Maggie Wilderotter, chief executive officer at cable, Internet and phone provider Frontier Communications Corp. (FTR:US) says it’s her “fiduciary responsibility” to study ending medical benefits long provided by her company.
“Frontier, like a lot of companies, is likely to at least consider dropping health-care benefits” in 2014, she said.
As President Barack Obama presses ahead with plans to broaden insurance coverage, many U.S. executives say his health- care law has them rethinking their options. Starting in 2014, the law’s $2,000 fine for not offering coverage appears to be far less than what most businesses pay for benefits.
In the end, though, companies will probably find compelling reasons to continue providing health coverage. Among them: Employers value coverage as a tool for recruiting and keeping workers healthy and also fear a backlash, especially among higher earners who might have to pay far more for their insurance than they do now, said Tracy Watts, a partner at Washington-based benefits consultant Mercer Inc. Employees might spend as much as $2,000 a month more in the law’s new online exchanges, she said.
“Some employees would end up spending a huge percentage of their incomes for health care if companies drop coverage,” Watts said in a telephone interview. “Employers couldn’t make it up in raises.”
The biggest argument against opting out is that it may simply prove a bad deal for employers. The $2,000-per-employee penalty imposed on companies that deny coverage isn’t deductible like other business expenses. And employees told they’re losing coverage are likely to demand some of it back through cash or other perks, said Randall Abbott, a senior consultant at Towers Watson & Co. (TW:US), a New York-based human resources consultant. While health benefits are tax-free, wages aren’t, he said.
“By the time you get done, if your intent is to make up the lost wages, exiting can be more expensive than retaining your health plan,” Abbott said.
A survey released in June by Mercer found only 6 percent of businesses plan to discontinue coverage in 2014. In July, the Congressional Budget Office estimated that the legislation will result in a loss of benefits for 2.5 percent of the 161 million workers expected to receive coverage through work by the end of the next decade -- or 4 million people. (At the same time, 30 million uninsured people are expected to obtain coverage through the new health law.)
It’s still early and any changes that occur are probably a ways off. Frontier CEO Wilderotter commented about possibly dropping health-care benefits in response to a question from an employee at a meeting Nov. 6 about the company’s third-quarter performance (FTR:US). The telecommunications company hasn’t yet analyzed the pros and cons of dropping health care and “nothing will change in 2013,” she told employees at the meeting Frontier’s Stamford, Connecticut headquarters. The company employs about 15,000.
Doing away with health benefits can sound appealing to some companies at first glance. The average family policy is expected to cost $12,000 by 2014, with employers typically picking up 80 percent of the bill, or $9,600, according to Towers Watson. That’s almost five times more than the $2,000 per worker fine, which applies to any company that employs 50 or more workers.
Ending benefits would free companies of the hassle of running insurance plans and negotiating rates with carriers and hospitals, not to mention the burden of ever-rising medical costs.
“Most people who went into business didn’t get into it to run a health plan,” said Douglas Holtz-Eakin, an economist who advised U.S. Senator John McCain and former President George W. Bush “I think they’d be very happy to get out of it.”
At Dallas-based AT&T (T:US), the nation’s largest phone company, CEO Randall Stephenson said he expects large employers to gradually shift away from providing benefits. While the CEO said he has no plans to do so for his 241,000 workers, “economic gravity will take over” for most businesses “and companies will stop providing coverage.”
Restaurants are looking at similar steps. Landry’s Inc., owner of McCormick & Schmick’s, and Carl’s Jr.-parent CKE Inc. (CK:US) plan to shift jobs from full time to part time to avoid the health law’s requirements for offering coverage. Jamie Richardson, a vice president at hamburger-chain White Castle System Inc., said he’d be “shocked” if competitors weren’t studying the idea, although he says his company isn’t.
The insurance exchanges to be created by the health law were designed with low- and moderate-income buyers in mind. They offer subsidies on a sliding scale to anyone making as much as four times the U.S. poverty level -- about $44,000 for a single person and $92,000 for a family of four this year.
For a low-wage fast-food worker, the exchange approach might offer a better deal, said Abbott of Towers Watson. Those who make too much for subsidies -- from office workers to senior managers -- would end up paying more, said Mercer’s Watts. A typical family may spend $2,000 a month on the exchange compared with the $300 to $400 a month they average now for their share of premiums in a company plan, Mercer estimates.
Dropping benefits may make most sense in low-wage, high- turnover industries like retail, restaurants and hotels, where there’d be less pressure to make up for the lost benefits, Abbott said. Even there, the Mercer survey found only 9 percent of retail and hospitality employers likely to terminate plans.
At family owned White Castle, Richardson said the law may raise the company’s $30 million in annual health insurance costs by 25 percent in 2014. The Columbus, Ohio-based chain is pondering changes to its health plans to defray some of the increase. Not on the table, at least so far, is an end to benefits, Richardson said.
“For us, it’s such a strong cultural value, providing what our founder called ‘freedom from anxiety,’” Richardson said in a telephone interview. “I don’t see us making that our first choice. I think it may be the last choice.”
White Castle and its 10,000 workers may have more flexibility than publicly traded companies, Richardson said. While he knew of no competitors in the restaurant business who have talked of ending benefits, “I’d be shocked if they weren’t considering it,” he said.
At the National Business Group on Health, a Washington- based trade group representing large employers including Wal- Mart Stores Inc. (WMT:US), International Business Machines Corp. (IBM:US) and Target Corp. (TGT:US), no members are planning to drop insurance “as far as we can tell,” said Steven Wojcik, the vice president for public policy.
Foot Locker Inc. (FL:US) Chief Executive Officer Ken Hicks said the New York-based sports-shoe retailer plans to keep its health plan even though he expects the Affordable Care Act will raise costs. He said he doubts the government can do as good a job keeping premiums down as he can.
“There’s more to business than just saving money,” Hicks said in a phone interview. “We think it’s the best thing for our associates to be able to offer them a good program that they’re used to. We will try as long as we can to do that.”
To contact the reporters on this story: Alex Nussbaum in New York at firstname.lastname@example.org; Alex Wayne in Washington at email@example.com
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