Skip to comments.The 15 Percent Solution; Adapting to the Brave New Health Care World
Posted on 04/14/2013 3:03:59 PM PDT by Rick Vassar
Why is healthcare tied to employment?
One of the smartest decisions the federal government made was compelling employers to collect insurance, taxes, unemployment, and Medicare/Social Security contributions through the employees paychecks.
We all have had the same reality check when we received our first paycheck. You remember you worked at a fast food place in high school, and you received $5 per hour. You worked 20 hours, and realistically believed you would receive $100.
Thats the first time you learned about taxes, and the thrill of the moment, receiving your first paycheck, is tempered by the reality of FICA, or payroll taxes. I dont know anyone who was prepared for this, and although it wasnt a lot of money, it just seems all a little unfair, especially to a teenager.
Most successful unions not only negotiate benefits on behalf of their membership; they also force the employer to collect their members union dues. Most unions would not survive if they were forced to collect their own dues from union members.
Thus, unions will negotiate a dues check off with the employer, in which the employer agrees to collect dues on behalf of the unions through the union members paycheck. If the union is successful in negotiating a dues check off provision, they will then receive their dues payments in a lump sum from the employer, instead of the necessity of setting up a billing and collections department within the union administrative offices to facilitate the collection of dues.
If the union does not compel the employer to collect the dues, they basically would need to wait outside the bank while the employee cashes their check and then use their influence to make the employee pay their fair share. Simply put, its much easier to collect premiums and taxes from employers than from each individual insured. Business has the means, the capability, and the infrastructure necessary to administer this program. Businesses are also responsible to collect payroll taxes, state unemployment taxes, federal income tax and federal unemployment insurance. They are also required to provide and fully fund workers compensation benefits. Heavy fines and penalties await those organizations that fail to deliver on these requirements. Unions figured this out years ago.
Why, then, doesnt it work with healthcare benefits?
The incentive is missing. All successful businesses, regardless of size, prepare for the day when they will add employees. They will improve their employee benefits to make employment at their firm more attractive and competitive for the top talent in the job market. These benefits include compensation,
healthcare, bonuses, taxes, tuition reimbursement, retirement programs and 401(k) matching contributions, and many others benefits were all familiar with.
The cost of these programs to the employer can be quantified as a percentage of payrolls. Workers compensation, for instance, averages approximately one percent of total payroll, and healthcare can average around 15 percent.
When a business plans to make a new hire, it takes the proposed salary for that employee and adds in the total burden percentage for benefits. This gives the company an estimated cost of that employee annually. As an example, if an employee is hired at a salary of $50,000 per year and the total burden rate for benefits is estimated to be 50 percent, or $25,000, the total annual cost of that employee to the company is $75,000.
All companies perform these functions already. Just as the fast food company took out FICA on your first paycheck, businesses are able to administratively adapt their accounting methods to incorporate a system like this immediately, without additional capital to facilitate any sort of change. If we continue to compel business to collect and disburse funds on behalf of the federal government, state and local jurisdictions, benefits, and union dues, we need to realize that businesses are much happier to comply if they are compensated to perform this valuable service.
It is important that businesses be given the incentive to perform these functions. If the federal government is able to create an opportunity for businesses to have a healthy financial hiring environment, where it is less expensive to hire more employees AND provide health care benefits than it would if they refrained from hiring, employment percentages would improve with less individuals accessing the federal government programs for assistance with their health care needs.
Employers provide healthcare as group coverage. Each employee is afforded the same coverage, and all are rated the same, regardless of past illnesses and pre-existing conditions. Thus, it is quite simple to calculate the cost per employee, or the burden the employer pays to provide benefits to each employee.
Since all of these benefits are group plans, the costs are spread to each employee equally, regardless of income, need or ability to pay. Most employers offer cafeteria benefit plans, in which the employee can choose a specialized plan within the framework of the overall program offered by the employer.
Unfortunately, the choices are often limited, and many plan administrators will offer plans that are substantially more attractive to the insurer, and will price more comprehensive plans out of reach. So, while there is an appearance of choice, they are really leading you into the most advantageous plan for the insurer.
Most companies do not have the in-house expertise to purchase, implement and adequately explain the choices that are provided to employees on an annual basis.
Some of this is by design if the employer makes wrong decisions on coverage or the application of premium, they could be held accountable for these decisions, both with potential civil and regulatory penalties assessed to the company. So the decisions on health care are generally left to the insurance broker or the insurer themselves from the commencement of the purchase of insurance to the decisions regarding coverage in both broad and specific areas.
Generally, though, health care coverage is much more complicated and intricate for most human resource personnel to understand, so companies tend to rely on the folks selling the program to them for the professional expertise necessary to procure such programs.
THE 15% SOLUTION - A MORE DETAILED LOOK AT COST
If we assume again that healthcare dollars represent 15 percent of payroll to employers, this loosely breaks down as follows:
Life Insurance - 1% Includes the following:
Short Term Disability (STD)
Long Term Disability (LTD)
Accidental Death & Dismemberment (ADD)
Employee Assistance Program (EAP)
Dental and Vision 1.5%
Health Insurance/Comprehensive Medical/HMO/RX- 12.5%
Now, lets say we take this 15 percent and ask each employer to put aside this amount to fund all life, health, dental and vision, and give each employee options as to which coverage, levels and amount of insurance they received.
This would give the employer and the employee flexibility in their healthcare planning. Just as important, it would tie the incentive to hire with a truly flexible fringe plan, so that the employer has the opportunity to offer options based on the circumstances of the individual employee rather than trying to find a universal one size fits all solution to life and health benefits.
HOW IT WOULD WORK
Once hired, the employee is steered to a website that offers a wide variety of benefits plans, including health, dental, vision, disability, long-term care and life insurance. The employee is then required to select an option that provides health and life insurance.
Or they can opt out under the Affordable Care Act, aka Obamacare, and the employer would have the proper documentation to avoid any fines related to claims arising from employees who state they were not offered coverage.
Note that most health care companies now offer web-based programs that are now able to tie in with the employers payroll system (with proprietary safeguards) and the health care companys claim system. This is certainly not a new or innovative product.
All of the health care options have deductibles and co-pay options.
At this point, the employee is free to make the selection of their health care.
Once the selection is made, the monies left over are credited to a health savings account (HSA), to be used for out-of-pocket expenses, such as those co-pays and deductibles. These funds are used through the calendar year, and if there is a balance in the HSA at the end of the year, the employee is given the option of rolling these funds into the HSA for the next calendar year, or rolling the balance into the company-sponsored 401 (k) plan. As in the past, once the employee makes a selection of his or her health care, they are tied into the benefits selected for a period on one year. If needs change, adjustments can be made during the open enrollment period for the next policy year.
Lets use an example using an employee making $50,000 per year. Upon hire, he is steered to the company benefits website. Once the health account is set up, the employee will find his account with a balance to spend of $7,500 or 15 percent of his salary.
This employee is a 30-year-old single male, with an active lifestyle and limited healthcare intervention. He elects a plan with a high deductible and co-pay, a low payout of life insurance, and perhaps a first dollar or lower out-of-pocket for disability.
In this scenario, his annual healthcare, life and disability premium would be approximately $3,000 and the balance would be placed into an HSA. If the employee chooses a $2,000 annual deductible and a 40 percent co-pay and an annual out-of-pocket maximum of $5,000, he will not be unreasonably tapped out should he have a catastrophic incident, such as a broken limb or a concussion. This is similar to current high deductible plans. This situation will also allow for a chronic condition should it arise, but the key is that the employee is banking on his health. If he is right, he can put some money into his 401 (k) to fund his retirement with the remaining funds in the HSA, but he is also hedged against a substantial injury or illness.
Now, lets say we have the same $50,000 hire, but a 45-year-old male, married with two kids, ages 10 and 13. The wife has chronic asthma, and both children have medical needs throughout their lives. This employee would probably choose a plan with a lower deductible for healthcare, disability and higher limits for life insurance. This plan may cost $6,000, leaving $1,500 for his HSA.
If the employee had to spend more on health care, that amount could be tax deductible on federal taxes. More on that below
In both instances, the employer is able to write off the entire cost of the healthcare benefits, which would then be offered to employees on a tax-free basis. The federal government would calculate a federal tax deduction of 15 percent of total payroll, and the IRS would put regulatory guidelines on the reporting of benefits afforded to each employee.
This is essentially what employers do now when they report pre-tax benefits on an employees W-2, reducing the taxable income by the amount of the qualified pre-taxed income. Instead of a complicated tax calculation, the employer would receive a tax deduction based on 15% of their entire payroll, regardless of overtime pay, exempt versus non-exempt employees, etc.
Companies could self-insure a portion of the coverage, which would allow for the potential for more savings, and would also encourage employees to take advantage of wellness and preventative medical services, such as annual checkups, smoking cessation, weight control counseling, etc.
Self-insuring would lower premium cost and allow employers to offer more programs to encourage a healthy lifestyle for the employees and their families. There would also be tax benefits tied to these programs, which would further encourage a healthy environment and lower long-term medical costs.
All plans would include preventative expenses paid at 100 percent, and employers could be entitled to additional tax credits for encouraging healthy lifestyle and effective work-life balance. The employee would pay for premiums, co-pays, and out-of-pocket expenses from this account.
THE EMPLOYEE TAX BREAK The Little Known and Less Advertised Donut Hole
As you have probably heard in the press, there is the now infamous donut hole in the current Medicare coverage
This is how the donut hole works (from Medicare.gov)
You pay out-of-pocket for monthly Part D premiums all year. You pay 100% of your drug costs until you reach the $310 deductible amount. After reaching the deductible, you pay 25% of the cost of your drugs, while the Part D plan pays the rest, until the total you and your plan spend on your drugs reaches $2,800. Once you reach this limit, you have hit the coverage gap referred to as the donut hole, and you are now responsible for the full cost of your drugs until the total you have spent for your drugs reaches the yearly out-of-pocket spending limit of $4,550. After this yearly spending limit, you are only responsible for a small amount of the cost, usually 5% of the cost of your drugs.
The PPACA will close this donut hole in 2020, but until then, seniors need to pay this additional $1,750 with relief for some, but not all.
There is also a little known donut hole in the current federal tax code that affects all those who incur medical out of pocket expenses in excess of what their flexible spending account or health savings account pays. This is basically a carryover from the days before high deductible plans became the norm, and most individuals and families generally would not incur the type of out of pocket expenses that is the norm today.
Currently, an individual or head of household can deduct medical expenses when, and only when their out-of-pocket medical expenses exceed 7.5 percent of adjusted gross income. So under the current system, the worker making $50,000 per year must incur $3,750 out of pocket before these expenses can be written off.
Lets take the worker who elects to have $5,000 placed in an HSA for additional medical expense, and his healthcare premium is fully funded by the employer. The worker ends up with out-of pocket expenses of $10,000. The HSA pays $5,000, leaving the employee with $5,000 in additional expenses.
First the adjusted gross income is reduced to $45,000 ($50,000 less $5,000 pre-taxed HSA).
Because the $5,000 in the HSA has been issued on a pre-taxed basis, the 7.5 percent starts when these monies run out
The 7.5 percent medical threshold is now 7.5% of the adjusted gross income of $45,000, or $3,375.
This means the employee can write off only that which above this threshold, or $1,625. This reduces the employees taxable income to $43,375.
Based on 2012 federal tax rates, an employee filing single would incur a burden of $7,025. With the $5,000 out of pocket expense, and the funded $5,000 in the HSA, the employee is out a total of $17,025.
Now, lets use the 15% Solution:
Same employee - $50,000 per year.
Employer places $7,500 into a 15 percent account. Employee elects to take a high-deductible plan costing $2,500 per year and leaves the same $5,000 in an HSA. The employee incurs out-of-pocket expenses of $10,000, leaving $5,000 in additional medical expense.
Now, the taxable income stays at $50,000, and the benefits are provided by the employer. The $5,000 paid through the HSA was tax-free income provided by the employer. Thus the employee is out of pocket $5,000. Because the 7.5 percent threshold has been eliminated, the employee can write off the entire $5,000 out of pocket expense, for a taxable income of $45,000. Again, a single filer based on 2010 federal income tax rates, would incur a tax burden of $7,438, for a total out-of pocket of $12,438.
These benefits bear repeating:
The company gets tax savings on benefits they already provide, at a relative rate.
The employee has $4,587 more in his or her pocket to pump back into the economy.
The federal government collects $413 more in taxes per person per year.
Under this plan, the employer receives a tax incentive to provide health care benefits, wellness programs, and lowers its overall costs because a healthier workforce lowers the burden on the health care plan, and also lowers the costs in productivity lost due to absences by employees for health reasons.
The employee has the opportunity to fund their health care, framing their care to the needs of themselves and their family, and create the opportunity to have it funded entirely by the employer or on a tax-free basis should the need arise to go out of pocket for a catastrophic event.
The federal government would reap the benefits of increased tax collection, as well as the reduction in disability costs associated with those who cannot work or who may be uninsured at the time of a catastrophic illness or injury. These funds can be utilized to provide more benefits for those who do not or cannot contribute to the programs, such as the poor, the elderly, or the incapacitated.
One of the best parts of this solution is the simplicity of the tax calculation, which makes it much more transparent for the employer and the employer to calculate and plan for their taxes as the tax year goes along, instead of having to wait to see how it all plays out and hope you dont owe too much.
The inability to plan for taxes can be devastating to the continuity of operations for a business, and can also financially devastate a family dealing with the stress of a chronic or catastrophic medical issue and also an unanticipated high tax bill.
So this is the question if you could implement a plan in which all employed individuals and their families are insured under the individuals company health care program; the plan would be funded by the federal government indirectly through tax incentives; the plan would actually create additional tax revenues, and the program can be implemented immediately utilizing programs that are already in place...
Why wouldnt you do it?
This was the first step into government-owned socialized medicine.
I was supposed to be cheaper for you to be in a 'group rate' plan, but as costs got hidden from the buyer, and went up and up, it because something NO ONE would buy, if they had a choice.
$12K a year? I dont have it right now, and I pay all my own medical costs cash. After 2 broken arms AND a food posioning, I am still probably $50K ahead.
Why wouldnt you do it?"
Because the Democrats who created ObamaCare want more control over what should be individual decisions and because they want to create many more public sector union members.
Nice work there.
The author's idea is just more nanny state BS.
There is absolutely no reason for employer provided health insurance (EPHI). How you pay for your health care is none of their business. Allowing another person - your employer - to select your insurance is not to your best advantage. The accounting burden for these group plans falls directly on the employer, while doing nothing to improve his profits. The lure of simplicity over quality has to be a factor in his insurance offerings to his employees.
Another negative aspect of EPHI, supposedly fixed by Obamacare, is the employees reluctance to seek better employment opportunities for fear of losing coverage. I'm doubtful Obamacare will resolve this dilemma.
Then there is the matter of price. Are you getting the best insurance for your employee dollar? Who Knows? How can you know? You didn't shop for it, it was take it or leave it. Are there better plans for you at a cheaper price? Doesn't matter, your employer doesn't offer it. Too bad.
How many different plans with different insurers are you offered at work? 2? 3? How many different auto insurers can you select from? 20? 50? How about life insurance? A zillion? Why must we pick from 2 or 3 “canned” health insurance plans pre-picked by our employer, yet Geico, Progressive, & a dozen other insurers will insure everything from your car to your pet hamster?
Insurance should be purchased by individuals & families in an open market, across state lines, just like car & health insurance is purchased now. If employers can expense insurance costs against taxable income, then individuals should be allowed to do so, too.
What could be simpler? If you don't like your insurance or insurer, buy it from some other insurer. Preexisting conditions can be factored into the system, just as auto insurers factor in the condition of a used car to be insured & life insurers factor in age when issuing a policy.
The accounting & administration of insurance is off the employer's back. Your privacy is increased. Fewer people are involved in your personal & financial decisions. The insured has a better idea of what he is paying for & how much he is paying. Obviously, if you don't want sex change insurance or free contraception, you don't have to buy it. Maybe you will want an insurance company that doesn't offer such nonsense - there will probably be one. Insurance companies can attract young people to buy insurance with lower prices & incentives to be long term insured, much as whole life insurance policies do.
Tinkering with the current nightmare system might help, or it might not. But, we know the free market works, giving the best product for the lowest price along with a multitude of options.
Think about it next time you see Flo explain your insurance options in 15 seconds in a way even a child can understand.