Health care penalty: A cheaper choice?

  • Article by: JACKIE CROSBY
  • Star Tribune
  • March 2, 2011 - 6:53 AM

Health care reform presents hair care giant Regis Corp. with a dilemma.

The Edina-based company, which operates Regis Salons, Supercuts and MasterCuts among others, estimates it could cost $70 million to $90 million to provide health care coverage for roughly 32,000 workers that would be eligible in 2014, when the new law's corporate mandates kick in.

If Regis dropped coverage and let workers purchase insurance on their own, the penalty could cost half that -- $40 million.

"We'll have to balance," Regis President Randy Pearce said. "It may be cheaper for us to pay the penalty and pay into the government pool than to pay into the plan that the government wants us to."

Regis is one of the few companies talking publicly at this point about an issue that many will have to confront. The law allows companies with more than 50 employees to avoid paying health care benefits, but charges them a fee for that choice.

The fees offset the government's costs of supporting new health care exchanges, where individuals can comparison shop for their own plan. But if more companies than expected choose the penalty, it could undermine the law's underlying objective -- to expand coverage to 30 million uninsured Americans.

"The math of the law didn't assume that a lot of people currently covered on their employer policies would end up going through these exchanges," said Paul Keckley, executive director for the Deloitte Center for Health Solutions. "For a lot of companies, if health care costs grow 8, 9, 10 percent a year, it's a lot less costly to pay the penalty ... and let your employees fend for themselves."

Regis executives underscored that it's early in the game, and that the company is "looking at all options."

Currently, between 95 and 99 percent of employers with more than 50 workers offer insurance benefits, according to surveys by the Kaiser Family Foundation. The law assumes that most large employers will continue coverage when mandates become effective in three years.

Low-wage, low-margin industries such as retail and hospitality may be more likely to consider paying the penalty instead of offering company-paid insurance, especially if the "shame factor" gets diminished, said Stephen Parente, a professor of health finance and insurance at the Carlson School of Management at the University of Minnesota.

"At the end of the day, a firm looks at this the way they look at any of their cost decisions," Parente said. "If it gets to the point where you can't pay rising health care costs -- and it becomes more socially acceptable from a corporate responsibility standpoint -- that's where you'll see people think seriously about getting out."

Industry experts say it's a safe bet that the publicly traded Regis is not alone in assessing the economics of the "pay or play" aspect of the health care law.

In the Twin Cities, representatives at Target Corp. and Best Buy Co. Inc. weren't willing to discuss "pay or play, " saying generally that the companies are committed to making quality care available to their workers.

The penalties exist to force businesses to share responsibility with taxpayers for making sure workers are covered. Businesses pay $2,000 for every full-time employee beyond the first 30 if they don't offer health care. They could also be fined if workers choose to buy insurance on state-run exchanges, a "double whammy," Parente said.

Businesses with fewer than 50 full-time workers are exempt, and certain small businesses qualify for a tax credit to encourage them to offer insurance.

James Gelfand, director of health policy for the U.S. Chamber of Commerce, said many retailers and other companies are in step with Regis' thinking. Without adjustments to the legislation, Gelfand predicts many large employers will drop coverage and "it will explode the law."

"For every business that drops coverage, they'll pay $2,000. But the federal government's subsidies will cost much more than that," he said, calculating that care will cost closer to $7,000.

"Either the penalty has to increase or the federal government will spend more than projected," he said.

For low-wage workers, the cost of a family plan is about the same as full-time minimum wage work. A worker earning $40,000 might pay $14,000 in premiums. That makes it hard for certain businesses to design an affordable program.

"For low-skilled jobs, employer-sponsored health care doesn't work," said Gary Claxton of the Kaiser Family Foundation. "That's why so few of them have it. There's no way to build a compensation structure, and people would still rather eat than have health insurance.

"If people can get better benefits from exchanges than through firms, workers might well be better off," Claxton said.

Deloitte's Keckley has spent the past four months digging into possible ways that the health care reform could play out for businesses, despite political and legal uncertainties and a still-sluggish economy, but he said it's too early in the process to offer much guidance to companies.

For companies thinking about not offering coverage, Keckley said the health care exchange provides a "moral safety net."

"When you make a decision not to provide, it's conceivable you could say, 'I'm not dumping you. I'm actually doing something that is good. ... You will make decisions about your health directly, instead of employers getting in the middle.'"

A competitive issue

Regis is the world's largest hair care company, with an interest in 12,700 salons, hair restoration centers and beauty schools, most of which are in North America and the United Kingdom. Regis has provided its salon workers with some form of health insurance for decades.

Nearly 80 percent of the 56,000 employees now work enough hours to qualify for one of four company-provided plans, but only a fraction -- about 9,250 -- take advantage of the benefit, according to Regis.

The majority of salon workers are young, female and work part time. Most make slightly more than minimum wage plus commissions. If they're healthy, they want their paychecks going into their pockets, not siphoned off to buy health care, company executives said.

Regis believes that paying health care benefits could put the mammoth chain at a competitive disadvantage in an industry loaded with mom and pop salon operators.

"We have no desire to eliminate these benefits in the future," Jason Sundby, Regis vice president of corporate administration, said in an e-mail. "However, the mandated elements of this law will drive very large increases in health care costs to large employers like Regis. Most of our competitors are small businesses and will not be subject to the mandates."

Edwin Park, director of the nonpartisan Center on Budget and Policy Priories in Washington, D.C., counters that many fears are unfounded, and based on faulty assumptions.

"As more people enroll as a result of the mandate, that also means the cost per worker will probably go down because ... more healthy, younger people will enroll in coverage, which in turn improves the overall pool of people who are insured," Park said.

The Congressional Budget Office, the agency charged with providing analysis for budget decisions, forecasts that despite the fears of Regis and others, large employers would see health care costs stay flat or decrease 3 percent in 2016, relative to today.

Douglas Holtz-Eakin, president of the American Action Forum, a conservative think tank co-founded by former Sen. Norm Coleman of Minnesota, has run some numbers and said it's not a far-fetched scenario that a rush of companies will get out of the insurance business, sending workers flooding to exchanges.

"All that's stopping this is the first big employer to go," said Holtz- Eakin, an adviser during Sen. John McCain's presidential bid and a former director of the Congressional Budget Office. "If that happens, their competitors will be out of line. And then, Katy, bar the door."

Jackie Crosby • 612-673-7335

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