Health Care: Making the Macro Decisions

Consultants aren’t always a good source for unbiased information, but this adviser’s viewpoints on the Affordable Care Act and other health-care to...
David McCannJanuary 24, 2013

First, let’s make one thing clear: consultants are almost always angling. In their public comments, anyway, they tend to heavily emphasize stuff that behooves their business interests and downplay or ignore everything else.

But that’s not the same as lying. And there are certain consultants I’ve interviewed a number of times and developed a sense that it behooves me to put some stock in what they say. A good consultant actually does know what he or she is talking about and speaks the truth and nothing but the truth, if not the whole truth.

A few weeks back, a fellow named Ron Fontanetta stopped by my office for a chat about health-care reform and related topics, and their implications for companies. He is with Towers Watson, a big human-resources consultancy. Not uncommon at such firms, he has a bulging title: Director and Head of Intellectual Capital Development and Delivery, Health Group and Benefit Practice.

What behooves Fontanetta’s business interests is that large companies (i.e., his clients) continue to offer employee health benefits and need guidance in implementing provisions of the Affordable Care Act (ACA). Knowing that helps me interpret his comments.

But to be sure, I pay attention to what he says.

I questioned Fontanetta on a number of health-care matters I’ve been following in my coverage for CFO. I can’t say his responses seemed amiss.

For one, the ACA provides that companies don’t have to offer health insurance to hourly workers who work less than 30 hours per week, and so a number of companies have made part-timers out of former full-timers, who now work about 29 hours per week. What did Fontanetta think of that strategy?

“One thing that will underlie how companies respond to the health-care reform law is the impact on their brand. They have to be sensitive to making decisions that give the appearance they don’t have a direct interest in their employees’ well-being and thus harm their reputation. On the other hand, organizations with large segments of part-time workers who historically had very limited medical plans are appropriately concluding that in almost all situations, part-time employees will be better off using the public exchanges [scheduled to be available in 2014], since most such employees will be eligible for federal subsidies.”

Underscoring Fontanetta’s point about the potential for reputational damage, last fall Darden Restaurants conducted a pilot test in which it reduced many full-time workers’ weekly hours to below 30. It gave up the effort in December after being deluged with negative feedback from customers on its website, on Facebook, and in restaurants.

Of course, the ultimate expression of disinterest in employees’ well-being would be to discontinue health-care coverage altogether. Under the ACA, companies not offering a health plan of sufficient quality below a certain cost threshold will have to pay a $2,000 annual penalty for each full-time employee in excess of 30 employees. But for most companies, annual health-care costs are several times that amount. That’s an awful lot of money to leave on the table, isn’t it?

“Yes, but in our view, for the foreseeable future defined as the next three or four years  most large employers will remain active sponsors of health plans for full-time employees. They want to see how the exchanges materialize, what their cost structures are, how they’re generally received in the marketplace. Large employers also want to see how effectively they manage their costs over the next several years.”

How about the potential for a domino effect, where an outlier, a big company, decides to take the plunge and starts a chain reaction?

“There’s always the potential for a herd mentality in certain industry sectors. But there will need to be some strong business rationale for any organization to exit health care, because it’s such a visible benefit. For example, an organization might exit if it has very, very high costs and is likely to trigger the resulting 40% excise tax that will be assessed starting in 2018. But if you can’t get your costs under that, you should be out of business.”

What about smaller companies?

“Those that cover, say, 50 to 500 lives and are in very tight-margin businesses are already finding it difficult to afford health care. They might rather pay the $2,000-per-employee and tell their employees to use the public exchanges. Say I own a large furniture store with 200 employees. If I offer health care, it might cost me $8,000 to $9,000 per employee, and the rates might fluctuate quite a bit from year to year. Many of my employees probably make around $30,000 or $35,000 a year and will be eligible for the federal subsidies. Then I might conclude that I can’t tolerate the high costs.”

Many companies are using private exchanges, though in most cases just for their retirees. But what did Fontanetta think about the viability of companies using private exchanges for active employees, about which I recently wrote a series of articles?

“That proposition is not clear just yet. It is an emerging industry and it is going to grow. But there are some important distinctions between how private exchanges might work for active employees relative to Medicare-eligible employees. As companies are envisioning it today, setting up a private exchange for active employees might allow a company to have a defined financial commitment. But the exchanges may or may not offer an efficient underlying response.

“For example, most large companies self-insure, which allows them to save on premium taxes, stop-loss costs, and state mandates. They save roughly 8% of their health-care cost by self-insuring. But if the options in a private exchange are fully insured options, you’ll be paying for those elements. Private-exchange vendors need to solve that.”

I also recently wrote about “complementary and alternative medicine” (CAM), which generally consists of preventive care, and procedures and treatments that haven’t received Food and Drug Administration approval. The articles particularly focused on the very liberal coverage under Parker Hannifin’s health-care plan. What did Fontanetta think of CAM?

“Whether we agree with it clinically or not  though it’s not like all the expensive traditional medicine is necessarily as effective  there’s an argument that part of what [Parker Hannifin] is doing is enhancing its employment brand. ‘We care about your health care. We’re going to stand behind it. We’re going to be open-minded in thinking about a range of things that could improve your health.’”

Thanks for coming into the office, Ron.