What Can Employers Do To Reduce The Cost Of Obamacare? The 9.5% Rule Rocks!


Getting employees to reject group health insurance gets the employer off the hook, that’s the key. The 9.5% Rule makes that easy to accomplish” – Sam Crafting, M.D.

By John Goodman

The Obamacare mandate applies to large employers beginning next year and to small employers the year after that. What can employers do about it? Surprisingly, firms that are large enough to self-insure can satisfy the mandate without covering hospitalization!  They can also avoid paying for mental health care and even emergency rooms visits.  Yet insurance for small firms and individuals does have to cover these things. There are also other options that are only available for large firms.

Companies that provide generous coverage to above-average income employees will probably not be too burdened by Obamacare. But for those who provide limited insurance or no health insurance to below-average income employees, the burden may be extremely onerous.

Here are some strategies some employers are adopting.

Stay Small.  As long as employers restrict their workforces to no more than 49 full-time employees the mandate doesn’t apply. But here is a warning: the IRS has signaled that if an individual owns, say, three separate businesses, it will treat them as one business—not three. In this way, the Affordable Care Act will discourage not only small businesses from growing, but also entrepreneurs from acquiring or starting other businesses.

For employers who try to use part-time labor to stay under the 50 employee mark, the IRS has another surprise: it will count “full-time equivalents.” For example, it will count two 15-hour-a-week employees as equivalent to one full-time employee in determining the relevant number of employees.

Use Part-Time Labor.  Even if the mandate applies, the employer does not have to offer insurance to employees who work fewer than 30 hours a week. That’s one reason why part-time jobs are soaring while full-time employment is stagnating. But don’t wait until next year to make decisions about your workforce. The IRS can look back to the prior 12 months to determine whether or not an employee has full-time status.

One firm I talked with, managing about one hundred fast-food restaurants, had an average workweek of 38 hours in 2012. In January 2013 they shifted to an average of 25 hours. At that time, everyone expected the mandate to take effect in January 2014.

Making sure that employees stay under the 30 hour bar will require vigilance. And mistakes can be costly. If a 29-hour-a-week employee works one more hour for 50 weeks that will trigger a $2,000 fine. Dividing the fine by the additional hours of work, translates into a $40-an-hour penalty.

Employees may be able to avoid a cut in take home pay by working part-time at two different restaurants-both of which avoid the mandate by switching to part-time labor. This is apparently happening in the fast food industry.

Use Non-Employee Labor. Independent contractors by definition are not employees. As long as they don’t work regular hours, workers can retain their status as contractors even if they work at the employer’s establishment.  Outsourcing is another strategy. As one business owner explained, “There is almost nothing that cannot be outsourced.” The temp business is booming — partly in anticipation of the mandate taking effect.

Charge Employees the Maximum Allowable Premium. Under the new law, health insurance is deemed “affordable” if the employee’s share of the premium does not exceed 9.5 percent of the employee’s wages. If the offer is rejected, the employer is off the hook—no health insurance costs and no government fine. Take an employee earning $30,000 a year. Insurance is considered affordable so long as the employee pays no more than $2,850 annually. If the total premium is $4,500, the employer has to pay only $1,650. The employee will pay more than half the cost. Under Obamacare, the employer doesn’t have to contribute anything to cover the employee’s dependents. Let’s say the employer offers family coverage that costs $15,000. The employer can ask the employee to pay $12,150, with the employer (again) paying only $1,650. If the employee accepts the offer, the employer is out only $1,650. (Remember: the employer fine for not offering any insurance is $2,000.

To add insult to injury, the employee’s contribution in all likelihood will be made with after-tax dollars, whereas the employer’s share, if the offer is accepted, will be paid with before-tax dollars. And here is the cruel upshot of all this: Once the employer has offered “affordable” health insurance (even though it clearly isn’t affordable), the employee and his family are no longer entitled to a subsidy in the health insurance exchange. If they buy coverage in the exchange – even a Bronze plan — they will have to pay the full price.

Unfortunately, what is in the self-interest of the employer can be very harmful to the employee and his family.

Offer A Minimum Essential Coverage (MEC) Plan.  Self-insured employers (who employ more than half of all workers with health insurance) have another option. As long as they offer insurance with minimum essential coverage (which mainly means preventive care with no cost sharing and no lifetime caps), a self-insured employer can escape the $2,000 fine. The remaining benefits can be quite skimpy. But note: since this plan does not meet other requirements of the Obamacare mandate for employers, the employer will be liable for a $3,000 fine for any employee who goes to the exchange and gets subsidized health insurance.

Ralph Weber is an employee benefits specialist in Houston and the founder and CEO of Medibid. According to Weber, the trick here is to make the plan attractive enough so that otherwise healthy, low-wage workers don’t go to the exchange for insurance. This might be a skimpy plan, which covers doctor visits, and generic drugs, but excludes inpatient surgery and ER visits. If an employee develops a serious illness, he is likely to go to the exchange to get a richer, subsidized plan. However, the $3,000 fine the employer will then have to pay may be a bargain compared to the cost of treating a serious illness.

Offer a MEC Plan with an Opportunity to Upgrade to Obamacare Compatible Insurance.Weber is also helping employers with another option. They can offer an upgrade to a plan that meets the “affordability’’ test and the “minimum actuarial value” test (see below). To meet the affordability test the employee’s premium (again, employee coverage only – not family) must not exceed 9.5 percent of the annual wage. If the employee turns down the offer, the employer is no longer at risk for a $3,000 fine. And if the employee becomes ill and goes to the exchange for coverage, he and his family will no longer qualify for any federal subsidy.

Again, what’s good for the employer is bad for the employee and vice versa.

Take Advantage of Imperfections in the Minimum Value Calculator.  In addition to being affordable, health insurance must meet a “minimum actuarial value” test. For self-insured companies, this means that the benefits can differ from the essential health benefits included in a standard plan, but the employer plan has to cover at least 60 percent of expected costs under a standard plan.

One official way to do that is to get a passing score on the Department of Health and Human Services’“minimum-value” calculator, an online tool. And here is a surprise: an employer can actually meet this test without including hospitalization!  (See the discussion atKaiser Health News.) At the site, the visitor is invited to check boxes indicating whether certain benefits are included in the employer plan. In addition to hospitalization, mental health care, imaging (MRI and CT scans) ER visits and specialist services are other items that do not have to be included to meet the government’s test.

Pay the Fine.  Employers can drop health insurance coverage altogether (or never provide it in the first place) and pay a fine equal to $2,000 per employee. That’s a stiff price to pay, but it’s less than the cost of health insurance. If the employer chooses this option, the employees will be eligible for subsidized insurance in the exchange.

By the way, this is a win-win choice. Economic theory tells us that the $2,000 fine will ultimately be paid by the employees – in the form of lower wages or reduced non-health care benefits. But most low-wage employees will get a subsidy that is worth much more than that and they will have generous health insurance to boot.