A Call to Action: How will PPACA motivate you and your employees to cancel their health insurance?

The Patient Protection and Affordable Care Act (PPACA) was enacted in March 2010. In an earlier edition of the Corner Office Gazette we described some of the impacts of this legislation on employers, employees and citizens in 2010.

One of the key provisions of this act will not take effect until 2014 (as currently written or understood). The act creates government-sponsored exchanges which will provide the ability (requirement) for all citizens to purchase health-care insurance coverage from exchanges or insurance companies without regard for individual pre-existing medical conditions or any other restrictions. So, if you are an employer, and already have employee health-care insurance, why should this matter to you?

Employers and employees will both have options when exchanges arrive. The two separate or joint choices will be—

• As an employer (with 50 employees or more), you will pay a $2,000 free-rider penalty for every employee (who works over 30 hours per week) that you do not insure or whose coverage you terminate. Further, if your employee has to pay more than 9.5% of their household income, your plan is deemed unaffordable and the employee will be able to go to the exchange for coverage. Your penalty in this case increases to $3,000.
• As an individual, you will pay a non-coverage penalty of 1% (starting in 2014 and with a $95 minimum) to 2.5% (by 2016) of your household income if you do not purchase health insurance—supplied by company or exchanges.

Let's look at a "back-of-envelope" analysis of the situation for employer "ABC" in 2014 considering both a single employee and a married employee with 3 dependents with identical household incomes of $80,000 each.  The 2014 estimated premium data is forecast using Kaiser Family Foundation information.



The above example is an interesting result if one only considers employer annual cost. This would seem to indicate a potential situation where both parties may be highly motivated to mutually drop coverage. This is because the cost savings for both parties is quite favorable and the individual can reapply (without any apparent penalty) just before or at the time they need some type of medical procedure and someone to pay for it. Let's call such coverage (payment arrangements) sick-party coverage [or SPC].

Four questions present themselves when you look at the back of the envelope and think of the implications of the analysis for both employer and employee.

• What would an employer do with future premium savings (if real)? In the end, we believe that most employers know that the health and welfare of employees is their concern and hence the current benefits will somehow be preserved. The employer will likely decide to provide supplemental insurance to cover their sick employees when the employee must rely on the SPC—and bridge the coverage gaps that will surely be built into SPC or exchange coverage by 2014 (just look at the history of Medicare). Also, many would argue that health insurance coverage is just another form of compensation. Hence, some of this apparent employer cost savings may also go back to the employee in the form of pay raises—but not everyone would agree with that thinking. Will there still be employer savings left to do any of this; who knows?
• What will be the fate of the private insurance companies if employers and employees begin to systematically and mutually drop insurance policies in lieu of SPC? I expect that private insurance companies will lead the way with packaging premium SPC policies to cover the gaps or restrictions (such as continuing access to your physicians or healthcare systems), just like premium Medicare coverage. Also, who do you think is going to process and pay the claims—a bunch of clerks in the basement of Congress?
• Will both employers and employees be motivated to cancel all their current health insurance policies, when possible? Yes, history (and Massachusetts) says both parties will act in their economic interest and reduce these costs by dropping all coverage as soon as possible. Why not; what is the risk? We are not entirely sure what the value proposition for exchanges will be by the time 2014 rolls around.
• What should a prudent employer do about this situation in 2010-11?

Wilkening & Company believes that the prudent company will begin to develop its future employee healthcare strategy and corresponding compensation strategy as soon as possible. While we have only discussed a well-paid employee in our example, also recognize that lower-paid employees may be eligible for federal subsidies through exchanges that will impact your cost and decision making in a variety of other complex ways. We recommend that you strongly now consider—

• A full analysis of your work force and healthcare costs and demographics;
• An analysis of cost scenarios under current PPACA rules;
• Development of 2011-2014 healthcare and compensation strategies in light of PPACA requirements; and
• Creation of an action plan to respond quickly and implement required changes in the event of inevitable PPACA rule and deadline changes.

While you technically have plenty of time to consider and act, we suggest you anticipate that changes will surely occur in this arena that will negatively impact your company if you are not ready to respond and act in your own defense—what do they say; the prepared will survive? Act to complete the above fours steps by 4Q11.

Wilkening & Company has developed information and methodologies to assist clients in the selection of 2010-2014 insurance and compensation strategies. We will continue to cover this evolving and changing mandates for our readers in future issues of the Corner Office Gazette.

Effective Strategic Planning—first, let's clearly state your strategy

Wilkening & Company has participated with clients in the strategic planning process, and has used client strategic plans for a number of purposes such as market planning and goal setting. We have found a wide diversity to what is called a "strategic plan." In many cases we find that a strategic plan is merely a multi-year financial plan and forecast—presented in a series of spreadsheets. As said, its purpose is essentially financial in nature and it is often used as the "top end" of the budget. While these tools may be effective for future planning, we would like to present a different definition or format for the strategic plan. In our experience, we have found that there are two characteristics of a successful strategic plan and the planning process. These generally are— Development of a clear and concise statement of strategy; and Active participation by employees (and other constituencies) in the strategic-planning process. In this discussion we will focus on the first characteristic, or the statement of strategy. Wilkening & Company believes that a strategic plan should be a clear statement of direction articulated in a one-page document with no more than two or three numbers (we will allow you an extra page if needed) that declares the following: What products or services a company will offer; What markets or customer groups will be served with these products & how will they be reached; How does the firm want to be known by all of its customers (its proposition of value); and How will we know we have succeeded? Let me give you a very brief example of a statement of strategy for a small industrial manufacturing company that was once a division of a Fortune-500 holding company.

The company will offer hand-actuated tools to skilled tradesmen to assist with the cold working and fitting of thin-wall copper, steel and stainless steel tube in diameters from 3/8 inch to 1-1/2 inch with generally low-pressure fittings, valves and connectors. These tradesmen will generally work within the plumbing, refrigeration and heating and air-conditioning industries. We will sell our tools in both US and foreign markets. The company will sell through exclusive arrangements with channel partners that will stock and distribute our products to the 5,000 worldwide sellers who sell to targeted tradesmen. Additionally, the company will sell directly to the 8-largest US tool marketing firms and the US government. All products will be sold under the brand name of ACME which has been a recognized market brand for the past 75 years. We are currently the oldest and most recognized brand in the market but have mixed perceptions of value amongst end users as the result of recent cost cutting and adverse channel-partner actions. However, end users know they can rely on ACME's unlimited lifetime guarantee for all products. This type guarantee is offered by no other competitor. In the future, we want our all of our products to be known by our end-user customers as the highest quality and the second highest-priced product in the marketplace. Further, all end-users will know that any new ACME product is always available on their seller's shelf. Our channel partners will know the company as having the highest commitment to service and quality in the market with premium margins for successful partners. The company has steadily lost share of market for its major products because of a lack of manufacturing capacity and inconsistent quality during the last two years. By reliable industry estimates the US and foreign demand for company products in applicable markets is $280 Million in 2010—65% in the US. Market growth is estimated to be roughly 2% per year. We now have 6% of that worldwide market. By 2015, the company will have gained a share of 15% worldwide which is 1st in share by 5 percentage points, and have no more than 70% of sales in the US market. During this period, the company will have a return on net assets employed (RONAE) of 32% or more. However, RONAE will be lower for the next three years, but never below 26%.

We have just stated a 5-year plan in 360 words and less than one page. Whether you like the plan or not, you understand it. But more importantly, what does this statement of strategy communicate to anyone that reads it? Each major discipline of strategic implementation (engineering, marketing, sales, operations…) knows its role and how to allocate resources. We can probably name our 150,000 worldwide end users and know how to find them. The value proposition is clear. As important as knowing what to do, management knows what not to be doing—i.e.: what "adventures" not to undertake. If we are going to succeed, we need to have the capacity to do so, and the continuing quality of product. Company (and individual) goals are clearly outlined and include crossovers with sales, profit, cash flow and the balance sheet—both quantity and quality. Notice in the plan we have not talked about how the company will fund any necessary (and certain) capital spending. I am not sure that discussion belongs in a statement of strategy. If the Board and management agree to a direction (as stated)—it seems to me that capital-funding needs are implicit. Otherwise, you cannot agree to the strategy. What do you think? With such a statement agreed-to by management and the Board, the company can then begin to build the organizations, systems, plans, annual budgets and spreadsheets that will provide the path to achieve its stated strategy. And if management or the Board (or your banker) is ever in doubt about what you are trying to accomplish and why, the one-page statement of strategy is always a quick and handy reference and guide. Do you have a statement of strategy? If not, could you complete one in a single page? Try it. Next month we will discuss active employee and other constituent participation in your strategic-planning process. Wilkening & Company has assisted clients with the formulation and implementation of business strategy. If you would like to discuss of share your statement of strategy, feel free to contact us.