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Senate Health Overhaul Plan Offers Employers Penalties, Assistance

Sep 30, 2009

Earl Stewart at his Toyota dealership in Florida

Earl Stewart, who owns a Toyota dealership in Florida, and Kevin Galvin, who owns a maintenance business in Connecticut, have something in common: Both say they can't afford health insurance for their employees.

But under the Senate Finance Committee bill, which is likely to be the template for any health overhaul legislation passed by Congress, the two would be treated drastically differently: Stewart, who has 130 employees,  would be penalized, while Galvin, who has seven workers, would get a big government subsidy to help him pay for insurance for his employees.

That dichotomy illustrates a major theme of the health legislation: How employers would be affected by the Baucus' bill varies greatly, depending on their size, whether they now provide coverage, the average wages of their workers and even the value of the benefits they are now offering.

Generally, small employers, which have the most difficulty affording coverage, would get help from the government through tax credits, which would allow them to recover part or all of the money spent on premiums.

Bigger employers that don't offer insurance could be punished. Those that do provide coverage might see their costs slow over time, if steps to hold down health costs – such as health information technology – actually work.

"In the long term, and through indirect means, it could be favorable to large employers, but nothing in the bill makes lightening strike in terms of bending the cost curve," said Michael Langan, a principal at Towers Perrin in Valhalla, N.Y.

The Baucus bill, unlike its House counterpart, doesn't require businesses to provide coverage. But it does mandate that companies with more than 50 employees – like Stewart's – pay a penalty if they don't offer insurance for lower-income employees who are eligible for government-subsidized insurance on newly created insurance exchanges. Under the "free rider" provision, as it's called, an employer not providing coverage would pay as much as $400 for each worker, whether they get government subsidies  or not.

"That would be very painful and I'm not sure a survivable cost for me," said Stewart, who has owned the car dealership for more than two decades.  "In good times, that might be a piece of cake, but in bad times like now, that might be the straw the breaks the camel's back."

Because of such concerns, most employers doubt that health overhaul legislation will help them, according to a survey released last week by the consulting firm Watson Wyatt. About 73 percent of employers believe health care costs will increase if overhaul legislation is enacted, the survey of 160 mostly large employers found. 

While most business groups including the U.S. Chamber of Commerce are fighting the "free rider" penalty, they are generally happier with the Senate Finance bill than with other health care bills being considered in Congress. 

The House bill, for example, includes requirements that all but the smallest employers cover their workers or pay a fine of up to a 8 percent of wages –a penalty that's much tougher than anything in the Baucus bill. In addition, many employer groups like the fact that the Baucus bill doesn't include a public health insurance option – a proposal defeated Tuesday in committee.

These groups, which include the National Federation for Independent Business and the U.S. Chamber of Commerce, oppose the public option because they say it would put private insurers out of business and destroy the employer-based health insurance system.

The Baucus bill isn't perfect, "but it is certainly a major improvement over the other bills we’ve seen so far,” said James Gelfand, senior manager for health policy at the chamber.

Here's a breakdown of how different types of employers would be affected by the Baucus' bill:

How Small Employers Would be Affected

Under the Baucus bill, Galvin, whose Hartford, Conn., maintenance business is based in the home town of Aetna Inc. and other big insurers, would get a 100 percent tax credit to buy coverage for his employees. "That would probably be something I would consider and probably move on," said Galvin, who hasn't provided coverage in a decade, he said, because the costs have been too high. 

 

Kevin Galvin, who runs a maintenance business, would get a hefty tax credit to help buy insurance for his workers, under the Senate Finance Committee bill.

Galvin, who said his inability to offer health benefits has made if more difficult to attract workers to expand his business, gets his own coverage through his wife, Whitney, a psychiatrist for a state-owned hospital.

He and other small employers could be helped in several ways by the Finance Committee bill: They could buy coverage through the newly created health insurance exchanges, which could be substantially less expensive  than anything they could get on the market now. And they'd find it easier to get coverage because of new rules that would bar insurers from denying insurance to people with preexisting medication conditions.  

A tax credit equaling 100 percent of the cost of insurance would go to employers with 10 or fewer workers with average annual wages of less than $20,000.

One drawback: Employers would have to put up their share of the premium and wait almost a year to get reimbursed by the federal government. "This could create another short-term cash flow problem for small businesses, especially those working on the edge," Galvin said.

Employers with fewer than 25 employees and average annual wages of less than $40,000 would be eligible for a tax credit of up to 35 percent of the cost of health insurance, assuming they pay at least half of the premium. The credit would extend to 50 percent in 2013.

"The tax credit would be a help, yes, and you can't turn down free money," said Mike Draper, owner of Smash clothing store in Des Moines, Iowa, who pays the full cost of his 12 employees' health coverage.

But Draper fears the legislation won't slow the increase in premiums. "A tax credit doesn't help bring down costs," he said. He also doubts the health insurance exchange would bring down prices. 

Large employers who currently offer coverage

More than 95 percent of employers with at least 50 employees offer health coverage. Most of them wouldn't be significantly affected by the Baucus bill.

But there is one way some could take a hit: Under the bill, a health plan sold by insurers or offered by employers that costs more than $8,750 for an individual and $23,000 for a family would be subject to a 35 percent excise tax on the excess amount. The national average premium is currently $4,824 for an individual and $13,375 for a family policy. 

The threshold amount for the excise tax would increase annually based on the overall inflation rate plus 1 percent. Employer groups are fighting the measure in part because heath costs are growing at least two to three times faster than overall inflation. As a result, employers say many of today's policies could be subject to the tax within a few years.

In addition, under the Baucus bill, employers would be required to pay corporate income taxes on the government subsidy for maintaining retiree prescription drug coverage. Under the 2003 law that established a Medicare drug benefit, firms were exempt from paying taxes on the subsidy.

For Xerox, which is based in Norwalk, Conn. and has more than 30,000 employees, the tax could add up to millions of dollars a year, said Martin Reiser, director of government relations.

But Reiser said that parts of the bill that are designed to make insurance more affordable for individuals and small businesses could pay dividends for all employers. "The better the overall health system works, the better it is for all of us," he said. If there are fewer uninsured patients, he said, providers wouldn't have to shift so many costs to paying customers.

Large employers that don't currently offer coverage

Companies with more than 50 full-time workers that currently don’t offer insurance -- or adequate insurance -- would have to reimburse the government for some or all of the cost of subsidies provided to full-time employees who work 30 or more hours a week and buy insurance on their own through the exchanges. An employer could pay up to $400 for each worker in the company, whether they are receiving subsidies for insurance or not.

Critics say the provision could unfairly affect lower-income job applicants. The reason: Companies might steer clear of them, out of concerns they'd have to pay penalties if they hired them. Instead, they might hire employees who have coverage through a spouse or other means.

Stewart, the Toyota dealer in North Palm Beach, likes to reward his employees by giving them $100 for going "above and beyond" in helping customers or $1,000 for quitting smoking. He's frustrated he can't afford to offer them insurance, but says his employees find a way to get health care without it.

And he's worried that the health care bill being debated in Congress might  make things worse. "Everything I see the government do, they mess up," he said. "The cash for clunkers was a good program, but its administration was terrible," he said alluding to slow payments from the government.

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