessman has certain responsibilities to society at large," says Wilker. But he says not every small business can afford to provide coverage and thinks it should be the government's job. "Small employers should not have to carry the burden of health costs. That's the federal government's responsibility."

Companies are also not likely to start jettisoning staff to avoid higher coverage costs, according to a report issued by the CBO on July 13. The CBO concluded that employer mandates may actually prevent the erosion of employment-based plans, and the effects on wages and hours worked would likely be minor, except in certain low-paying industries, such as retail. Wal-Mart (WMT) and Target (TGT), however, have come out in support of pay-or-play.

Other recent reports came to much the same conclusions as the CBO. A study by Phillip Cryan, an economist at the University of California at Berkeley, concluded that health-care reform may actually boost overall employment slightly. New health-care jobs would be created, improved health would raise productivity, some employers who choose to pay rather than play would save money, and the overall rate of health inflation would slow, freeing up money for more hiring.

Looking to Hawaii For real-world examples, the CBO examined Hawaii, where an employer mandate has been in place since 1975. One study found that the rate of employment grew faster in that state than the rest of the U.S. after the mandate was instituted.

A more recent example can be found in Massachusetts, where a 2005 health-care reform law requires employers to offer insurance or pay a fine of $295 per employee per year. There was concern that the fine was too low to be a deterrent to dropping coverage. But 150,000 more residents are privately insured through their employers now than before the law was enacted. "There are a lot of academic arguments that employers will drop benefits, or drop employees," says Joseph Paduda, principal of the consulting firm Health Strategy Associates. "The fact is, it doesn't happen."
Arnst is a senior writer for BusinessWeek based in New York.
John_tozzi
Tozzi is a reporter for Bloomberg Businessweek in New York.

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