Health care reform requires most employers to make a major decision about health insurance by 2014: Whether to offer coverage to employees or pay a penalty for not doing so. And the decision is not quite as black and white as it sounds.

The determination to “pay or play” encompasses more than simply weighing the cost of the penalty against the cost of an affordable health plan that meets government standards for minimum coverage. Employers will need to consider how the decision will impact some important measures on a broad scale, such as:

• Employee morale and loyalty
• Workplace health and wellness
• Engagement and productivity

In addition, employers must also consider:

• The cost of making employees “whole,” because health care plans are such an essential part of their current compensation package
• The ability to attract and retain workers with skills critical to a company’s success without offering health benefits
• The need to balance a benefits plan that is attractive to talented workers with the cost controls that are essential to business success, taking into consideration the penalties and tax advantages of each option.

To determine the potential penalties or advantages, employers will have to ask themselves these important questions:

• Is the company’s workforce small enough (fewer than 50 full-time equivalent workers) that no penalties will apply?
• Does the health coverage the company offers “meet minimum value defined by the government?”
• Is the coverage affordable enough according to the thresholds established by the law?
• Are any employees eligible for premium assistance, which can trigger a penalty?

These guidelines from the government’s Congressional Research Service provide the details employers need to understand how each of these criteria can impact their decision, and explain how penalties would be calculated in different scenarios. 

Another helpful reference is this decision tree provided by the Kaiser Family Foundation. It shows graphically how these answers can impact a “pay or play” decision. 

What do the surveys say?

Numerous consulting and research firms have conducted surveys to measure employer response to this major question. Only one widely publicized survey, conducted by McKinsey in 2011, reported that a substantial number of employers would possibly drop coverage (30%). ²

A more recent 2012 survey from Deloitte  reported that 81% of companies (representing 84% of the workforce) said they did not anticipate abandoning coverage. Only 9% (representing 3% of the workforce) said they were likely to drop coverage within the next three years, while another 10% were not sure what they would do.³  

A survey conducted by Lockton in 2011 asked employers to list their reasons for continuing to offer coverage, and 86% of those surveyed said their decision was driven by the need to attract and retain the best employees for their workforce.  Another 30% also said they will offer coverage because they do not believe their employees would be able to get the same level of coverage the company is able to offer, affordably, through the Health Insurance Exchanges.⁴ 

A recent study by Truven modeled the financial impact of the “pay or play” decision and determined that employers are unlikely to truly see a cost advantage, neither immediate nor down the road, if they choose to pay the penalty.   According to Truven, to retain skilled workers, employers will need to provide competitive benefits and compensation.  The report notes that “employers will not be able to unilaterally cut benefits and expect employees to absorb the projected inefficiency of Exchanged-based coverage.”⁵

Impact on employers:

Before making a final “pay or play” decision, employers will need to consider each possible impact the decision will have on their business and workforce. In addition, those who do offer coverage will need to determine whether the coverage is considered a qualified plan offering minimum essential benefits, and is affordable enough to avoid penalties.

Small employers may be able to offer health insurance for the first time by taking advantage of the significant tax incentive offered by the government for up to six years.

Impact on brokers:

Employers will likely lean on their trusted advisors to help them determine whether their health plans meet government standards for minimum essential benefits, and look for strategies to keep coverage affordable.

Impact on individuals:

Some individuals may gain group insurance, because their employers prefer to pay for a competitive advantage rather than pay a penalty that has no real gain. Employees who are not offered coverage through the workplace may be able to gain coverage through the individual Health Insurance Exchanges.