Some analysts predict that a large number of employers will terminate their health plans in 2014 and simply pay the annual penalty of $2,000 per employee.
After all, they argue, employers’ health plan costs will only continue to rise, and the fines will be relatively modest compared to what it will cost to continue providing coverage. Additionally, there will be exchanges where insurers must accept everyone, so employers who terminate their plans will not be banishing their less-healthy employees to the ranks of the uninsured. All of this, they project, will make the prospect of getting out of the health insurance game irresistible to many employers.
What these analysts ignore, however, are other factors that would significantly increase the true costs of terminating coverage. For instance, an employer would have to increase wages to make up for revoking coverage or risk losing some of its most valuable employees. The tax consequences of this wage increase and of paying penalties with after-tax dollars would be significant.
Additionally, eliminating this important benefit would breach the psychological contract between an employer and its employees. Most importantly, terminating coverage would prevent an employer from ever realizing the total value of its workforce’s health. The true costs of dropping coverage will therefore outweigh the benefits.
Employers should decide now whether they plan to retain or drop coverage in 2014, because their decision will have serious, long-term business implications. The employer that anticipates dropping coverage will not focus on improving its workforce’s health. Its employees will therefore continue to get sicker and its plan costs will continue to rise. In 2014, this employer will have no choice but to terminate its unaffordable plan, even if doing so will damage its business.
On the other hand, the employer that anticipates retaining coverage will begin pursuing a long-term health improvement strategy and most likely contain its plan costs by 2014. This employer will retain its plan because it will be affordable to do so, its employees will want it to continue offering coverage, and it will be using its plan to leverage the total value of its work force’s health, which will prove to be a significant, long-term competitive advantage.
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