The HR Report: Responding to the Challenge of Rising Health Insurance Premiums

The information contained in this article is not intended as legal advice and may no longer be accurate due to changes in the law. Consult NHMA's legal services or your municipal attorney.

Effective in 2020, the Affordable Care Act (“Obamacare”) will impose an excise tax on health insurance plans whose total premium costs, including both employer and employee contributions, exceed certain pre-established price points. Premiums in excess of those price points will be subject to a 40 percent excise tax. Currently, the so-called “Cadillac Tax” will be triggered if a family health insurance plan has a total premium cost in excess of $27,500 ($30,500 for plans that cover emergency services personnel), with lower thresholds for single and two person plans.

If a municipality or school district has not already done so, it would be prudent to determine whether the health insurance plans currently offered to employees are already over the Cadillac Tax threshold, or whether, assuming reasonable rate of medical inflation, those plans project to be over the threshold by January 2018. If either is true, and if it can be assumed that local taxpayers would not like to see their tax dollars being expended to pay a federal excise tax, then immediate consideration should be given to lowering premium cost by changing health insurance plans.

Some might argue that the Cadillac Tax will never become a reality—that Obamacare will be repealed or significantly modified by the next administration, or that the Cadillac Tax will be delayed or the thresholds raised. All or none of this may come to pass. Regardless, many communities are currently facing a significant unfunded liability, which, if it becomes a reality, could have devastating financial consequences.  

Even if the Cadillac Tax never becomes a reality, public employers are still facing a health insurance crisis. A 2014 Kaiser Family Foundation study showed that over the 10 year period between 2004 and 2014, the average total cost of health insurance plan premiums had increased by 69 percent. The study found that the average amount that employees had been asked to contribute towards premiums had increased by 81 percent over the same time period. This rate of increase is simply not sustainable. Many employers can remember when the total cost of all employee benefits, including employer funded health insurance, represented 20-25 percent of total compensation. Given the fact that the rate of premium increase has significantly outpaced the rise in wages over the same time period, benefit costs now exceed 50 percent of total compensation for many entry level employees.

These benefit costs have fundamentally changed the workplace. Here is just one example. Federal overtime laws enacted during the Great Depression were intended to incentivize employers to increase the size of the workforce so that most work could be performed at straight time rates. However, the high cost of employer provided health insurance has actually made it less expensive to pay overtime to fewer employees rather than add benefit eligible positions. As a result, the public sector workforce is leaner than ever and many employees are expected to work significant amounts of overtime hours.

The obvious solution is to lower premium costs. Cost shifting—asking employees to pay a larger percentage of the premium—may provide temporary relief. However, cost shifting results in increased pressure on employers to increase wages. With New Hampshire among the states with the lowest rate of unemployment, employers are already feeling pressure to increase wages in order to recruit and retain good employees. Cost shifting will not make it easier for employers to attract the workforce necessary to provide governmental services. An alternative solution is to substitute lower cost alternatives for existing health plans. For some employers, this will be unavoidable, as risk pools and insurance carriers are eliminating entirely some of their most expensive health insurance products. 

I do not pretend to be an expert on how insurance premiums are set, but it is obvious that the scope of services and service providers, the utilization experience of the employer or pool, and the amount of risk borne by the insured employee are all part of the calculation. Interestingly, premium cost-sharing is not a significant consideration, as it has been largely ineffective as a method of changing consumer behavior with regard to medical care. While it is hoped that wellness programs and other proactive measures will help lower future experience ratings, it appears that asking employees to take on greater risk is the most effective way of lowering premiums.

Employees take on greater risk when there is a direct out of pocket cost associated with medical expenses. Unlike premium cost sharing, where an amount is automatically deducted from pay so that employees are less conscious of the expense (and are almost incentivized to “get their monies worth”), risk shifting requires employees to be thoughtful about each medical expense. This is accomplished either through co-pays (for example, a $20 fee for each physician office visit or $100 for an emergency room visit), or deductibles, where the employee is responsible for the entire cost of medical care up to a preset limit. By shifting those risks to the employees, it is anticipated that they will become more cost-conscious consumers.

Risk shifting can have a dramatic impact on health insurance premiums. For some employers, the move from a higher end health maintenance organization (HMO) or indemnity plan to a plan where employees carry greater risk could be in excess of $10K per family plan. Cost sharing does nothing to reduce the total premium costs. In contrast, risk shifting produces real savings, which is reflected in decreases in the amount of employer and employee premium costs. But from the employees’ perspective, those savings are offset by the increased risk, which could make employees hesitant to adopt higher risk plans. In unionized workplaces, employers rarely have the ability to unilaterally change health insurance plans. As a result, employers need to consider how employees can be encouraged to overcome their apprehension regarding higher risk plans. Beyond educating employees on how the plans operate and how to be better medical care consumers, employers need to consider whether some portion of the premium savings resulting from risk shifting should be shared with employees.

Risk shifting is not intended to deny employees access to health care. It is cost-effective for employers to have a healthy workforce. Instead, the intent is to encourage employees to be more mindful of the cost of the medical services and to apply their skills as consumers to make value based purchases.

The “shared savings” approach has the potential of allowing employers and employees to partner towards their mutual benefit. By reducing premium costs, employers can free up cash and apply it for other purposes. For example, employers facing significant turnover costs resulting from new police officers or firefighters leaving after several years for higher pay in other communities may be able to offer wage adjustments without sourcing new money from the taxpayers.  Employers can also consider increasing employee take home pay by reducing, rather than increasing, premium cost sharing. Employers can also consider subsidizing the additional risk undertaken by employees through the use of employer contributions to tax deferred advantaged Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs), Flexible Spending Accounts (FSAs) or other partial risk subsidies.

Risk shifting through a shared savings approach presents tremendous opportunities for public sector employers and employees. The lower premiums that result from risk shifting can protect both employer and employees from the impact of the looming Cadillac Tax. Even if the Cadillac Tax never becomes a reality, risk shifting allows employers and employees to shift dollars away from health insurance premiums and put them under the employees’ control, either through adjusted wages or to tax advantaged accounts. Achieving these results requires a commitment of time and effort on the part of elected officials, administrators, employees and their families to understand the new plan options and the practical implications of risk shifting, and to develop an approach to shared savings that meets the needs of your community. Considering that the “cost of doing nothing” includes the continual increase in health insurance premiums and the potential impact of an unfunded Cadillac Tax liability, it is well worth the effort to give risk shifting plans serious consideration. 

Mark Broth is a member of the DrummondWoodsum’s Labor and Employment Group and his practice focuses on the representation of private and public employers in all aspects of the employer-employee relationship. This is not a legal document nor is it intended to serve as legal advice or a legal opinion.  Drummond Woodsum & MacMahon, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such. “Copyright 2016 Drummond Woodsum.  These materials may not be reproduced without prior written permission.”