Health Care Reform – The Impact on U.S. Employers and Employees

“While I personally did not support President Obama on U.S. Health Care Reform, such reform is already proving very good for my business (Zane Benefits) and for many entrepreneurs in health care and wellness. I feel today like an arms manufacturer on December 7, 1941.”

Paul Zane Pilzer, March 23, 2010

Note: Zane Benefits has posted a technical article (http://zanebenefits.com/blog/2010/03/216/Health+Care+Insurance+Reform+%E2%80%93+How+it+Affects+Insurance+Agents+and+their+Clients+) summarizing the impact of health care reform on insurance agents, employers, and employees, including which changes take place in 2010, 2011, and 2014.

On March 23, 2010 President Obama signed into law H.R. 3590 – the Patient Protection and Affordable Care Act (the “Senate Bill”) (http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h3590eas.txt.pdf) which mandates sweeping changes in U.S. health care and health insurance. The U.S. Senate is currently debating the Health Care and Education Reconciliation Act H.R. 4872 (the “Reconciliation Bill”) which makes modifications to the Senate Bill as described herein.

Here’s how this already-passed legislation will impact small (2-50), medium (51-200), and large (>200) size employers and their employees.

Changes in the Individual / Family (“Personal”) Health Insurance Market

First and foremost, new insurance regulations prevent health insurers from denying coverage to individuals or charging more based on their health status or gender. These regulations also mandate that health plans provide a very generous list of services (i.e. a federal government formulary), cap annual out-of-pocket spending for participants, impose no annual or lifetime limits on coverage, and, beginning September 23, 2010, offer preventive (wellness) services with no copays or deductibles.

These new mandates, while laudable in their intent for consumers, will significantly increase the cost of health insurance (before federal subsidies) for the majority of U.S. taxpayers. If you are among the 25% of U.S. households earning more than $88,250 a year, your current cost for health care will potentially double. Below $88,250 a year in income, the new legislation caps your health care cost at 2% – 9.5% of your income for premiums and $0 – $5,950/person/year for out-of-pocket expenses.

The net effect of these federal subsidies for employers is that when you switch from group to personal policies the federal government is insuring that each of your employees can afford health insurance at widely varying cost based on their income.

Small Employers (2-50 employees)

Small employers in the U.S. employ more than 50% of American workers and are responsible for the overwhelming majority of new jobs. More than 55% of small employers today do not offer health insurance-because of cost. Both the Senate Bill and the Reconciliation Bill impose no penalties or mandates on small employers to offer health insurance. Congress seemed to recognize that any increase in employer mandates would cause small employers to hire less workers and/or substitute more technology for labor in the workplace.

Most importantly for this sector, health care reform is dramatically accelerating the switch of small employers from group to personal (individual or family) health insurance. While personal health insurance has grown from covering 12 million people in 2002 to 35 million people in 2009, the reason 45% of small employers still offer group plans is because, in 45 states, employees with pre-existing medical conditions were unable to obtain personal insurance.

This is no longer the case. Beginning 2014, insurance carriers must accept all applicants at the same price regardless of health status, and beginning 2010, there is a new federal “risk pool” to guarantee coverage to people who do not have health insurance and cannot medically qualify or are charged more for traditional medically-underwritten personal policies.

Moreover, recent federal legislation allows employers to pay for personal policies with pre-tax dollars, and new Treasury regulations allow employees to use pre-tax salary to reimburse themselves tax-free for personal policy premiums. These two changes have the practical effect of reducing by 20% – 50% the after-tax cost of personal policies for employees and employers.

Thanks to health care reform, small employers with group plans in all states can now cancel their group plans and switch to giving each employee a pre-tax allowance to purchase their own personal policy-while being assured that all their employees can get and afford personal health insurance.

A company I founded, Zane Benefits, is the leading supplier of software administration platforms that allow employees to pay for their own personal health insurance with pre-tax employer and/or payroll-deducted funds. Thanks to health care reform, we have experienced a significant increase in business from employers (and their agents) seeking to switch employees from their group plan to personal policies, or at least offer employees the opportunity to save 20%-40% on health insurance by paying for their personal policies through pre-tax salary reductions.

Medium Employers (51-200 employees)

Medium-size employers were not as lucky as small employers when it comes to health care reform. For employers with 51-200 employees, the health care reform bill signed into law on March 23, 2010 mandates a $750 per employee annual penalty for employers that do not offer (and substantially pay for) health insurance. The Reconciliation Bill would raise this $750 per employee penalty to $2,000 per employee (less an exemption for the first 30 employees).

Most medium-size employers who currently do not offer health insurance will simply pay this penalty rather than increase their operating costs by approximately $10,000 per employee for health insurance. Medium-size employers who do currently offer health insurance face an expected doubling of their health insurance costs, from $5,000 to $10,000 per person per year, due to the new federal mandates on coverage.

This creates a choice for all medium-size employers of either paying the penalty or paying a much greater cost for health insurance. The penalty along with new health insurance mandates could have a devastating effect on new U.S. job creation and employment at a time our economy can least afford it. A $750-$2,000 per employee penalty, and/or a doubling of employer health insurance costs, will force many medium-size employers to move jobs overseas, create less new U.S. jobs, and/or substitute more technology for labor in the workplace.

Additionally, think about employers with 49-50 employees seeking to expand. The addition of a single employee could cause their company to incur a penalty of up to $100,000.

Large Employers (>200 employees)

Large employers fared the worst in health care reform. Those large employers who cannot afford to offer health insurance face the same ($750-$2,000) per employee penalty as medium size employers. And those large employers who currently offer health insurance will face an expected doubling of their health care costs due to the new federal mandates on what must be covered and no lifetime limits on coverage.

Moreover, large employers are required to automatically enroll employees in their lowest cost health plan if the employee does not choose coverage or does not specifically opt out of coverage. For each employee who chooses to opt out of employer coverage, employers are charged a $3,000 annual fee up to a maximum penalty of $750 ($2,000 with the Reconciliation Bill) times their total number of employees.

Among the new federal mandates for coverage, I am troubled by the potential cost of the mandate requiring no lifetime limit on coverage. Prior to health care reform, most states already mandated a per-person minimum lifetime maximum on health insurance benefits ranging from $3 million in Texas to $6 million in California. States typically required insurers operating in their state to re-insure their catastrophic risks, and Wall Street practically required large employers to purchase re-insurance on their catastrophic risks. Re-insurers, such as Lloyds of London, were only able to re-insure carriers and large employers because there was a defined maximum amount of lifetime benefits.

From a practical standpoint, very few people could ever come close today to utilizing $3 or $6 million of medical costs. The new federal mandate for no lifetime limit may cost Americans hundreds of billions for very little benefit, and may even be unobtainable in the re-insurance marketplace. The federal government should move now to either change lifetime maximum benefits to a practical $3-$6 million amount, or offer carriers and large employers the re-insurance they need to comply from the U.S. Treasury at minimal cost.


Health insurance reform is here to stay. I do not expect this legislation to be repealed, or successfully challenged in the courts.

Like most government programs of the past, health care reform will create enormous opportunities for entrepreneurs. I plan on exploring these opportunities in future articles and perhaps an entire book. As always with change, those entrepreneurs who get there first will reap the greatest rewards.

While I personally did not support President Obama on U.S. Health Care Reform, such reform is already proving very good for my business (Zane Benefits) and for many entrepreneurs in health care and wellness.

As a businessperson, I feel today like an arms manufacturer on December 7, 1941. Only time will tell us as a nation whether health care reform was worth the financial cost. To quote Tiny Tim (Charles Dickens), “God bless us, every one!”

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