How to strategically plan for the ACA and reduce expenses
By George Reardon
Recent actions of the Obama Administration have delayed, waived or liberalized several key provisions of the Aﬀordable Care Act, adding to the list of ACA provisions that had already fallen by the wayside since the law’s enactment in 2010. The recent action most signiﬁcant to the staffing industry is a one-year postponement of the employer mandate and its associated penalties to Jan. 1, 2015. These changes are prompting speculation about the survival of the ACA. I won’t try to predict the outcome of that political drama. I will assume that what is left of the law will continue in force through its ﬁrst few years of implementation.
For most staffing ﬁrms, dealing with the ACA will be like gambling in casinos. They can’t expect to come out ahead in the long term, but there are intelligent ways to reduce the amount and rate of their losses. And there are some opportunities to oﬀset increased cost with increased business.
Because of the ACA, staffing ﬁrms are incurring new business expenses. Advisers like me are being retained to educate ﬁrms on the law, help them make key decisions and devise cost reduction strategies. That advice and consultation will need to continue for some time as the rules evolve.
To plan for ACA, most ﬁrms are spending time and money analyzing the hours and tenure patterns of their workforces in much greater detail than they ever have. Continual detailed analysis will be needed for government-required reporting, penalty calculations, cost control and insurance plan administration (including eligibility, new hire adjudication, enrollments, income tracking, payroll deductions, COBRA, etc.) Staffing ﬁrms are doing the initial analysis with manual programs and spreadsheets, but they will need to install elaborate new software to perform the ongoing burden efficiently.
Neither the increased administrative costs nor the ACA penalties generated by in-house staﬀ will reasonably be billable to staffing customers.
Staffing ﬁrms will also experience higher temporary labor costs, either as insurance premium contributions for temporaries or as penalties for not oﬀering them aﬀordable and minimum value coverage. It will be a rare staffing ﬁrm that can pass all of these costs on to customers. So far, few staffing ﬁrms have even discussed this issue with customers.
Since the passage of the ACA, the American Staffing Association, as a member of the Employers for Flexibility in Health Care (E-Flex) coalition, has lobbied the government for various detailed regulations that would relieve staffing ﬁrms (and similar employers) of the administrative and ﬁnancial burdens that the unmodiﬁed statute would impose. The chief result of that lobbying eﬀort is the 144-page proposed IRS regulation on the employer mandate, which would extend very substantial relief from the employer mandate to employers with highly transient and relatively lower-paid workforces. The IRS expects to issue ﬁnal regulations on the mandate after it resolves a number of issues that it openly confesses are still problematic.
Meanwhile, congressional committees are challenging the administration’s unilateral order to delay the statutory mandate and are investigating the business community’s inﬂuence on that decision. Those investigations could lead to the blocking of further regulatory relief from the statute or even to a rollback of relief that has already been granted.
The good news is that, if the employer mandate delay stands, there will be more time for the government to ﬁnalize the employer mandate regulation and to publish anti-discrimination regulations before staffing ﬁrms make and launch their long-term plans.
The ACA already imperils the proﬁts that insurance companies make from products they provide to individuals and groups of “permanent” employees. Will insuring previously uninsured temporary workforces look attractive to them? Because of high turnover, lack of claims history, high administrative cost, low participation rates, low employer subsidies and other underwriting handicaps, commercial temporary employee workforces are not good health insurance risks and are not an attractive expansion market for insurance companies. I am aware of no commercial, non-captive insurance company that has oﬀered fully-comprehensive and fully-insured primary health coverage for temporary employee populations.
The delay of the employer mandate won’t make any insurance underwriting problems easier to solve. Government insurance rules that violate economic and actuarial principles inevitably produce undesirable consequences — usually in the form of higher prices or unavailability of coverage.
Insurance agents, brokers and administrators are working to devise compliant options for staffing ﬁrms. The principal options are self-insured “bare bones” insurance plans, self-insured conventional programs with stop-loss reinsurance and captive insurance vehicles that are more elaborate variations on self-insurance. Regulations or statutory amendments might kill the “bare bones” option, because the loophole it exploits seems to fundamentally oﬀend the law’s purposes. If that happens, the “play” option will become much less attractive to staffing ﬁrms.
The insurance industry will continue to oﬀer non-ACA-compliant but still useful coverages — like the indemnity type of “mini-med” plan.
Many staffing ﬁrms were alarmed after the Supreme Court and the 2012 federal election failed to save them from the ACA. The 2014 deadline suddenly seemed very close. But the employer mandate delay may now give ﬁrms an extra year to implement cost-reduction strategies that they thought wouldn’t be necessary. Some of these strategies involve managing temporary employees’ hours and tenure when no coverage is oﬀered to them, but others can coexist with an oﬀer of coverage.
One opportunity that ACA presents to staffing ﬁrms is outsourcing operational functions for customers. Customers that have around 50 fulltime employees may want to outsource certain functional positions to staffing ﬁrms in order to preserve or obtain mandate and penalty exemptions as “not large” employers. These outsourcing relationships may be structured somewhat diﬀerently than traditional staffing relationships. To ensure employer mandate exemptions in 2015, customers currently hovering around the 50-employee mark would need to outsource functions early enough in 2014 to ensure that their remaining full-time monthly employee count for 2014 averages fewer than 50.
There are two extreme outlooks about the possible futures of staffing, assuming that ACA continues to be the law:
Optimistic view. The professionals at the IRS and other agencies understand and sympathize with the staffing industry. They will ﬁnalize penalty, discrimination and employee attribution rules that allow staffing ﬁrms to operate pretty much as they always have. Staffing ﬁrms will comply with the employer mandate by oﬀering “bare bones” coverage to the very few temporary employees deemed full-time under a 12-month look-back rule and by paying $3,000 individual penalties for those temporaries who seek additional coverage through states’ insurance exchanges. Customers for all temporaries will readily pay higher rates for the socialized (spread) insurance and penalty costs generated by a few of their suppliers’ full-time temporaries, even if those temporaries aren’t assigned to them. It won’t be necessary to use legal cost/penalty reduction strategies, which the IRS, without support from ACA itself, describes as “abusive.”
Pessimistic view. The staffing industry is disfavored by the current administration. Because of politics, apparently favorable interim rules are unreliable long-term. Ultimately, the IRS and other agencies will develop penalty, discrimination and attribution rules that imperil the staffing industry’s proﬁts. Insuring temporary employees with comprehensive coverage at reasonable cost is not actuarially feasible. Staffing ﬁrms that oﬀer such coverage will suﬀer runaway costs. The “bare bones” coverage loophole violates the spirit of ACA and will be closed. Customers will not absorb costs that do not directly beneﬁt them. Cost/penalty reduction strategies are essential to business survival and will be helpful for reaping the opportunities that ACA presents.
The actual future may fall somewhere between these positions.
The opinions expressed in this article are of the author and do not necessarily reﬂect the position of Staffing Industry Analysts.
George Reardon is special counsel at employment law firm Littler Mendelson. He can be reached at email@example.com.