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Mr. Nixon came to my office looking for help to see his doctor, a doctor who could confirm his cure from a debilitating bout with depression, a doctor who could affirm his fitness to return to his old occupation.  But Mr. Nixon had another problem.  He had no health insurance and he had no money.  We couldn’t help him. Our office offered health insurance to employees, not would-be employees.

Almost a half year later he showed up again to enroll in his health insurance program.  He had his old job back after finally navigating the public welfare system to get the physician certification he needed to return to work.

A different kind of Notch

He couldn’t work because he was sick.  He couldn’t get the treatment he needed because he didn’t have health insurance.  He didn’t have health insurance because he couldn’t work.  He couldn’t work because he was sick.  Am I talking in circles?

For all of its faults, the Affordable Care Act will make it a little bit easier for people like Mr. Nixon to spend less time battling bureaucracies and more time getting cured and consequently more time as a productive, working member of society.

Professor Kessler opines

But Daniel P. Kessler, Senior Fellow at the Hoover Institution and Professor in the Graduate School of Business, Stanford University, thinks otherwise.

In Monday’s Wall Street Journal, Professor Kessler argues that the subsidies available in the Affordable Care Act (ACA) health insurance exchanges will

“introduce far-reaching negative effects on rewards to work and bizarre new inequities into American life.”

To Mr. Kessler’s credit, he calls attention to one of the peculiar incongruities of the ACA, the notch.  To again quote Mr. Kessler:

“A similar family earning $93,699 (400% of poverty) gets a subsidy of $14,799. But a family earning $1 more—$93,700—gets no subsidy”

The “notch” is the dramatic drop in subsidy when one crosses that boundary between subsidy and no subsidy.  Professor Kessler fears this “notch” will be the source of “unfairness” that will “induce sharp reductions in labor supply.”

The problem with Professor Kessler’s analysis is two fold:  his one sided presentation of the facts; and his conclusion.

First the facts

This alleged “unfairness” exists in all kinds of ways under the current system.    Professor Kessler worries that two neighbors with a dollar separating their incomes will have very different levels of government subsidies.

But subsidies exist today in the form of employer support for employment-based insurance.  That these subsidies come from employers, does not make them any less a subsidy.  Yet less than half of private sector employees get their health care coverage from their employers.  So what about the two neighbors who earn identical incomes, one whose health insurance is subsidized by his employer and the other, perhaps a self-employed entrepreneur, who cannot buy health insurance at all because of a pre-existing condition or some other reason.   Where is Professor Kessler’s concern for “fairness” in that situation?

And what is this about a “sharp reductions in labor supply”?  What about the Mr. Nixon’s of the world?  His story is far from unique. I would invite Professor Kessler to spend some time in my chair and lecture the next Mr. Nixon who comes to my office about “fairness.”

And the conclusion?

Professor Kessler suggests that “the only fix is to drastically reduce or eliminate the premium subsidies.”   Does that sound like someone with a clear understanding of what it is like to live on $30,000 or even $90,000 per year?

The notch is indeed a flaw in the law.  It is the product of an assumption that people should pay the “price” of insurance instead of sharing the cost as well as the medical risk.  If everyone pays a flat percentage of all income, there is no “notch” and there is no “unfairness”.

And there is no negative effect on the reward to work, because health insurance would be removed as factor in employment decisions.

Employers who now cannot afford health insurance cannot hire workers who need health insurance.  That concern will disappear in a single payer health care system funded by a flat percentage of all income.

We need a system that allows people to pay when they are working so they have coverage when they can’t.

Photo credit:    walknboston

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Much fuss has been made of health reform’s “individual mandate”.  It is the favorite target of tea baggers.  Several states have filed suit against the federal government to block its implementation.

There are debates about whether the individual mandate is legal, and more important, whether it will be effective.

These questions may take on even more significance if employer-sponsored health insurance (ESI) does not survive.   There are some, including this author, who question whether it will survive?

Shamrock on First Day of Spring

Confusing Incentives

What will be the incentives under ACA (the Affordable Care Act) for employers to continue to provide health insurance?  During the debate leading up to its passage a year ago, employers clung to the promise that if more people paid for their coverage it would lower the costs to employers.

But employers resisted efforts at a strong employer mandate.  So absent a strong mandate and any certainty of cost containment, what incentives does ACA hold out to keep employers in the game?

It’s confusing.

There is a $2,000 fine per employee if employers don’t offer “qualified coverage”.   BUT ONLY:

IF the employer employs more than 50 employees (I am sure the regulators will have many, many paragraphs splitting the hair between the 50^th and the 51^st employee.);

AND IF one of those employees purchase their health insurance from one of the new health insurance exchanges;

AND IF one of those employees who purchase their health insurance on the health insurance exchange requires a federal subsidy.

THEN the employer would have to make an “assessable payment” of $2,000.   BUT ONLY:

- On the number of employees in excess of 30 employees.

Let’s do some math

An employer with 60 employees covered under a group health insurance plan could easily pay $500,000 with an average group policy.  If one of this company’s employees exercised their presumed right to get his or her health insurance through an insurance exchange, then the company would be required to make an “assessable payment” of $60,000.  That is the 30 employees in excess of the first 30 times $2,000.

But wait!  If all 60 employees get their insurance from the exchange, the company’s “Assessable payment” will be — $60,000.

Hmmm?  Oooops!

Of course, it’s not quite that simple.  It never is.  The company would have paid the overwhelming majority of that $500,000.  In the exchange, the employee would have to pay the full cost – minus any government subsidy.

So if a company were serious about moving its employees onto the exchange, it would most likely have to consider:

• Increasing the employee wages by the amount now paid by the employer for health insurance.
• That amount would need to be “grossed up” to account for taxes on the employee wages so that the net pay increase to the employee would cover the cost of health insurance.
• There would be additional tax and other consequences to the employer for increasing wages to its employees.

There are two considerations that would likely be decisive for the employer:

1. Medical inflation.  Health care costs for employers have historically been higher than general medical inflation and two to three times higher than the general rate of inflation.  If the ACA does not flatten that cost curve, companies could well calculate that it is to their long term advantage to take the cost hit in the first year for a more predictable cost curve in the future.
2. Competition.  Once one large company make that decision, all of its competitors will jump on that bandwagon to the basement.  No one will want to lose its competitive advantage on account of health care costs.

There are further complications in this analysis and those don’t make it any more favorable for employer sponsored health insurance.

I will explore those additional wrinkles and the false dichotomy between individual and employer group health coverage in future posts.

Photo Credit:      FLICKR CameliaTWU

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In an article in Employee Benefit News, Nancy Bolton expressed some of the concern, confusion, and questions of many in the employee benefits profession right now.

Where are we going?

Will health care reform be good for employee benefit plans?

Readers familiar with my musings and rants will know that I will not mourn the demise of employer sponsored health coverage.  But I am also no fan of an individual mandate.

Good guys

Nevertheless, Bolton’s perspective is an interesting one.  Like me, she administers a public plan.  She asks the question, “Aren’t employers the good guys?”

Why didn’t the politicians who loudly proclaimed support for employment based health care, do more to underwrite its cost.

This translated to me, as a purchaser of an employer-sponsored health plan, that any reform would have to contain incentives to encourage employers to stay in the game.

I suspected post-reform employer-sponsored insurance would resemble a Medicare Part D subsidy on steroids, since the anticipated cost just to cover the nation’s estimated 30 million uninsured is staggering.

I find this argument curious, since her plan is already a public plan supported by county tax dollars.

Going against the grain

She is justifiably proud of the role her employer has played in providing health care security to 5,000 families.  As she navigates the changes imposed on employer-sponsored plans, she questions the future of that plan and that tradition in her community.

She finds herself in the unpleasant role of calculating the opportunity costs of continuing to provide health care coverage and she finds the results a bit disturbing.

The cost of coverage is four times the cost of paying the fine.

As I noted previously, this logic is curious. Prior to fines, the alternative dollar cost of not providing coverage was zero.  There was, and is for now, the cost of not being able to recruit talent.  Will the insurance exchanges of health care reform make that argument go away?   If so, will fines or other incentives be the only reason to persuade employers to stay with their own plans?  Bolton is not the only one making that calculation.

A poll by the Society for Human Resource Management reveals that:

Respondents at nearly half of the organizations (46 percent) said they have decided not to drop health care coverage for employees as a result of the new health care reform law.

What about the other 54%?

As Bolton observes, there may be some consequences to the wage side of that calculation that may make the math for terminating coverage less favorable.  But  a straightforward comparison of the fines to the cost of coverage does not make a compelling case for continued coverage.

During the health reform debate, organizations purporting to support employer sponsored health care coverage opposed a strong employer mandate.  That includes the American Benefits Council (ABC), the Society for Human Resource Management (SHRM), the Chamber of Commerce, the National Federation of Independent Businesses (NFIB) and others.  All of these organizations were more interested in protecting the “right” of businesses to not offer health insurance.

It may well turn out that the absence of a strong employer  will create an economic mandate to end coverage.

The end of the world?

As I argued in a previous post, the end of employer-sponsored health insurance will come when a large national employer, citing competitive pressures, abandons its health care coverage.  Others will quickly follow suit.

But a public employer does not have those competitive pressures.

So when a public employer is considering, even reluctantly, the option of discontinuing its health plan; this is ominous.

Bolton writes that health care reform reminds her of the REM song, “It’s the end of the world as we know it (and I feel fine)”.

The world of employer sponsored health insurance is changing.  But if an individual market is the alternative should we really feel fine?

Photo credit:  James L. McGee

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Wednesday, September 9^th, President Barack Obama stood before the American people and a joint session of Congress and said:

If you are among the hundreds of millions of Americans who already have health insurance through your job, … nothing in this plan will require you or your employer to change the coverage or the doctor you have.  (Applause.)  Let me repeat this:  Nothing in our plan requires you to change what you have.

Someone will need to explain to me why this is a good thing.

The door may blocked

As the President was speaking these words, the 70 workers at SK Hand Tool Corp in Chicago, IL were without health insurance because their employer had made that decision for them.  It had unilaterally stopped paying for health insurance for its employees.

An inviting portal

As the President was reassuring Americans that they could keep their health insurance, the employees of SK Hand Tools, represented by Teamsters Local 743, were starting the third week of a strike to keep their health insurance.

That strike would eventually last for ten weeks.

There is an overwhelming body of health policy research that supports the necessity of continuity of care to improve population health outcomes.  Yet for most Americans, employment is not a continuous engagement.

Why do we build a system that relies on continuity on another system that flourishes on discontinuity?

The door needs a key

Human resource professionals will argue that good employment practices encourage employee retention.  But the same HR professionals spend a significant amount of time and psychic energy on issues related to discontinuity – turnover, hiring, firing, growth and “downsizing”.

Turnover is a fact of employment life. It should not be a part of our health care life. Last week, I argued that an improved patient delivery system is a necessary pre-condition for an improved health care delivery system. To enter into the health care delivery system we must pass through a portal that screens us based on criteria such as age, income, dependent status, military status, ethnic status, and employment.

But employment status is not a reliable portal

• “Working age” describes only that portion of our lives that begins after we end the first phase of our education until we become too old or infirm to continue working
• Only 60% of firms offer health insurance
• 30% of the work force are people who primarily work as free lancers or part time employees, people not typically eligible for health care benefits

The doors open to different spaces

If we continue the image of a portal into the health care system, changing employers means changing portals.  But pass through a new portal and you enter a new space within the health care delivery system.  In health care jargon this is called a network.

You don’t need to change employers to confront a new portal.  Employers routinely place their health coverage out to bid.  A new health plan frequently means a new network forcing at least some workers to choose between continuing their relationship with their existing doctors and paying more out of pocket or choosing a new in-network doctor.

In addition, slightly more than half of employees covered by health plans work in firms that offer multiple health plans.  These employers offer annual “open enrollments” that permit employees to change health plans. The conclusion.

Employment is not an efficient portal into the health care delivery system because:

• It is not always there
• It is not there for all employees
• It does not always lead to the same health care delivery system

Next week:  Employers don’t really want to be in this business anyway.

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If the devil is in the details, then it is the angels that proclaim the broad principles.

During the upcoming congressional recess, Republicans plan swarm attacks on the devilish details of the various health care reform plans in circulation.  Advocates for a major overhaul of health care need to keep their eyes and  their voices focused on the prize.

Health care reform is not an insurance issue.

It is a workforce development issue and an economic development issue.  It is an issue that affects not just the health of our people, but the health of our economy and the health of our nation.

England recognized this when they adopted the National Health Service after World War II.  It was prompted in part by concerns at the highest levels of British society that so many working class and poor Brits could not pass the army physicals during the war.

The issues facing this country are very different but no less critical to the future of the American economy.

We have a health system that fails on two fronts.  It fails to foster the health of the American workforce and it fails to foster a vibrant American economy.

The first point has become a staple of political stump speeches – the poor international standing of the U.S. in such public health measures as longevity and infant mortality.

The current system is a drag on the economy

It is not just the cost.  Reforming health care financing, payment and delivery should be the focus of every politician interested in revitalizing the American economy and the American workforce for the next century.

Our distorted an uneven employer centric financing of health care distorts competition and it distorts workforce incentives.

We don’t need to look outside the United States to see how health care costs distort competition. We have the auto industry bankruptcy / bailout / crisis, whatever you want to call it.   Too often the fault is laid to “overly generous” health care benefits.

What is the standard for “overly generous”?  The auto companies and the auto unions provided benefits to their workers and their retirees because that was what responsible companies did.

This is not the fifties anymore

It is absolutely a holdover from the days when a few lumbering giant corporations dominated the economy.  They could afford the luxury of saying, don’t let the government do it.  We can do it.

But then foreign companies came here to compete. They didn’t necessarily offer less generous benefit packages.  But they did hire younger workers and they did not have any retirees with burdensome retiree health care costs.

So everything else being equal, they started out with a competitive advantage – health care costs.  Is that a level competitive market?  No!  Especially with regard to retiree health care costs.

But there are also companies who seek that additional competitive advantage by providing no or very minimal health care benefits.  Wal-Mart is accused of being such a company.  While not offering benefits themselves, they don’t hesitate to let their employees know what tax-supported programs are available.

Why should some companies assume the expense of health care for their employees and others be allowed to rely on tax supported programs?  Is that a level competitive market?  Absolutely not!

A third distortion occurs when companies pay for the health care costs for employees of companies that do not offer insurance.  A study by the Commonwealth Fund found that nearly 18% of employer health care costs pay for the health care of dependents who work for companies that do not offer health insurance.  In some cases, companies may be paying the health care costs of their competitors.  Is this a level competitive marketplace?

De-couple health care from employment

De-coupling health from employment totally is the key to a vibrant workforce and a revitalized economy and eventually, a healthy workforce.

What are the trends in the workforce?  Even before last September, younger people were entering the workforce later, older people were, and still are, interested in continuing to work past retirement either part time or part year.  Mid career workers are increasingly interested in leaving their jobs to learn or enhance skills or to do volunteer work for an extended period.

Workforce consultants and progressive employers promote such concepts as paid time off, part time work, freelancing, job sharing, work hardening, and phased retirement.

Freelancing and part time work has grown at least in part because employers avoid health care costs.  But freelancing has its appeal to many workers.  How much more so if health care costs were not also a concern on the employee side?

Health care is a fixed cost.  It is fundamentally incompatible with variable work hours and schedules.  The current system is an impediment to every one of those trends.

Liberate American workers and employers

De-coupling employment from health care will mean that employees can accept other risks – like working for a start-up company or starting their own business.  They may work part time while doing more volunteer work.  More part time employment will mean more employed people and less poverty.

It means that employers will be able to choose employees from among the best and not just the available.  The available excludes those not willing to risk losing their current health care insurance.

De-coupling employment from health care will permit reforming the patient delivery system.  Academics and health care policy wonks endlessly ponder reforms to the health care delivery system.  But such concepts as the medical home, payment reform, patient centered care, chronic condition management will never gain traction as long as the patient population is fragmented and cycled through health care silos by income, age or employment relationships.

Put common sense ahead of ideology

There are lots of heartbreaking stories about individuals who have suffered through their encounters with the maze of US health care and health care insurance.  But these aren’t just stories of financial, physical and emotional distress, these are heartbreaking stories of citizens who have been denied opportunities to maximize their contributions to the American economy.

It is time that the health care system be put to the service of the 21st century American economy and the 21st century American worker instead of sacrificing the American worker to the American health care economy.

(A version of this was first published in The Nelson Report)

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Why is there not more support for an expanded employer role in providing health insurance to all Americans?  I sense a certain exhaustion among decision makers and employee benefit professionals as they grapple with costs that just defy control. I notice at professional conferences an increasing openness to the single payer model.

We have seen one cost control fad after another.  More and more employers are dropping health benefits in order to stay afloat.  In this game of Old Maid, those employers who do provide benefits struggle to maintain their social compact with their employees without footing the bill for the rest of the world.

The rest of the world? How does that occur?  In a number of ways.

They pay more than their fair share. Doctors and hospitals complain that the compensation they receive from public programs like Medicare and Medicaid is inadequate.  Hospitals complain about the cost of providing uncompensated care.  How do these entities survive?  Because private payers, read employer plans, pay more than the cost of care.

They pay for other firms’ employees. Thursday morning (Jan 29th) there was a story on NPR’s Morning Edition about the high cost of COBRA coverage.  Almost overlooked in the story was that the woman’s employment based insurance supported her husband’s small business.  My church employs three people, all of whom have health insurance through their spouses’ employment.  We  do appreciate that support, but is that fair to those employers?

They pay for ineligible dependents. One of the latest trends for cost control is an eligibility audit.  Employees must provide proof through birth certificates and marriage certificates that the dependents on their plan are eligible dependents.  Our plan has always been fairly strict about providing documentation for new dependents.  But for years we didn’t question the dependents of new hires.  I don’t know whether to laugh or cry when the occasional employee contacts our office to add a new spouse.  We inform him (usually a him) that before he can add a new spouse he has to provide documentation that the previous spouse is either deceased or divorced.   That’s when we learn that he was never married.

They pay for retirees. There are still plans thatoffer coverage to retirees – mostly government plans.  Often those retirees work for other employees or are self-employed.  Why should their former employer pay for the  cost of their health care.  The auto and steel industries illustrate how those legacy cost distort the market.

But there are other arguments that point to a less pivotol role for employers in the provision of health care.

It skews the competitive playing field. Firms that provide health insurance are at a competitive disadvantage  against firms that do not.  Firms that also provide retiree health insurance are at an even greater compettve disadvantage.

It reduces employment flexibility. Health insurance is a fixed cost per employee.  That  economic fact goes against the grain of recent employment trends such as more part time work, less overtime, job sharing, and phased retirement.

Some employment plans and employer coalitions have been voices for change within the health care system.  Much of the current emphasis on pay for performance and quality measurement got its big push form employers and unions.  Many employers have aggressive Wellness initiatives at their work places.

The ideal reform effort will relieve big businesses of the disproportionate share they now pay for health care and make health care more affordable for small businesses and non-profits, while preserving that positive voice advocating for employee health and the welfare of health care.