There's been a lot of discussion about the challenges faced by businesses large and small in managing health care costs, especially as those costs escalate and as employers' options are increasingly limited by the strictures imposed by Obamacare. An even clearer picture of the dilemma small firms face is offered by a peek inside their internal deliberations, including the trade-offs that companies have to offer their employees in order to keep them reasonably content, as well as control costs and comply with the law. The following memo was sent to employees of Capterra, a Virginia-based firm that serves as a marketplace for business software, by Michael Ortner, the company's president. Capterra has just 23 employees, so it's subject to fewer restrictions than larger employers (especially those with more than 50 employees) but has fewer resources and less bargaining power than larger companies, too.
Ortner is no stranger to political debate, having written on health care issues for public consumption, and this memo includes some (informed) policy discussion. But the memo also outlines the hard choices the company has to make as it decides what (and whether) to offer employees in the way of health coverage. With permission, I've included the whole memo including political discussion, with one name excised, so you get everything in context.
Following up on [N]'s email, I wanted to give to give some more background as to why we are considering a switch. In fact, I will take this as an opportunity to dive deeper into the health insurance world. Unfortunately, given the times we live in, we can no longer afford to be in the dark on this stuff. We have some tough choices ahead of us, if not now, then likely in a year or two. First, the short answer…
We're considering a switch from CareFirst to United because CareFirst is increasing their rates by 28%. We may be able to switch to United without any increase in our premiums for the next year; our insurance guy will confirm this over the next couple weeks. The last time I checked, CareFirst and United are the two largest health insurance providers in the country. We would be moving from CareFirst's best plan (zero deductible in network and no need to see your primary physician before seeing a specialist) to United's best plan (also zero deductible in network and no need to to see your primary physician before seeing a specialist) and maintaining the same arrangement where Capterra pays 100% of premiums for individuals and 75% for families.
I know that some of us use doctors that do not take CareFirst and my guess is that some of your doctors do not take United. In fact, I know of some doctors who have dropped all insurance over the last 12 months so whatever program we go with will not be perfect. That said, I am happy to look at other insurance providers if your doctor does not take United. Please ask them what insurance plans they do accept and I will have our guy look into those plans. If we hear a common theme, then that would certainly increase the likelihood that we would go with that insurance plan if the price is right. If you would like more time to investigate then we can extend our deadline a month. We have the option of switching over on June 1 or July 1.
And now the long answer, but please keep reading. 🙂
Health benefits are our third highest cost, after payroll and search ads, but now more than our rent. A 28% increase is significant. We essentially have four options:
1) Keep the exact same CareFirst plan, and have Capterra swallow the cost. Individuals currently pay 0% of their premiums (which are around $500/month) but families pay 25% (of their $1500 monthly premiums). So the families would also pay more for their 25% share. The higher cost for Capterra would reduce our ability to hire, give raises, etc.
2) Keep the exact same CareFirst plan, and start charging both individuals and families 25% of the premiums. (Most companies, yes even Google, that provide health insurance benefits to their employees have them pay 25-50% of their monthly premiums.)
3) Keep CareFirst but subscribe to a cheaper plan that includes an in-network deductible. This basically means if you ever visit your doctor, you will be paying the first 1k or whatever the deductible is in expenses that year.
4) Switch to a different top tier plan from a a different insurance provider such as United that for whatever reason has not increased their premiums yet and not change anything (yet) about how we pay for everyone's insurance.
5) Stop paying heath care benefits, pay people cash instead and encourage everyone to do health savings accounts (they are not taxed!) and buy catastrophic plans with part of the cash. More on this later.
#4 seems like the least painful solution for everyone here. Again, please let me know what other insurance plans your doctors take if they do not take United and I can have our insurance guy research it. Also, if you have any input regarding the other options I mentioned I'd love hear it.
You may be wondering how the health insurance industry got to be so convoluted. Let me explain why and it requires going back in history a bit:
Back in the 1940s, our federal government enacted wage controls that restricted what some businesses could pay their employees. (There were smart people who spoke out against this terrible idea but unfortunately not enough.) This resulted in businesses looking for other ways to compensate their employees and the IRS decided that it would not treat benefits such as health insurance as taxable wages. Until then people generally paid medical fees out of pocket in the same way they paid for virtually anything else out of pocket. The fees up until were relatively small for two reasons: 1) medicine was not very advanced so when something catastophric happened there was not often much that could be done to help the patient and therefore no huge expenses were incurred and 2) since people were paying their doctors directly it was a very efficient and fair market.
So 70 years later, even though the wage controls thankfully disappeared, the IRS treatment of health insurance did not. Health insurance benefits continue to not be taxed as income. At first glance by the uninformed citizen (such as me until a few years ago), this appears to be a good thing. But in reality it is actually a terrible thing. Here is why.
First, let's look at the first obvious and intended consequence: while our total compensation remains the same whether we are getting salary plus health benefits or all of it in the form of salary, our freedom to decide how much of our salary to spend on health benefits is lost. And many of us would and should spend less than we do on health benefits. For example, there is no way most 23 year old single people should be spending $500/month on health insurance. That's a bad deal for most 23 years olds and if given the choice most should take atleast half of that in cash and save it/invest it. 23 year olds are already getting stuck with higher premiums on auto insurance since they are higher risk drivers; by the same principle, they should be paying much lower premiums since they are generally less at risk health-wise.
But that's just the start. Other unintended consequences that have gradually worsened over the last 70 years:
1) Irrespective of much we decide to spend, we lack freedom in choosing the specific plan that is right for us when we receive it as a benefit from our employer.
2) If we decide to buy health insurance directly (10% of Americans do), we are discriminated against since we do not receive the same treatment from the IRS. We have to use post tax dollars to purchase it. This is completely unjust and should be the first thing on an political leader's agenda when it comes to solving the healthcare problem. Either everyone should pay taxes on them or noone should.
3) When we develop a treatable medical condition, we are out of luck if we leave our employer since our insurance was tied to that employer and we now have a pre-existing condition.
4) The worst of all…because most of us receive our heathcare as a benefit, we are completely separated from any real knowledge of our actual expenses. This is the major reason why our healthcare expenses are now through the roof.
The beginning of a solution is relatively simple:
1) Allow individuals to deduct their health insurance from their taxes (just like they essentially can if they receive them as a benefit)
2) Have employers get out of healthcare as a benefit and instead kick that money into the salaries of their employees
3) Allow people to buy health insurance from any provider across the country (also not currently allowed)
4) Allow insurance companies to offer plans that are primarily catastrophic in nature (also not currently allowed due to over-regulation)
Oh yes, and elect principled political leaders who have the guts to to offer real solutions like this instead of the misery that is happening now. It was bad prior to the most recent healthcare legislation; it is now way worse. For example, one big reason that our rates are skyrocketing is that it is becoming illegal for CareFirst and all other health insurance companies to deny someone with a preexisting condition. What insurance provider in their right mind would cover someone new who say, just contracted flesh eating bacteria, for example? It's the equivalent of a home insurance provider accepting a new customer whose house was already burning down. People can now pay a small fine/tax, and not get insurance until they get a major health problem and then the insurance provider has to accept them at the same rate that everyone else is paying. This is just plain stupid; it violates the entire point of insurance and will result in people gaming the system. It tries to solve a problem by dealing with the symptom. Anyone who has a preexisting condition (exclude the poor—15% of population—who are covered by Medicaid) should be on their own insurance plan that they have been purchasing since they rolled off their parents plan. (It's slightly more complicated than that but I'm trying to be brief.)
Anyway, why am I saying all this? Everyone needs to be educated on this stuff because it is impacting all of us. And more to the point, assuming United works for this coming year, my guess is that rates will go up next year, and we'll go through this again. And I think we should seriously consider #5 next year or atleast do #2.
In the meantime, we need to decide whether to do #4 and switch to United or #2 which means sticking with CareFirst and having all employees start paying 25% of premiums. Guessing most of you would pick #4, but please let me know.
I'm simply trying to be fully transparent and help everyone be more informed! Anyway…please let me know if you have any questions. Happy to host a roundtable or discuss individually if you have questions. Sorry if this seemed convoluted. 🙂
By the way, you've probably already heard that calculating the size of a company for the purposes of Obamacare compliance isn't as simple as counting the names on the payroll, but rather is a matter of "full-time equivalent" employees. as Businessweek explained in March, "[t]he FTE calculation considers full-time any employee who is scheduled or has worked more than 40 hours per week, averaged over a month. So if you have two part-timers who work 20 hours a week, they would count as one FTE." *
Where things get interesting is with companies that have fluctuating staff needs, depending on short-term jobs and shifting contracts. As that same article explained to a business owner whose staff varied from 37-53:
A business like yours, which employs variable-hour workers who may work 40 hours one week and not at all other weeks, must add up the total hours those employees worked in a year. Divide that number by 2,080 (which represents 40 hours/week times 52 weeks in a year) and you'll get the number of FTEs your company employs.
Got it? So figure out how many employees you have, and start parsing your options, just like the folks at Capterra.
* Jonathan Ingram, Director of Research at the Florida Foundation for Government Accountability, tweets to me that this is wrong. Says he, "BusinessWeek is wrong. FTE not 40 hrs. All part-time hours are added together and the total is divided by 120 hours per month. … See 26 U.S.C. §4980H(c)(2)(E) for the exact language. Hope no small businesses are misled by the BusinessWeek article!"
Now imagine small businesses wading through this crap …