2 live examples of opting out of ACA

Two businesses talked to the Wall Street Journal about the possibility they may drop health coverage for their employees next year. Let’s look at their numbers.

I’ve been wanting to write about the implications of dropping out of the mandatory health care coverage. Obviously, I can’t use as an illustration any of the organizations I’m familiar with.

So when the WSJ had a discussion today, I found some public numbers we can work with. The article is Some Small Businesses Opt for the Health-Care Penalty.

The data

I’ll quote just enough of the article to get the basic data on the table:

[Owner of the first business] currently spends about $140,000 a year on insurance premiums to cover 25 managerial staff at his business…

Under the new law, he will have to offer insurance to all of his 102 full-time employees starting in January. Assuming all of them take the coverage, [he] says the cost of premiums could exceed $500,000.

“I’ve never made a profit in any year of the company that has surpassed that amount,”

He says it makes more sense to drop insurance entirely and pay a penalty of about $144,000.

[Owner of the second company] has similar plans. He intends to stop offering health insurance benefits at his home health-care company.

[He] employs about 250 workers and currently provides health insurance to his 20 office personnel. If he were to start covering the 100 or so nurses and nursing assistants that work full-time, his annual health-insurance costs would jump to roughly $600,000 from the current $100,000, he says.

Even if he takes the penalty option, he estimates he would have to pay about $240,000… He says he will hire more part-timers to ensure patients receive the same level of care.

Analysis

The first company:

Cost structure:

• Current – 25 managers – cost $140k total or about $5,600 each
• With full health care– 102 full-time staff – est cost over $500k or over $5k each
• Increment to provide coverage for all full-time staff – $360K

Dropping coverage for all staff will save the $140k current cost, less a wild assumption of 40% tax, would make it around $85k. Penalty would be $144k (calc’ed as 102 less no penalty for first 30, times $2k).

So here’s a wild guess on the after-tax costs:

• Current – $85K
• Full coverage – $300K (500k less wild guess of 40% tax rate, which is obviously high if he has never made a profit that large)
• Drop coverage – $144K

The second company:

Staffing:

• Office staff – 20
• Other full-time staff – about 100
• Part time staff – about 130

Here’s the cost options

• Current – 20 office staff – $100k, or about $5K each
• Next year – 120 staff – $600k, or about $5k each
• No coverage next year – $180K penalty as I calculate it (calc’ed as 20 office plus 100 nurses, for total of 120, less 30 not penalized, or 90 staff with penalty, times $2k equals $180K)

Let’s make a wild guess of 40% tax rate, which gives the following after-tax costs:

• Current – $60k
• Next year – $360k
• No coverage – $180k

Incremental costs

So for the first company, providing full coverage for FT staff would increase costs about $215K after tax. Dropping all coverage and paying the penalty would still increase costs about $60k and would mean dropping coverage for managers.

For the second company, covering all full-time staff would cost an extra $300K. Even taking the penalty would increase costs $120k.

This is why we are starting to see comments that companies are converting full-time jobs into part-time positions. My fear is we will see a lot of that.

Per person costs

Notice that providing health insurance costs both companies about $5,000 per person per year.

Alternatives

The article says the second company will reduce hours so that far more staff are part-time and not eligible for health insurance coverage and thus not incur a penalty. Seems like if he cuts all 100 of the nurses back to under 30 hours they won’t have to be provided health insurance and won’t incur a penalty. That would also allow him to keep costs the same and still provide insurance to his office staff.

Both of the companies are seriously considering dropping all health insurance coverage next year.

Major assumption

All of those insurance amounts assume the costs next year will be the same as we see today. There is a growing consensus we will see a 20% or more increase in premiums next year.

If we see increases next year in the range of 15%, or 20%, or 35%, the differentials mentioned above would be greater.

Next post takes this analysis to the NPO community.