The True Cost of Paying Instead of Playing

August 2, 2012

Authored by: benefitsbclp

A recent study by Truven Health Analytics attempts to model the employer and employee cost impact of various strategies for dealing with PPACA’s “play or pay” employer mandates/penalties.  The study is notable primarily for two reasons. First, it attempts to take into account the employee, as well as the employer, cost associated with each strategy.

The report essentially concludes that any cost savings an employer may receive will result in a precipitous increase in costs to employees.  In effect, Truven is saying that the balance between employer and employee is a zero-sum game (or nearly so): there is no way for an employer to save money that does not result in a precipitous increase in employees’ cost.  Furthermore, if an employer attempts to make employees whole for the cost, then it will actually end up costing the employer more than providing health coverage, Truven concludes.

Perhaps more importantly, however, it looks beyond the penalties and costs of health coverage in attempting to quantify the employer cost and also attempts to quantify both the impact on an employer’s other programs (such as workers compensation and short- and long-term disability) and the impact on employee productivity (such as through increased absenteeism).  The report is a good summary, but is short on details on how the researchers determine the costs of these collateral impacts.

Even so, it is worth considering whether, and how, the lack of employer control over health insurance could have an impact in these collateral areas.  For example, if an employee cannot afford a plan that is as high-quality as the one an employer is able to provide, will that discourage him or her from going to the doctor?  Will this deferred health care create a greater likelihood of a workers compensation or disability claim?  Additionally, will it result in increased absenteeism thus reducing productivity?  Finally, what will the effect be on employee loyalty?  Much of the discussion about employers dropping coverage and paying the penalties ignores these collateral impacts.  The Truven study suggests the answer to some of these questions is “yes,” but each employer will need to make this assessment based on its own workforce and the level of coverage it is currently offering.

The only apparent easy criticism one could make of the Truven study is to point out that it assumes a 6% health insurance cost increase, which the study says is roughly the average cost increase from 2007-2010.  Of course, the dates are highly relevant – none of those years reflect any meaningful implementation of the health care reform law.  In fairness, the best Truven could have done (assuming data was reasonably available) was to include 2011.  However, even that would have ignored the impact of the health insurance exchanges, community rating requirements, and the full implementation of the guarantee issue provisions, among PPACA’s many other requirements that have yet to be implemented.  That’s not to say the Truven study is wrong, just that the actual impact will depend on how viable the exchanges really are and whether they will reduce health insurance costs, as PPACA proponents argue they should.

Finally, the Truven study assumes that employers will continue to offer coverage on the same basis that they currently do (which the study has to assume because there is no way to reliably predict the effect of employer innovation).  However, as noted in this issue brief by the Employee Benefits Research Institute, the health reform law has brought renewed interest in employer-run exchanges and “defined contribution”-style health insurance arrangements.  As the EBRI issue brief points out (and as we may discuss in a later post), there are potential compliance and other concerns with such arrangements.  The bottom line, however, is that employers can, and will, continue to innovate to address health insurance costs. Such innovation may result in a “third path” beyond simply choosing to “play” by the current system or “pay” the penalties.

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