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What health reform means for the people of Illinois

A blog by IllinoisHealthMatters.org

Tuesday, December 16, 2014

Employers: Dropping Group Health Insurance Could Cost You

Looking ahead to 2015, many employers are deciding how to respond to the rising cost of employee group health insurance premiums. A study of employers by the large consulting group Mercer suggests that “the per-employee health benefit cost will rise by an average of 3.9% in 2015.” Although this is moderate compared to past premium-increase trends, “two-thirds of respondents say they will make changes to their health plans next year to rein in cost growth.”

Using Cash Pay-Outs Instead

To control costs, some small employers are considering dropping group coverage altogether. In a recent article by the Wall Street Journal, WellPoint, Inc. reported that “its small-business-plan membership is shrinking faster than expected and it has lost about 300,000 people.”

Many small employers are instead planning to offer a cash payout – a lump-sum of cash – for employees to purchase coverage on their own or through the new ACA marketplaces. While this may appear an attractive way to rein in health insurance costs, employers must consider the tax implications for employees and their organization. Taken together, cash pay-outs will actually increase costs overall for both employers and employees.

Employees Will Pay More...

Group insurance is a better deal for employees. With group health insurance, the amount that an employer pays towards an employee’s health insurance is not counted as taxable income. In addition, employee premium contributions can be withdrawn pre-tax directly from their paycheck. This substantially reduces the employee’s overall taxable income and the income tax they will pay. The example below shows the monthly take-home pay for a person making $6,250 per month who participates in an employer-sponsored group health plan.

As the example indicates, the employee’s net pay is $3,955. In comparison, if the same employee instead received a cash pay-out to purchase health insurance individually, they would make $3,595 per month. Example 2 shows how employees will end up paying more in taxes and more for their insurance when a cash pay-out is used.

As you can see, cash pay-outs will reduce overall employee compensation. When employees give workers cash to pay for their own health insurance, the money increases their gross income and in effect the monthly taxes they must pay. Additionally, the money directed toward employee premiums cannot be withdrawn pre-tax from their paycheck.

The real numbers will change depending on premium costs, tax brackets, and income level, but the message is consistent: employees will lose money. Employee Benefits Corporation has a great calculator tool that helps individuals understand the personal impact of pre-tax benefits.

... And So Will Employers

Because cash pay-outs increase employee gross income, the amount that the employer must pay in state and federal taxes will also increase. In our example above, when the employer offered group health insurance, the employee earned a base monthly salary of $5,650. In the second scenario, the employee’s monthly salary increased to $6,850. Employers pay on average 7.65% of their monthly payroll for Social Security and Medicare. For the employer providing group health insurance, the cost for Social Security and Medicare is $432; the employer offering cash instead of benefits would pay $524. This results in a difference to the employer of $92 per month – just for this one employee.

Higher salaries created by cash pay-outs also mean higher workers compensation costs, and short-term and long-term disability insurance. Since workers’ compensation replaces a portion of the employee’s salary, the higher the salary, the higher the costs. The same is true for short- and long-term disability insurance, which replaces all or part of employee salaries.

Stick With Group Health Insurance

Before quickly migrating to cash payouts employers should quantify cost implications for themselves and their employees. This calculation can complicate and lengthen the decision making process – but it is time well spent in the long run. If the goal is to reduce financial burden, using cash pay-outs ultimately creates the opposite effect and the promised reduction in costs is an illusion.

Michele Thornton, MBA
Insurance and Benefits Consultant

Wednesday, December 10, 2014

Why Narrow Networks are a Big Deal: A Discussion of Network Adequacy

A network is defined as the healthcare facilities, professionals, and suppliers that an insurance carrier has contracted with to include in a given health plan. Network adequacy is the extent to which a health plan has a satisfactory number of primary and specialty healthcare professionals that consumers can access in a timely manner.

The terms network and network adequacy are pretty technical words, so the average consumer may not know their definition, but a percentage of the population is even unaware of how to apply these terms to the process of purchasing a health insurance plan. According to a Commonwealth Fund survey of marketplace shoppers, 25% said they did not know the quality of the network for their health insurance plan. The survey results indicate that consumers may lack an awareness of how network adequacy impacts them on a personal level.