Dropping heath coverage in favor of paying ACA penalty not a money saver

Ever wondered whether it’d be cheaper for a company to simply drop its health insurance coverage and pay any required fines under the Patient Protection and Affordable Care Act (ACA)? Many have speculated that it’d be more cost effective for employers to follow this route. Recent research from Truven Health Analytics disproves this notion, saying that “what is clear is that employers should not see the existence of an option not to cover their employees as a ‘slam dunk’ cost-saving measure.”

Employers opting to drop their health care plans in 2014 and pay the penalty imposed by the Patient Protection and Affordable Care Act (ACA) instead of maintaining coverage for their employees will not benefit economically in the short- or long-term, according to Truven Health Analytics. Beginning in 2014, employers with 50 or more full-time employees will be required to provide "minimum essential" health care coverage for their full-time employees or pay an annual penalty of $2,000 per employee (excluding the first 30 employees). The study, Modeling the Impact of "Pay or Play" Strategies on Employer Health Costs, analyzed four separate benefit design scenarios in which employers eliminate their group health coverage to determine how employers fare under this "pay or play" system.

Research findings. The report found the following:

• Employers will not experience immediate or long-term cost advantages if they choose to eliminate group health benefits.
• It will be more costly for employers to "make employees whole" when shifting their benefits to a Health Insurance Exchange than to continue existing group health plans.
• Dropping employer-provided coverage will result in a significant reduction in overall employee compensation, as the incremental costs of benefits will shift to the employees.

Conclusions. Truven Health Analytics offers several conclusions from its research. For instance, the researchers say, The potential penalties for dropping group plans, as well as the net gain most employees would need to receive in their compensation packages to make up for not receiving health benefits, should be enough to discourage most companies from discontinuing such services to their workers.”

However, the firm cautions that future research is needed to determine whether the patterns it current observes will persist after the Health Insurance Exchanges take effect in 2014. For example, “the economics of Pay or Play for midsized and large employers will be greatly dependent upon how the market for Exchange-based plans develops and whether Exchanges can offer plans that are as efficient or more efficient than existing group health plans. There may also be opportunities for an employer to selectively Pay or Play on a group-by-group basis.” Truven Health Analytics notes that it didn’t reflect this “more nuanced approach” in this current research.

“An employer’s cost calculations to Pay or Play are much more complex than simply balancing their current group health costs against the nominal penalties” under the law. “Not only is eliminating group health coverage not cost efficient, it may potentially have a large impact on an employer’s competitive market position for retaining and recruiting talent,” the researchers conclude.