Some analysts predict that a large number of employers willterminate their health plans in 2014 and simply pay the annualpenalty of $2,000 per employee. After all, they argue, employers'health plan costs will only continue to rise, and the fines will berelatively modest compared to what it will cost to continueproviding coverage.

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Additionally, there will be exchanges where insurers must accepteveryone, so employers who terminate their plans will not bebanishing their less-healthy employees to the ranks of theuninsured. All of this, they project, will make the prospect ofgetting out of the health insurance game irresistible to manyemployers. But despite rising costs, employers  should(and will) retain health care plans after 2013.

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Most importantly, terminating coverage would prevent an employerfrom ever realizing the total value of its workforce's health. Thetrue costs of dropping coverage will therefore outweigh thebenefits. Employers should decide now whether they plan to retainor drop coverage in 2014, because their decision will have serious,long-term business implications.

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The employer that anticipates dropping coverage will not focuson improving its workforce's health. Its employees will thereforecontinue to get sicker and its plan costs will continue to rise. In2014, this employer will have no choice but to terminate itsunaffordable plan, even if doing so will damage its business. Onthe other hand, the employer that anticipates retaining coveragewill begin pursuing a long-term health improvement strategy andmost likely contain its plan costs by 2014.

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This employer will retain its plan because it will be affordableto do so, its employees will want it to continue offering coverage,and it will be using its plan to leverage the total value of itsworkforce's health, which will prove to be a significant, long-termcompetitive advantage.

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Rising health care costs: the indefinitetruth
The root cause of any employer's rising healthplan costs is the steadily declining health of its insuredpopulation. America's workforce is getting sicker for a number ofreasons. First, as they age, individuals naturallyprogress from having few health risks to developing numerous healthrisks and chronic conditions. Second, societal changes contributeto deteriorating health.

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For example, technological innovations save labor and time, butresult in more sedentary work and home lives. Third, theever-increasing stress that employees experience leads them toengage in unhealthy behaviors like smoking, drinking and eatingpoorly. As a result, more people than ever before are nowoverweight, hypertensive, diabetic and suffering from one or morechronic health conditions. Employers try to contain their healthplan costs in a number of ways.

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Most of their strategies are ineffective, however, because theyfail to address their insured population's declining health. Forinstance, shifting more plan costs to employees does not addresstheir health, and it prompts some (usually the healthiest) tosimply drop their coverage.

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Discouraging use of medical services by imposing largedeductibles, co-pays and/or co-insurance likewise does not addresshealth, and it deters employees from using services that help themmaintain or improve their health. Consumer-directed health plansalso do not address health, and they can discourage employees fromseeking preventive or even diagnostic care because they do not wantto spend “their own” money.

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And even most wellness and disease management programs areineffective because they are primarily reactive, fail to engageenough insured employees and spouses, place too much emphasis onindividual, rather than cultural, change, and focus primarily onhigher-risk employees while largely ignoring lower-riskemployees.        

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The Patient Protection and Affordable Care Act will also nothelp contain health plan costs in the near future, as it ended upbeing more about expanding coverage than reducing costs. In fact,it will likely contribute to increasing costs for at least the nextseveral years by expanding coverage for young adults and children,removing lifetime cost and pre-existing condition limitations, andimposing new taxes on pharmaceutical and medical devicecompanies.

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The insurance, drug and medical device industries willinevitably pass these costs on to employers. Health insurers willalso likely increase premiums more than necessary while they stillcan. Then, when 2014 arrives, over 30 million formerly uninsuredpeople will begin to obtain health insurance coverage, startseeking postponed care, and discover and treat previouslyundiagnosed conditions. New fees for health insurers also takeeffect in 2014. The ACA will therefore not begin reducing plancosts until 2014 at the earliest. 

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Cost of terminating plans outweighbenefits
Contrary to what many analysts predict, thecost/benefit analysis for terminating a health plan will not be assimple as merely calculating the difference between what a companypays to provide coverage and what it would pay in penalties if itdropped its plan. Those perceived “savings” will be only one factorin the equation. Reasonably assuming a more competitive labormarket by 2014, an employer will also have to factor in the cost ofkeeping its employees financially “whole” in order to retainthem.

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At a minimum, the employer would have to increase wages enoughso employees could purchase coverage from an exchange insurer.Employers will also have to consider the benefits they derive fromretaining their plan, including their workforce's appreciation,respect and loyalty, and their ability to actively manage theiremployees' health. From a purely financial perspective, it is notat all clear that the average employer would save any money bydropping its health plan in 2014.

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In fact, researchers who have simulated the ACA's effects, suchas Bowen Garrett and Matthew Buettgens of the non-partisan UrbanInstitute, have found the opposite to be more likely – totalemployer spending on premiums, assessments and vouchers will likelybe lower under ACA than without reform.

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Specifically, the average employer with 100 employees or lesswill likely pay 7.9 percent less to insure its employees under theACA, while an employer with 101 to 1000 employees and an employerwith more than 1,000 employees will likely pay 1.1 percent and 3.1percent less, respectively.

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Some of the reasons for this include: the significant taxadvantages employers and employees enjoy with employer-based groupinsurance; the fact that most employees have total householdincomes above the threshold at which it would be less expensive fortheir employer to continue insuring them as opposed to subsidizingtheir exchange-based coverage; the fact that only a smallpercentage of lower-paid employees select family coverage (therebyreducing an employer's savings from eliminating their coverage);and the fact that higher-paid employees tend to be older thanlower-paid employees (thereby increasing how much employers wouldhave to subsidize these employees' more expensive age-rated,exchange-based coverage).

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The average employer should be able to use the ACA's “play orpay” mandates to save money by retaining its plan, but modifyingthe plan's design and subsidizing it only to the extent that itmakes financial sense to do so. To begin with, employers will onlybe required to offer “minimum essential coverage” plans that are“affordable” in order to avoid the $2,000 per employee penalty.Most employers' plans already offer minimum essential coverage.

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Additionally, these plans will only be required to cover 60percent of covered plan expenses. Most plans currently cover ahigher percentage of plan expenses, so there is room to modify themto save money. Moreover, these plans will be considered“affordable” under the ACA (and therefore sufficient to avoid a$3,000 per employee penalty) if they do not require an employee tocontribute to his premium more than a certain percentage of histotal household income.

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Factoring in a spouse's income, most employees' total householdincome is high enough to render most employers' plans affordable tothem, thereby making them ineligible for subsidized exchangecoverage. Employers will therefore be able to strategicallydetermine the rate at which they will subsidize their plans so theywill continue to cover only those it knows it can insure for lessthan if they obtained exchange coverage and then soughtreimbursement.

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As for each employee the employer cannot justify covering, itwill simply pay the $3,000 penalty plus the small, subsidized costthe employee pays for affordable exchange coverage.

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The value of health coverage
But it's notjust about dollars and cents. Employers will also have to factor inthe cost of breaching the psychological contract they haveestablished with their workforce. Of all the benefits a companyoffers, employees value health coverage the most.

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They also highly value the assistance that most employersprovide in navigating the complexities of health care services andinsurance claims. Employees would therefore view their employerterminating coverage as a major breach of the psychologicalcontract, demonstrating a lack of concern and severing an importantconnection. Health care reform in Massachusetts provides an exampleof the psychological contract in action.

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There, reform law mandated that all individuals purchasecoverage. When employees of companies without health plans couldnot afford coverage in the individual market, they asked theiremployers to offer coverage. Most employers did, choosing to honorthe psychological contract rather than risk losing employees tocompetitors with health plans.

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As a result, between 2006 and 2009, more Massachusetts employersoffered health insurance coverage than before the law took effectdespite state unemployment rising by 4.5 percent during that sametime period. Many experts predict the same thing will occur underthe new federal law.

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So what are employers supposed to do if their health plan costsare guaranteed to keep rising, yet the hard and soft costs ofterminating their health plan in 2014 will outweigh the benefits?Employers need to do the only thing that works to contain healthplan costs – improve their workforces' health. 

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Managing workforce health
Regardless ofhow health care reform plays out, employers will need to continueto hire good people and obtain their best efforts in order tosucceed. The problem, however, is that most employees, when leftalone, will not maintain their health, and unhealthy employees willnever perform at a high level.

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Employers must therefore take advantage of the enormousopportunity they have to influence their employees' behavior. Themost effective way to do this is to retain their health plan anduse it to improve their employees' health. This will not onlyreduce health plan costs and increase productivity, but it willprovide employers with a significant competitive advantage.

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Historically, employer health promotion initiatives were littlemore than a leap of faith.  Management always knew,intuitively, that a healthy workforce costs less and is moreproductive, but they did not know where to focus their healthpromotion efforts. They were also unable to measure the costsavings or degree of increased productivity that they wereachieving in return for their health promotion investment.

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Heavily investing in health management was therefore consideredrisky due to the uncertain return on investment. Investing inhealth management is no longer a leap of faith. In fact, manyproactive companies now have health management down to a science.With the benefit of decades of research involving hundreds ofcompanies and millions of employees, we now know exactly what doesand does not work to reduce and contain health plan costs.

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For example, using data mining and predictive modelingtechnology, employers now have the ability to accurately predicthow much they will spend in future years if they continue doingexactly what they are doing versus aggressively managing theirworkforce's health. These employers do not wait for their nextgroup of large claimants to reveal themselves in the form of shockclaims.

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Instead, they identify their highest-risk employees and get themthe help they need before they actually incur largeclaims.  Numerous studies and surveys reveal thesignificant, positive returns on investment that proactiveemployers realize by aggressively managing their workforce'shealth. These studies all lead to the same conclusion:“high-performers” (those with a strong health promotion culture andan aggressive health management process) enjoy significantly lowerhealth plan costs and otherwise outperform their competitors byleveraging the total value of their workforce's health.

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The total value of health to a high-performer is much more thanjust the value of the medical and pharmaceutical claims costs itprevents or postpones by keeping its employees healthy. It includesthe value of reduced employee time away from work due to sickness,short and long-term disability, and injuries. It also includes thevalue of decreased “presenteeism” – employees' unproductive timewhile at work caused by chronic health conditions.

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As more employers come to appreciate the total value of health,they will stop focusing on what they think they might be able to“save” by terminating their health plan and instead will focus onwhat they stand to gain. They will realize that they need to getsignificantly more –not less –involved in managing their employees'health, and they need to start doing so immediately. They willcreate a strong health promotion culture and aggressively managehealth.

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And once they gain control of their plan costs and beginrealizing their own TVH, they will choose to maintain that controlas opposed to turning their employees over to exchange insurerswhere no one will be managing anyone's health. As a result, theywill enjoy a significant competitive advantage over those who optto simply give up and get out of the health insurance game.

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Brad Warrick is the managing member of Warrick LLC, whichspecializes in change leadership and management, reducing healthplan costs and improving productivity. Brad can be reached at[email protected] or434-295-0590.

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