Good Medicine or a Bitter Pill?
Implications of health care reform for businesses in America
By Robert W. Clarke > Paul H. Keckley and Steven Kraus> Illustration by Jon Krause
America seemed to collectively exhale on March 30, 2010 when President Obama signed final revisions to the Patient Protection and Affordable Care Act (PPACA) into law. Whether hopeful, angry, excited or fearful about the act’s potential effects on the nation’s health care system, many citizens seemed grateful for a breather after 14 months of arduous congressional debate and emotional public dialog.
Other issues and events may have since replaced health care reform in daily headlines. But the impact of, and debate about, this landmark legislation continues to reverberate in the media and boardrooms, workplaces, kitchen tables and government corridors.
The full implications of the PPACA, and other legislative and regulatory initiatives affecting health care, will unfold over the next decade and beyond. But the journey to a new health care system has begun, with enormous implications for businesses in America. In fact, reform affects the majority of American businesses because of their role in funding and providing health care for employees and employees’ families.
For one group of businesses, reform presents a double challenge. Health sciences companies – health insurers, health care providers, and life science companies – will need to adapt to both the changes affecting them as employers and the transformation of the health care delivery system in which they play key roles.
While many of the most dramatic changes will occur in 2014, important milestones this year will demand the urgent attention of business leaders. This article explores our view of the current and future path of health care reform and examines the resulting effects, both certain and possible, across the business spectrum – from employers who may now bear an even greater burden of responsibility for providing health benefits to employees, to the health industry stakeholders that are front-line providers of care. And it offers considerations for business executives in their efforts to address their organizations’ transition to the new health care order.
Health care reform – not a one-act play
Generally speaking, health care reform has three goals: expanding health coverage to the uninsured, improving health care quality and access, and stemming the growth in health care costs.
With the passage of the PPACA, the first goal should be attained in 2014, with approximately 32 million uninsured Americans becoming covered.1 The other two goals are more aspirational, to be influenced by many factors. At this stage, whether health care reform will contain or lower costs is conjecture, dependent on successful demonstration projects and pilot programs in the bill, and efficient management of services for an aging population and the newly insured.
The PPACA is the centerpiece of health care reform today, but it is not the only element:
- Provisions in the American Recovery and Reinvestment Act (ARRA)
of 2009 provided additional funding for Medicaid, expansion of health benefits for the unemployed, and development of health care information technology.2
- New clinical coding standards described in the International Statistical Classification of Diseases and Related Health Problems 10th Revision (ICD-10) are scheduled for U.S. implementation in 2013.3
- The Obama Administration’s proposed federal government budget for fiscal year 2011 contains reform-related provisions, including changes in Medicare and Medicaid reimbursement and funding for comparative effectiveness research, public health programs, targeted programs for states to reign in health costs, programs for health centers to expand primary and preventative care, and programs for expanding access to care in medically underserved areas.
- Efforts are also underway at the state level, such as expanding insurance coverage through public and private insurance programs, health savings accounts, premium support, and support for development of electronic data exchanges.4
Federal rulemaking will clarify a number of provisions in the PPACA. The words “The secretary shall” preface over 1,000 provisions, which the U.S. Department of Health and Human Services (HHS), led by Secretary Kathleen Sebelius, must address. Many different federal agencies will issue PPACA-related rules, including HHS, the U.S. Food and Drug Administration, the Center for Medicare and Medicaid Services, the National Institutes of Health, and the Centers for Disease Control.
As federal and state governments begin implementation of health care reforms, businesses need to start addressing an array of new issues and requirements – and the sooner the better.
Another uncertainty is how states will fulfill their roles in implementing health care reform. Much of the heavy lifting falls to the states, including establishment of health insurance exchanges intended to provide a resource “where individuals and small businesses can compare and purchase health insurance online at competitive prices.”5 While HHS will provide funding, guidance and information systems to help states comply with reform mandates, the states are likely to respond in different ways.
As federal and state governments begin implementation of health care reforms, businesses need to start addressing an array of new issues and requirements – and the sooner the better. Mandated changes in employee insurance coverage go into effect in fall 2010.6
Implications for employers: New coverage and reporting requirements
A recurring debate during the health care reform deliberations centered on whether the United States would or should adopt a government-operated, national “style” of health care system similar to Canada, Europe and many other countries to replace employer-sponsored insurance. With passage of the PPACA, the United States is arguably moving in the opposite direction. If anything, the act solidifies the role of employers in providing health benefits to their employees.
Employers seem generally amenable to this, provided there is a competitive playing field for companies throughout their business sector and that all are held to the same requirements. Major concerns remain among employers – will enough younger, healthier individuals enter the insurance market to offset retiree Medicare costs? Will the government impose additional restrictions and costs of compliance on employer-sponsored plans? And long term, how will Employee Retirement Income Security Act (ERISA)-exempt plans be impacted?
The “new normal” for employer-sponsored insurance benefits is likely to include:
- Substantial consolidation in the hospital and health insurance industries as stronger players absorb weaker players, with a resulting strengthening of their bargaining position for prices for their services.
- Substantial cost increases by hospitals and other providers as underlying medical costs increase from an aging population, new technologies are introduced, and demand for services increase, all resulting in greater price pressure on insurers and employers.
- Substantial pressures from employees and dependents for expensive technologies and treatments that might work for some but not all.
More than 20 areas in the PPACA are likely to impact employers, taking effect in coming years (see “Health Care Reform – Employer Timeline” next page.) Some of these provisions with more immediate deadlines have come into sharp focus. All employers, especially larger companies, should analyze these provisions as they begin to redefine their employee health benefit strategies in light of the new law.Key considerations include:
How and to what extent “grandfather” provisions of the PPACA apply
During the health care debate, President Obama repeatedly assured Americans that if they like their health care coverage they won’t have to change it. The PPACA does in fact include a grandfather clause for employer plans in existence as of the date of the act’s enactment.
With the exception of some insurance reforms—such as barring coverage denials for pre-existing conditions and shortening allowable waiting periods before extending coverage—employer plans in existence on the date of enactment will not have to be changed to comply with other parts of the PPACA. Regulatory guidance on how much an existing plan can change and not lose grandfather status is expected later in 2010. This will be a critical issue for businesses as they weigh the effects and costs of other provisions, because loss of grandfather status could force employers to broaden their benefits plans and potentially incur higher health insurance premiums, both of which might result in higher overall health benefits costs.
Health plan changes resulting from insurance reforms and creation of the “essential health benefit package”
If a company has a health plan that loses grandfather status, or it is creating a plan for the first time, it will likely be required to establish an “Essential Health Benefit Package.” Effective in 2014, this is a groundbreaking provision, as the federal government has never previously mandated that a set of services be included in employer plans.
Which services will be required in an Essential Health Benefit Package is yet to be determined, and a comprehensive set of services will be established annually by the HHS secretary. However, if the experience in individual states is a guide, additional services not covered historically by employers, such as acupuncture and homeopathy, could potentially be included in the package.
Workforce planning implications of new eligibility and coverage provisions
The PPACA establishes minimum standards for insurance eligibility and coverage for the first time. Effective when regulations are issued, new full-time employees working at least an average of 30 hours per week during a month must be enrolled automatically in an employer-sponsored health plan. Employees can opt out and instead obtain coverage from their state’s insurance exchange. In addition, while the PPACA does not explicitly require that an employer offer its full-time employees acceptable health insurance, employers with at least 50 full-time equivalents will generally face penalties, beginning in 2014, if one or more of their full-time employees obtains a premium credit through an exchange.8 While not a mandate, these provisions may have a similar effect.
The PPACA standards will significantly affect industries that employ part-time, temporary, seasonal and float-pool workers extensively. In addition to the 30-hour provision, employers will only be allowed to impose a maximum 90-day waiting period before full-time employees become eligible for benefits. This maximum is significantly less than the competitive norm in certain industry sectors. Also, employers that previously offered coverage only to employees will now need to offer coverage to employees’ dependents.
Employers that don’t provide coverage, provide coverage that is too expensive, or have employees who opt out of coverage and buy through the exchanges face financial penalties.
These changes could dramatically affect industries such as retail, hospitality and health care. Many retailers, for example, require that employees work 35 to 40 hours per week before being considered full time and eligible, as well as going through a waiting period of 180 days or longer before receiving health coverage. Such employers should consider assessing their workforce profile in light of the new eligibility and coverage realities of the act.
Compliance and reporting requirements
The PPACA imposes an “individual mandate” requiring everyone in America to have health care coverage obtained in one of three ways: from an employer, from a governmental plan like Medicare and Medicaid, or purchased from one of the state insurance exchanges to be established in 2014. Employers that don’t provide coverage, provide coverage that is too expensive, or have employees who opt out of coverage and buy through the exchanges face financial penalties.
Under the act, children can remain on their parents’ employer health insurance plan until age 26. Also, health plans cannot deny coverage to children under the age of 20 because of a pre-existing condition.
Reporting requirements in the PPACA require changes in benefit administration systems. Employers will be required to submit a filing to the Internal Revenue Service certifying whether full-time employees have coverage, whether they have single or family coverage, how much it costs, and the design of the health care plan. Employers also must calculate on a standardized basis the value of health care benefits they provide to individual employees. They will be required to communicate the value of those benefits through a line item on each employee’s W-2.
Steps employers can take now
As noted, most provisions of the PPACA don’t go into effect until 2014. However, with insurance reforms effective for plan years starting in September 2010 and an urgent need to inform employees of upcoming changes, employers should take steps now to comply.
They should proceed cautiously, though, especially considering the grandfather provisions. A misstep could mean losing grandfather status and becoming subject to additional requirements. For example, employers that completely revise their employee health care offerings in 2011 or later will lose protections that grandfather status may bring. And, pending regulatory guidance, material modifications to a plan’s value or cost to employees may also trigger unintended consequences. Hopefully, material modification guidance will be forthcoming during 2010.
Employers should consider a three-phase approach in addressing health care reform: First, consider adjusting plan designs to meet the immediate requirements of the act, while maintaining grandfather status. The goal is to make needed design and contribution changes without unintended consequences created by loss of grandfather status.
Second, analyze what plan changes will be needed for 2014 when health exchanges and individual coverage mandates go into effect. It will be critical by then to understand what actions employees are likely to take in terms of staying in or opting out of employer-provided coverage. Think of how employees will react to the individual mandate – will they be more or less likely to opt for employer coverage? Also compare coverage costs through an exchange to employer plan costs.
Finally, take a strategic view of health care reform that seeks to balance the PPACA’s requirements, health care costs and the business’s commitment to providing employee coverage. This strategic analysis needs to be performed in the context of a potentially changed competitive landscape. First, to what degree does health care reform modify how employers within an industry or sector deal with their rewards responsibilities. Second, will health care reform require rethinking workforce composition within selected sectors?
A time for decisive and informed leadership
Health care reform has monumental implications for businesses in America. Changes will occur over time, and specifics of many of those changes are largely unknown today.
The many uncertainties surrounding health care reform should motivate boards of directors and senior executives to engage as never before in understanding the health care landscape and taking decisive action to shape their companies’ strategies going forward. Simply put, corporate leaders can no longer place total responsibility for health care on their human resources departments. Instead, they should address it as diligently as any other aspect of the business, applying similar levels of rigor to planning, risk management, compliance and measurement associated with their organization’s health benefits.
Also, a heightened commitment doesn’t end at the gates of the corporate campus. Businesses now have a bigger ownership stake in health care than ever. We believe they can help shape the future of health care reform by:
- Developing effective practices in benefits design and sharing them with other employers.
- Working collaboratively with other businesses in their community to shape the local health care delivery system, holding providers and each other accountable for health care quality, safety and cost containment.
- Taking an active part in shaping national and state health care policy through involvement with trade associations.
Finally, health care reform is likely to be a catalyst for innovations in health care services and delivery. What has historically been an insular and rigid system is now even riper for innovation. New players and new service delivery models are expected to emerge to help employers overcome traditional barriers to cost control, efficiency and improving workforce health and quality of life.
By acting both methodically and quickly to comply with near-term reform requirements, while simultaneously laying the groundwork for future decisions, executives can better prepare their organizations for the continuing evolution of the nation’s new health care order. DR
Robert W. Clarke is a partner with Deloitte Financial Advisory Services LLP (Deloitte FAS), and is the Deloitte FAS National Health Sciences Leader.
Paul H. Keckley is a director with Deloitte Consulting LLP, and is the Executive Director of the Deloitte Center for Health Solutions.
Steven Kraus is a principal with Deloitte Consulting LLP.
The authors would like to acknowledge the contributions of Robert Davis, senior manager with Deloitte Consulting LLP; Pat Nigro, director with Deloitte Financial Advisory Services LLP; and Frank Stevens, principal with Deloitte Financial Advisory Services LLP.
“Some of the changes go into effect for the first [insurance] plan year that begins on or after six months after enactment (September 23, 2010), so for calendar year plans, January 1, 2011.” http://www.dol.gov/ebsa/faqs/faq-PPACA.html
Ron Barlow, The Implications of Health Reform for Plan Sponsors, Deloitte Consulting LLP presentation.
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