by Paul Zane Pilzer and Rick Lindquist, authors of “The End of Employer-Provided Health Insurance: Why It’s Good for You and Your Company“
U.S. companies can no longer afford to provide group health insurance to their employees. There. We said it. Consider this stark statistic: In 2013, as a group, Fortune 500 companies spent more on health insurance than they earned in profits. On its face, this sounds like bad news. But much like the growing turmoil in an unhappy marriage, it’s really just one more piece of evidence that what once worked no longer does. And since nature abhors a vacuum, something new will rush in to meet the need that’s being created.
The question is what YOU are going to do, right now, to respond to this paradigm shift.
Of course we’ve known for quite a while that our health insurance system is broken — haven’t we? And both employers and employees alike have tried to make the most of a bad situation. Facing double-digit growth in health insurance premiums, companies have either eliminated health benefits or redesigned the plans to include higher deductibles, larger copayments, and greater premium sharing by employees.
For many, it’s been a struggle. In fact, since 2000, more than 10 million Americans have filed personal bankruptcy due to their employers’ failed health insurance plan.
But the Affordable Care Act has changed the game. And the solution is obvious: Rather than sticking with the “devil they know,” most companies should terminate their group health insurance in favor of defined contribution employer-funded healthcare and individual insurance policies purchased by employees. And the sooner, the better.
Making this switch will allow companies and employees to save up to $12,000 per employee per year, while offering a better employee health benefit program for recruiting and retention purposes. This is a massive savings and it will happen nationwide — there’s no arguing with that. The only question is when will individual companies make the leap? And how long will it take other professionals, such as CPAs and insurance brokers, to realize the abundant opportunities now available to them?
Below as an overview of the steps you should take right now whether you’re an employer, insurance professional, trusted adviser, or employee:
If you’re an employer…
Cancel your group insurance.
Unless your company is large enough to have dedicated, full-time employees managing your employer-provided health insurance program, the money and time you and your managers spend getting your employees covered is one of the greatest threats to your business. That’s because every hour you spend managing your employer-provided health insurance is another hour you are not spending managing and improving your product or service.
Even if your company is large enough to justify it, with health insurance costs today exceeding profits for many companies, it’s rare that the CEO and CFO of a Fortune 500 company don’t spend many hours managing their health benefits program. When you cancel your group insurance, not only do you set your employees up to receive coverage that is much less expensive for them (and you), but you also can keep your management focused on improving your products and services versus improving your employer-provided health insurance.
Develop a defined contribution solution.
When your company terminates employer-provided health insurance, it can save your employees money, while allowing you to offer a better employee health benefit program for recruiting and retention purposes in the form of a defined contribution solution. Basically, employees purchase their own individual policies on the open market (a purchase frequently offset by government subsidies), and employers reimburse them.
There are three main approaches to defined contribution healthcare your company can consider. One, offer a monthly taxable stipend. With this approach, your company provides a taxable monthly stipend on employee paychecks. Two, establish a formal reimbursement program to reimburse employees for their substantiated individual health insurance costs on a post-tax basis — up to a healthcare allowance specified by the company. And three, utilize Section 105 of the Internal Revenue Code to establish a formal self-insured medical reimbursement plan to reimburse employees for their substantiated individual health insurance costs on a pretax basis.
Regardless of the defined contribution approach you decide to take, your company should utilize third-party administration software to ensure compliance.
If you’re an insurance professional…
Develop the components necessary for becoming a health insurance concierge.
As employers begin to transition away from employer-provided plans, they’ll need help. And that’s where enterprising insurance professionals come in. Licensed health insurance brokers or service providers can play a valuable role for employers by helping employees select and purchase individual health insurance plans. You can attract these employers by emphasizing your familiarity with the individual market and your experience working with defined contribution solutions. Also, let them know how knowledgeable you are about healthcare reform.
There are certain requirements that must be met in order to market yourself as an insurance concierge. First, you need to be certified with the Health Insurance Marketplaces in the states where you want to operate. Second, you need to be appointed with individual insurance companies. Information on how to complete these requirements can be found on health insurance company websites, Health Insurance Marketplace websites, and at our site, www.healthinsurancerevolution.org.
Partner with a defined contribution software provider.
Losing group health insurance clients due to cost or participation requirements? Need solutions and tax-savings for clients not offering health benefits? Want to sell more individual health insurance? Partnering with a defined contribution provider can solve these challenges.
Opportunities to profit from offering defined contribution solutions include:
- Increased individual health insurance policy sales
- Commissions from the defined contribution provider (one-time and/or recurring)
- Referrals from happy clients
- Consultant fees charged to businesses for expertise in health reform, small business health insurance, and defined contribution
For health insurance brokers and agents, a defined contribution solution offers a tool to increase individual health insurance policy sales and retain clients who are dropping group health insurance. Health insurance brokers partner with defined contribution software providers to increase their book of business. Defined contribution offers brokers an opportunity to retain small and medium group clients who are dropping health insurance because of cost. Defined contribution also serves as a lead generation tool to acquire new clients who have not been able to offer group health insurance in the past because of cost or participation.
Additionally, the rules and regulations governing defined contribution solutions can be complicated — especially now, with new health reform regulations. A defined contribution partner takes care of the administration and compliance so you, the health insurance broker, can focus on your main business — health insurance!”
If you’re a trusted adviser (CPA, attorney, tax professional)…
Become a compliance expert.
When providing tax-free reimbursement of individual health insurance policies through a health reimbursement plan, employers must ensure compliance with federal regulations, including but not limited to, legal plan documents, summary plan descriptions, and new market reforms required by the Affordable Care Act.
Compliance with changing federal guidelines may not be a do-it-yourself task for most employers. And that is where trusted advisers, such as CPAs, attorneys, tax professionals, and other advisers, come in. It will be crucial for employers to ensure that they structure tax-free and/or taxable reimbursement arrangements that work today and in the future. Trusted advisers can assist employers by helping them structure these arrangements while also ensuring that they’re compliant with all ACA regulations and tax laws.
Help small business clients handle the tax implications of moving away from a group plan.
The Affordable Care Act requires CPAs, tax advisers, and accountants to be experts on the key provisions of healthcare reform. As a result, tax advisers will now be the “go-to” for all health insurance decisions. The primary shift in the role of the tax professional will center on assisting business and individual clients in determining: 1) the size of the business based on full-time equivalent employees (FTEs) vs. annual revenue, and 2) the amount of tax credits and subsidies available and whether or not that outweighs the tax penalties and costs of offering qualified group health insurance.
There are many other tax-related areas where CPAs can show great value to employer clients. For example, the ACA introduced tax penalties for both individuals and employers. Most individuals face a tax penalty if they do not have health insurance coverage. Larger businesses face a tax penalty if they do not offer health insurance coverage to full-time employees. These are called the individual shared responsibility payments and employer shared responsibility payments. CPAs should be able to explain these new penalties, evaluate which clients they impact, and calculate the amount of the penalties.
The ACA also introduces new tax credits and subsidies for both individuals and employers. CPAs should be able to explain these new tax credits and subsidies, evaluate which clients can benefit from them, and calculate the amount of the credit and/or subsidy.
If you’re an employee…
Ask your employer to cancel your insurance.
For decades, Americans have relied on and been grateful for the health insurance coverage we received through our employers. But guess what? Times have changed, the Affordable Care Act is here, and the outdated group plan we’ve been desperately clutching with both hands is not as great as we think it is.
In fact, most would be far better off asking their employer to kick this inefficient (and far too expensive) dinosaur to the curb. There are many downsides to employer-provided health insurance. It’s overpriced, unreliable — you can lose your coverage if you’re sick and unable to work — and limits you to a certain group of medical providers and facilities, just to name a few. We recommend switching to defined contribution health benefits. Basically, employees purchase their own individual policies on the open market (a purchase frequently offset by government subsidies), and employers give them the money.
These defined contribution solutions save businesses and their employees 20 to 60 percent on health insurance costs annually. They’re better for everyone — with ACA on the scene, group plans just don’t make sense anymore. Consumers can migrate from employer-provided group policies to employer-funded individual plans at a total cost that is 20 to 60 percent lower for the same coverage. That’s $4,000 to $12,000 in savings per year for a family of four for the same hospitals, same doctors, and same prescriptions.
Research and calculate the most cost-effective plan for you and your family.
When you’re evaluating the cost of a health insurance policy, you should consider your premium amount (the amount you will pay to the insurance company for your plan, usually monthly) and “out-of-pocket” costs (the amount you will pay when you receive medical care), such as deductibles, copayments, coinsurance, etc.
The good news is that the Marketplace has made it a lot easier to understand the coverage levels of plans. As of 2014, individual health insurance plans are categorized in four standardized levels of coverage, called “metallic tiers of coverage.” These categories help you better compare plans “apples to apples.” Open enrollment in the Marketplace begins on November 15, 2014, and runs until February 15, 2015.
In order to save money, it is important to select the right metallic tier for your health and financial needs. If you have a family and anticipate using a lot of medical services, it is more ideal to select a platinum or gold plan. Although the premium is higher, you will pay less out-of-pocket when it comes time to receive medical care. If you are a healthy individual and do not anticipate having a lot of healthcare needs, selecting a silver or bronze plan is more ideal to save money. Although there will be higher out-of-pocket costs when you do need medical services, you will pay a significantly lower premium.
Millions of Americans are already flooding the Health Insurance Marketplace, and as employers change the way they provide healthcare coverage, that number will only increase. Whether you’re an employer, employee, insurance professional, or other kind of trusted adviser, you stand to benefit from this time of great opportunity.
Paul Zane Pilzer is the New York Times best-selling author of 11 books, a former professor at NYU, and has served as an economist in two White House administrations. He is also the founder of six companies including the two largest U.S. suppliers of personalized employee health benefits, Extend Health (1999) and Zane Benefits (2006). Rick Lindquist is president of Zane Benefits, Inc., the U.S. leader in individual health insurance reimbursement for small businesses. They are authors of “The End of Employer-Provided Health Insurance: Why It’s Good for You and Your Company“.