Human Capital & Careers

Farewell, Company Health Plans?

Now that health-care reform bills have passed both the House and the Senate, some CFOs are seriously considering whether or not to drop employee co...
Alix StuartDecember 31, 2009

For the past 19 years, Frank Santos, CFO of the privately held, seven-property Rosen Hotels and Resorts in Orlando, Florida, has prided himself on delivering high-quality health care to his employees in a unique and low-cost way.

In 1991 the company set up a primary-care clinic in one of its hotels, allowing employees to get basic health-care services during their working hours. By cutting out other primary-care options and contracting directly with hospitals and specialists for additional services, Santos says, the company has been able to offer a full health-care package to its 5,000 or so employees and their families and save at least $10 million a year compared with national averages.

Beyond the basics, the company goes to great lengths to keep its employees healthy, including offering them many wellness services, such as exercise classes and serving only healthy foods (no French fries) in its cafeterias.

The current Senate health-care reform bill that passed on Christmas Eve, however, may change all that. “There’s no incentive for someone who has a plan such as ours to keep it,” says Santos. “We currently spend about $2,700 per associate, but the government is going to allow us to forgo that plan and pay $750 per associate,” he says, referring to the $750 per-employee penalty that would be levied on employers whose employees need government subsidies to purchase health insurance called for in the current Senate bill.

Indeed, many other CFOs are considering the same option. “A number of midsize employers are thinking they would drop coverage because it would be more economical to do that, given the penalties, and the employees would still receive coverage,” says Dean Hatfield, senior vice president and health-practice leader at Sibson Consulting.

Larger employers that could be at a competitive disadvantage by not offering health-care insurance may also make substantial changes in how they deliver it to employees. “The new rules, as proposed, are going to make group insurance more expensive, and at the same time they’re going to make the individual market more viable,” says Steve Wetzell, vice president of health-care initiatives for the HR Policy Association, a group of nearly 300 large employers. “That creates the opportunity for employers to take a hard look at going from defined benefit to defined contribution,” similar to the widespread shift from pensions to employer 401(k) contributions, in which employees could take a subsidy from their employer to buy their own insurance.

Among the proposed items that could raise the cost of sponsoring a health-care insurance plan are $500 billion in cuts to the Medicare budget and taxes on prescription-drug manufacturers, both of which are likely to create more cost-shifting to plan sponsors. Under one version of the bill, plan sponsors could also be subject to state-by-state inspections of their benefits administration.

Meanwhile, employers that offer more than $8,500 worth of benefits to individuals or $23,000 to families would be taxed at 40% for the overage. Hatfield says about 11% of Sibson clients would exceed those thresholds now, and many more are likely to in the future, since the threshold increases, as currently envisioned, would not match historical annual increases in health-care costs.

Santos says he knows employees are worried about losing their current coverage and would much prefer to continue it, but that it will be hard to justify turning down the $8 million the company could save, net of lost tax deductions. One compromise, he says, may be to keep the clinic open at a cost of approximately $2 million a year, thereby continuing the primary-care coverage and, he hopes, defraying some insurance costs for employees. But still, he would rather see incentives in the form of tax deductions or some other vehicle to make it economically feasible to continue the model the company has been using.

“We believe our model is one that can so easily be replicated among other employers or groups of employers. If you have 500 employees, you can negotiate very favorable discounts with hospitals and specialists,” says Santos. “If the government would [provide an] incentive [for] that, there could be some real cost-saving opportunities. Instead, they are doing just the opposite.”