Increased competition, payment structure reform, changing delivery models, accountable care organizations, patient-centered medical homes, new boutique organizations entering the market — all of these factors created by healthcare reform are exerting huge pressures on hospital margins. As a result, most hospitals have been laser-focused on the fundamental changes they need to make in running their businesses: how they charge patients; the type of organizations they align with; buying physician clinics, rehab units or nursing homes, etc. With reimbursement moderating and tied to efficiency and quality, ways to generate revenue and control provider performance across the continuum of care has become all-consuming for every hospital's leadership.
However, as large employers, hospitals also need to comply with the same requirements of the Patient Protection and Affordable Care Act as every other organization in the country. Starting next year, they will have to make two decisions that until now have been further down their to-do lists than those of employers in other industries that don't have to worry about a massive change in their business models: 1) whether they will play or pay — continue to offer employees healthcare coverage or pay a penalty to send them to the public exchanges, and 2) how they will bring their employee health coverage below the threshold level of the excise tax by 2018 to avoid paying a 40 percent tax on the overage.
Play or pay decision for hospital employers
For hospitals, the decision to play or pay will not be so much about whether they should provide healthcare benefits to employees, but how they should do so. Compared to employers in other industries, every hospital is highly likely to continue to offer health benefits to employees. To opt out would be very much at odds with many hospitals' missions — even more so for the high percentage of hospitals that are faith-based. And it could damage their image with the public just when patient satisfaction is more important than ever under the PPACA. As a result, hospitals will not consider options another type of employer might, such as sending part-timers or lower-wage employees to the public exchanges for benefits, even when those employees might be better off because they qualify for a federal subsidy.
Traditionally, hospitals have large employee segments of both variable-hour employees without benefits (those who work more than 30 hours a week who opt out of benefits or per-diems, who opt to work more than 30 hours a week for higher wages in lieu of benefits) and full-time, lower-wage, low-skill maintenance workers with benefits. There is a real opportunity for hospital employers to step back and really think about how their workforce is structured.
Hospitals more vulnerable to excise tax
The 2018 excise tax is going to be a big deal for healthcare employers. Hospitals, as an industry, will be faced with the excise tax as much as, or maybe more so than, any other sector of the economy. Their costs tend to be very high. Their populations tend to be older. They tend to have high healthcare utilization for a bunch of reasons. And their costs in many cases are already above the excise tax ceiling that starts four years from now. With cost increases averaging between 5 and 6 percent a year, they're going to have a huge tax liability by the time 2018 hits if they haven't changed or modified their plans.
For example, in one 2,000-employee hospital's case, we recently estimated its costs would be over $60 million over the first five years of the excise tax. It could put them out of business.
With that in mind, here are four suggestions for changes hospitals can make to address the implications of the excise tax:
1. Change from market-rate accounting to marginal pricing. Some hospitals use the same cost basis for their medical plan that they use in the marketplace. As a result, their rates and costs for employees are the same as any other person receiving the same service at the same hospital. It tends to vary regionally across the country, but at least half the hospitals in the U.S. use domestic or a marginal cost-of-care pricing. In this case, the hospital charges itself a lower amount than it would charge any other person, up to 30 percent, 40 percent or 50 percent lower. It's a big lever in reducing hospital costs enough to avoid hitting or exceeding the threshold of the excise tax. So if a hospital is not using that strategy, that's almost always where we want to start.
2. Change plan design to leverage account-based health plans. Hospitals often have very rich plans with little cost sharing. We encourage hospital organizations to review their plan design and consider changes to lower costs, such as account-based health plans or high-deductible health plans. Although hospitals have not generally embraced these plans, the excise tax will force them to look more closely at these options.
3. Reduce or end spousal subsidy. The PPACA regulates type, level and cost share of employee coverage, but not spousal coverage. And because many spouses are working at another employer that is required to offer coverage, the need for offering coverage to spouses may be less important than it is today. Spouses tend to be more expensive than employees and drive a lot of cost.
4. Manage your population's health. Hospitals tend to have a less healthy population than general industry. It tends to be an older population with a higher incidence of health issues like heart disease, diabetes, excessive weight and high blood pressure. This will also be a major challenge to hospitals if they want to lower their healthcare costs. Hospitals might consider implementing wellness and disease management programs, encouraging the use of their own facilities (often referred to as "domestic resources") or redesigning current employee benefit plans to adopt some of the effective tactics other organizations have embraced, including consumer-driven and high-deductible plans often backed up by health spending accounts.
Jane Jensen is a senior health and group benefits consultant in Towers Watson's Denver Office and can be reached at jane.jensen@towerswatson.com.