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In the voluminous health-care reform law, CFOs see hope, uncertainty, and – above all – a giant omission.
Alix Stuart, CFO.com | US
March 26, 2010
For legislators, the long process of reforming the nation's health-care system has finally come to an end. On Thursday Congress passed the reconciliation bill containing the final changes to the landmark Patient Protection and Affordable Care Act, which President Obama signed into law on Tuesday. But for finance chiefs, the process of determining what health reform means for their companies is only beginning.
Joel Quall, corporate controller at publicly traded Knight Capital Group, a New Jersey–based electronic trading services firm, says he has been talking with employees about how health-care reform is going to affect them. Some of the firm's 800 U.S. employees are positive about the change. "People are relieved about being able to cover children up to age 26 on their plan," says Quall. And the lifting of lifetime caps on insurance coverage resonates personally with Quall, who says he saw his late father worry about that issue through a wrenching series of cancer treatments.
But other employees are concerned that their premiums will go up, or worry about new individual taxes they may face. And when it comes to specifics, Quall, like most people, is at a loss to predict the future.
Action items are few and far between. "People have asked me, 'Do we have a Cadillac plan?'" says Quall, referring to the high-value health plans that will eventually incur a 40% excise tax. "I've looked and I can't tell if we do or not." He says the company would likely adjust the plan's benefits to fall below the trigger levels for the tax if the plan turns out to be a Cadillac plan. Beyond that, however, he's planning to wait a few months before calling in a health-care consultant to assess next steps.
Meanwhile, even finance chiefs who are in favor of the reform say a key issue was left unaddressed: the rising cost of health care. "I can certainly see the benefits of making health-care insurance more readily available to everyone, and as a U.S. citizen, I'm glad to see that," says Cal Stuart, CFO of water and air treatment equipment maker Rainsoft. But he adds that while the new law "addresses the area of availability, it doesn't seem like it's really addressed the issue we're facing, which is the continued increase in health-care costs."
When Rainsoft renegotiated its health-care insurance late last year, the Chicago-area private-equity-backed firm ended up with a 20% increase in costs to cover its 175 employees — and that was after negotiations. Stuart has scrimped on other areas of spending, including the company's 401(k) match, in order to keep premium contribution costs flat for the company's lowest-paid employees. Still, some of those employees have opted out of the plan, apparently going without insurance at all because it was too expensive.
Stuart sees the cost increase as a preemptive strike on the part of the insurance companies. "We feel that to a certain extent, we've already felt some of the impact of this reform," he says.
To be sure, there is some language in the reform legislation that targets waste in the health-care system. For one, the law directs both the Comptroller General and the Department of Health and Human Services to study "value-based purchasing programs" for hospitals, nursing facilities, and home health agencies in an effort to align doctors' pay with their performance. In addition, the law provides for incentive payments to hospitals that meet certain standards starting in October 2012. There are also multiple efforts made to tighten up the Medicare program.
Experts also point to some indirect effects that may create cost savings. For example, as hospitals see less bad debt from services provided to uninsured people, their rates could come down anywhere from 5% to 20%, estimates Ron Fontanetta, a principal with Towers Watson. Also, the 40% excise tax on Cadillac plans will likely accelerate shifts to lower-cost plans, he says, such as those based on health savings accounts (HSAs) and high deductibles. The reconciliation bill also allows for greater variation in premiums for people who refuse to participate in wellness programs than current laws do, which could ultimately lead to a healthier population.
However, critics say reform doesn't go far enough, failing to include, for example, efforts to limit medical malpractice suits, which are seen as a major area of waste. They also say some of the measures intended to help mitigate costs — including tax credits aimed at small businesses that provide health care — fall short.
Mike Mitternight, head of Louisiana-based Factory Service Agency, a heating and air-conditioning service firm with about 10 employees, says reform will likely do little except raise his costs. Mitternight already pays 100% of health-care coverage for his employees, at a cost of more than $4,000 per month. He says the 50% tax credit for businesses with 25 or fewer employees likely won't apply to his firm, since his workers make more than the $25,000 annual average cap specified in the current law for companies with 10 or fewer workers.
Mitternight also notes that a tax credit won't help unprofitable businesses, and may also be unhelpful when monthly cash flow is tight, since the credit would only be available annually. "For a small business, cash flow can make or break you," he says.
Given the uncertainty, though, few CFOs say they have plans to change their current insurance offerings at this point. Stuart says his objective is to do what he can to help Rainsoft's employees manage the cost of health care through the firm's traditional and HSA-based options. "We're not expecting to make many changes, if any," he says, although he notes the new legislation does allow insurance premiums to be adjusted for tobacco use. "We'll have to explore that further, but our plan would be to have employees that do use tobacco pay higher premiums," he says.
For Mitternight, the equation may be tougher. "With the economy being down, bids have become so competitive, you can't just keep raising your rates to cover your costs," he says. But he is loath to make a change as well. "Most of my guys have been with me for a long time — I wouldn't do anything to hurt them unless I was forced into it," says Mitternight. "And we wouldn't do anything without some discussions."