SI Review: July 2013

Print

Healthcare Reform: Which Route to Take?

[Update]

By George Reardon

On July 2, the Obama Administration informally announced its intention to postpone the Affordable Care Act’s employer pay-or-play mandate and its related reporting features by one year, from Jan. 1, 2014, to Jan. 1, 2015. On July 9, the IRS issued a formal notice of the action, which did not materially add to the main points of the informal announcement. The rest of the law was unchanged by this action.

The employer mandate requires large employers (those with 50 or more full-time employees or equivalents) to either offer affordable, qualifying health insurance coverage or pay penalties to the government. It is expected to increase the operating costs of staffing firms dramatically, and, in recent months, most staffing firms have been wrestling with decisions on how to minimize its looming effects. The postponement means that no play or pay penalties will be payable for 2014. The IRS urges employers to practice reporting on their coverage in 2014 anyway (as soon as rules are published) and to maintain or expand their health coverage.

The government attributes the need for a postponement to shortcomings in the reporting rules. Some commentators have suggested additional reasons for the action, including political factors relating to the 2014 Congressional elections, the IRS’ failure (after more than three years) to finalize regulations on the penalty rules and coverage discrimination, and a desire to jumpstart the state insurance exchanges by driving employees to them who otherwise would have received new employer-sponsored coverage.

One apparent motive was surprising. Mere hours after it announced the postponement, the government urged federal courts to dismiss at least two cases challenging the ACA’s employer mandate, arguing that the postponement deprives the cases of the necessary urgency or “ripeness” (readiness for the court to resolve the issue.) This tactic could backfire, since it may give those federal courts the opportunity to resolve the ripeness issues by ruling that the postponement was beyond the power of the executive branch.

The administration admits that its decision was influenced by business groups, and the House of Representatives plans to investigate those influences. This action is not the first executive waiver of portions of the statute, and others are likely to follow. One risk of a generalized challenge to the executive branch’s unilateral carving on the law could be that other regulatory relaxations of the law — such as the proposed 12-month look-back rule for determining employees’ full-time status — could be declared invalid or be called into question.

But in the meantime, the one-year reprieve will come as welcome news to staffing firms, most of which still have no ready means for offering qualifying and affordable comprehensive insurance to their temporary employee populations and no clear rules on how the penalty alternatives will work. The extra year will give them the time to find coverage or confirm that it will not be available. It will also allow them to explore and install various cost reduction strategies, which can be fruitful whether or not the firms offer a health plan.

The factors that affect a firm’s decision to offer insurance or pay fines

By George Reardon

By next year, staffing firms will have had to decide whether to offer health insurance coverage to their contingent workers or pay fines. Many factors will affect this decision. Attorney George Reardon discusses some of those factors in this first of a two-part feature.

In the past, staffing firms have typically provided health insurance for their internal staff, but not their temporary employees. Insurance products, if available for that population, would have been cost-prohibitive. In exceptional situations, customers urged their staffing firms to cover highly paid workers (such as IT professionals) on long-term assignments. Many commercial staffing firms offered low-benefit, low-cost, employee-paid “mini-med” policies that Affordable Care Act (ACA) makes illegal in 2014.

The ACA, through its mandates, penalties and discrimination rules, is forcing staffing firms to choose between paying penalties or offering to all full-time temporary employees the kind of comprehensive health insurance that they already offer to in-house staff.

The ACA statute focuses on coverage for employees who are full-time, reckoned on a month-by-month basis. Because of this monthly measurement, staffing firms initially assumed that their insurance or penalty costs would be huge and potentially unbearable. However, proposed IRS regulations, if finalized, may allow full-time employee status to be defined over 12-month measuring periods.

Far fewer temporaries would qualify as fulltime under a 12-month period than would qualify as full-time under the month-by-month method. So staffing firms are now hoping that offering coverage to a relatively small number of temporary employees would cost less than the ACA penalties for not offering coverage to all (meaning at least 95 percent) full-timers.

That decision — to insure or not, to play or pay — should take a number of factors into account.

Calculating Costs

Various consultants, brokers and associations have created online calculators to help employers determine whether to offer coverage to substantially all full-timers (play) or to pay the penalties (pay). These tools can be helpful, but they cannot be the basis for the whole decision for staffing firms, because many of the inputs to these tools are unknown variables with wide ranges, as they are based on past rather than future conditions. These tools also ignore subjective factors like legal risk, and they do not take into account the marketing opportunities that ACA will create for staffing firms.

Calculators are also limited to static analyses that do not consider the changes in behavior and markets that will greatly affect future results.

Insurance Availability and Cost

Comprehensive insurance coverage for commercial temporary employee populations may not be available by 2014 — or ever. Traditional group insurance is based on several conditions that do not apply to commercial temporary employee populations — difficulty in obtaining the employment, continuous employment once it is obtained, long-term (generally indefinite) tenure, a high percentage of employee participation, affordable cost-sharing by participants and a high level of financial subsidy by the employers.

Insurance companies are struggling with the challenges that ACA poses for their existing business. ACA makes their products harder to provide and limits or eliminates the potential profits that they might earn by providing them. Health insurance carriers are hesitant to expand their risks by insuring transient populations that are expensive to serve and for which they have no historical claims data.

There is some talk in the staffing community about forming captive insurance companies (companies owned by the insured firms), self-insuring or using high self-insured plan deductibles combined with stop-loss reinsurance that limits the overall losses of the plan. These techniques are used mostly by very large companies with financial reserves comparable to those of insurance companies. Every method other than pure self-insurance depends on an insurance company’s willingness to cover catastrophic losses, and the availability and rates for that coverage may determine the feasibility of the approach. If the insurance people who make their livings taking risk will not bet on you, should you make the same bet on yourself?

Staffing firms hope that insurance companies will view temporary workers that serve a full year of full-time active service as less risky than the overall temporary workforce. Some insurance firms are working on this, but at the time of this writing, I am not aware of any ACA-compliant fully-insured products being offered to specifically cover temporary workers with traditional comprehensive coverage.

If no realistic insurance solution is available to staffing firms, there will be no “play or pay” decision for them to make; if that is true, they should focus their plans on minimizing the penalties for not offering coverage.

Counting Full-Timers

The number of temporary employees who would qualify as full-time will vary according to each staffing firm’s mix of business. Many staffing firms surveying prior patterns of temporary service are finding that fewer than 10 percent of temporary employees working anytime during a 12-month period are full-time for that 12-month period. Of the temporaries working on any particular day or in any particular week, the percentage of full-timers would be considerably higher.

A staffing firm’s ratio of daily temporary employees to staff is usually 20:1 or higher, so adding 5 percent or more of the temporary employees to the staff would at least double the total number of insurance-eligible employees. After the first year, the number and percentage of full-time temporary employees are likely to rise, because the prior year’s full-timers who are still there will be considered full-time, even if their hours drop, while other, newly hired employees will qualify for fulltime at the same rate as the first year.

A static 12-month look-back analysis ignores the dynamic likelihood that employer-sponsored and subsidized health coverage will change the percentage of long-term temporary employment. Temporary employee turnover depends in large part on voluntary attrition by the temporaries, and incentives affect behavior.

Staffing firms offering health coverage may find that their temporary employees stay longer, thus changing the cost profile of the temporary workforce.

The Look-Back Length

The foregoing analysis — being used by many staffing firms — assumes that all temporary employees must wait for 12 months to pass the full-time test before becoming eligible for insurance. However, that is not a valid assumption in light of the IRS regulations. The number of temporary employees that would have to be offered coverage can’t be accurately estimated by simple 12-month tenure surveys of the temporary employees. Here’s one reason why.

ACA requires that coverage offered to newly hired full-time employees be effective within 90 days of their start dates (assuming they choose to participate.) IRS is having difficulty squaring this requirement with its proposed 12-month measuring period for fulltime status. How can an employer know at the start date whether a new hire will be full-time for the initial 12-month period and thus be eligible for insurance within 90 days — especially a newly hired temporary employee?

The IRS tries to solve this problem by classifying newly hired employees into three groups.

  • People hired into jobs that are clearly/ historically/structurally intended to be full-time and long-term (like in-house staff ) must be eligible for coverage effective within 90 days.
  • Newly hired employees whose future hours and tenure are not so clear (like temporary employees) are divided into two groups. Those expected to have erratic patterns of assignments that might keep them below full-time status for the year can be made to wait for an offer of coverage until they have passed a 12-month look-back test of full-time service.
  • Newly hired temporary employees who start out on full-time schedules (over 30 hours a week) can’t automatically be made to wait a year, and many of them may have to be offered coverage within 90 days. The IRS specifically forbids employers from denying coverage to such persons in reliance on the employer’s overall tenure and turnover statistics and will, starting in 2015, also require employers to assume that newly hired employees will serve out the entire measurement period, even if there are reasons to believe that the employment will end sooner.

Newly hired employees must be categorized on the start date. Most commercial staffing assignments begin with a full-time schedule for periods of one or more weeks. That means that many newly hired temporary employees will start out looking like full-timers eligible for coverage within 90 days.

The proposed regulations include examples of new-hire categorization, but they do not clearly resolve the issue. Among scenarios (examples) discussed in the regulations, number 12, a staffing firm example, makes it look relatively hard for staffing firms to make typical newly hired temporaries wait for 12 months, but example 13 (which is not a staffing firm situation) makes it seem easy for non-staffing firms to do so.

If staffing firms fail to offer 90-day coverage to all temporary employees, making them wait for 12 months, the employees who eventually qualify as full-time may have claims against the staffing firms and their plans for not offering the coverage within 90 days. Worse, failing to offer coverage to at least 95 percent of their fulltime employees could add $2,000 per employee penalties to the staffing firms’ cost of sponsoring the insurance for temporaries.

To avoid these risks, even staffing firms that adopt a 12-month look-back system may feel compelled to offer coverage within 90 days to many newly hired temporary employees. That will raise the number of insured temporaries above the number that a simple 12-month look-back survey would predict and thus raise the expected costs of sponsoring coverage for temporaries.

Insurance companies may also favor coverage at 90 days, instead of 13 months (12 months of look-back plus one month of enrollment time). Insurance companies insist on definite rules for eligibility and coverage. They will not want front-line staffing firm personnel to have the power to decide between insuring newly hired temporaries at 90 days or at 13 months.

The combination of legal risk and insurance company underwriting rules may convert the theoretical 12-month look-back to a much faster and more expensive rule for offering insurance to temporaries.

Look to the August 2013 issue of Staffing Industry Review for the conclusion of this article.

George Reardon is special counsel at employment law firm Littler Mendelson. He can be reached at greardon@littler.com.

Comments

Add New Comment

Post comment

NOTE: Links will not be clickable.
Security text:*