Exploring the Safe Harbor in Health Care Reform

Posted by Steve Kraus on July 28, 2011

By now, many of the executives I talk with, both in HR and Finance, have realized that health care reform isn’t going away — and by health care reform I don’t mean simply the “poster child” Patient Protection and Affordable Care Act of 2010 (PPACA). Heath care is changing on many fronts, from clinical science to information technology to Medicare and FDA transformation to the very way doctors, hospitals, insurers and patients interact. Every employer is impacted and the issue goes well beyond the compliance aspect of reform that garnered so much attention last year.

In fact, moving beyond compliance is one of six evolutionary trends in our Human Capital Trends 2011 report. As the chart below shows, employers have a range of choices to consider, only one of which centers around compliance.Healthcare Graph

The light green status quo line is included mostly for the sake of comparison. Maintaining the status quo by seeking “grandfathered” status is not practical for most employers, but if it were, trends indicate health care costs would increase about 8 percent a year.

The dark blue line is where employers keep their basic benefits package and increase benefits where required to comply with health-care reform. For most companies this will mean a 2 percent to 5 percent increase over the status quo.

The bottom, dark green line is the choice to pay a $2000 penalty per full-time employee for not offering coverage. While we hear this strategic option being discussed, we don’t see a lot of movement in that direction and don’t anticipate a surge in 2014. What we do see energy around is the idea of taking health care in the direction pensions moved 20 years ago — away from defined benefit pension plans and toward defined contribution 401(k)s. Rather than paying the majority of an employee’s health care coverage costs, the employer would instead set aside a lump sum every year that the employee could use to purchase insurance, likely on one of the state-based exchanges set to launch in 2014. Just as employees now choose how to invest their 401(k) funds, they could choose their insurance provider and the type and level of coverage. This option would fall somewhere between the dark green line and the light blue line above.

This light blue line, “safe harbors,” is a provision of health care reform not commonly understood and is the foundation for some significant strategic opportunities. Safe harbors are the minimum standards that employer-provided coverage must meet to minimize exposure to penalties. Most employers already offer benefits that exceed these minimum standards in one or more areas. This is where the chart’s Opportunity line comes into play.

We are working with our clients to consider this area of opportunity, exploring the costs and benefits of providing more than the minimum coverage and the value derived from doing so. It may mean balancing mandated costs with reductions in another area. Employers will have many interacting aspects at play, not only people and benefits strategies, but things like workforce structure and operations, taxes, legal and risk considerations and accounting. It’s not an easy analysis or a fast one — HR and Finance executives — really the entire C-suite – should cooperate in the effort. But it’s at the heart of the evolutionary trend we see to move beyond thinking about health care reform as a compliance issue toward a more holistic view of its impact on the organization.


Steve Kraus is the national practice leader for Deloitte Consulting’s employer health care benefits strategy practice. He has more than 35 years of consulting experience and specializes in employee benefits strategy, rewards transformation, and health care consumerism.

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