Shifting Power: How Will the DOL Affect Healthcare?

Posted On: January 16, 2017 | By: launchadmin

Abstract

Many continue to speculate the future of the Healthcare sector as it
pertains to the Affordable Care Act and new Department of Labor laws. As
President Elect Donald Trump takes the stage, he looks toward Andrew Puzder
as Labor Secretary. Besides the debate between the right and left wingers,
a big discussion on increasing the minimum wage laws will occur – some
speculate as high as $15/hr – not only does this change the playing field
for healthcare expenditures, but also 401(k) employer expenditures. If this
occurs, companies will shift medical costs and/or decrease 401(k) matching
from employers to employees. Profit margins will shrink for the employer
and gross income will decline for the employee. Once again, this provides
an opportunity and challenge for employers to create strategies in their
employee benefits. Overall, expenses continue to increase while profits
shrink, and a major question appears: where do the benefits rank in the
greater expenditures “pie”?

Introduction

The challenges and opportunities of 2017 began months ago, in 2016. Looking
back to June when the race for the presidency heated up, many speculated
the future of society and the economy. President Elect Trump opposed the
ACA, while Hillary Clinton fostered the idea of a more equal healthcare
system. At this point, the endless combinations and possibilities of
proposed changes and additions to the healthcare system ensued.

Fast forward to today – has predictability increased? Not necessarily, for
a few reasons. Recent news states President Elect Trump will choose Andrew
Puzder as the Secretary of Labor. Puzder, CEO of CKE Restaurants, has an
extensive background working in big business. Yet, the battle between the
Republicans and Democrats in the House and Senate creates different
opinions. The mission of the Department of Labor states the promotion of
fair, increased wages among Americans – some speculate the increase in
federal minimum wage level as high as $15 per hour (more than double the
current level of $7.25 per hour), says Nick Thornton of Benefits Pro. On
one side, the Democrats promote the increase of the federal limit, yet the
possibility of Puzder as Secretary of Labor could say the opposite. Will
this affect small business owners’, mid-market companies’, and large scale
corporations’ costs and expenditures? The employee will face what type of
outcome? How will each scenario play out?

Increased Federal Minimum Wage Limit

With the possibility of the minimum wage level elevating to the extreme of
almost double its current amount, employer creativity in employee benefits
must continue to increase. Clearly, margins will tighten. The media expects
a decrease in contributions towards the second and third largest employee
costs, healthcare benefits and retirement vehicles (for example, 401(k)
plans). Healthcare costs continue to sky-rocket between 13% – 15% annually
against an annual CPI increase of 2% – 3%. The combination of both
increases will leave employers stuck between tightening profits and
recruiting and retaining employees. On the investment side, a hindrance in
401(k) matches and other similar retirement plan contributions, if given at
all, to the employee will persist. On average, benefits as a percentage of
total compensation are 31.4%. If minimum wage increases, legally companies
must increase level of pay, directly increasing salary expenses as a
percentage of overall expenditures. Where will companies recuperate lost
profit from this increase, and who will bear the burden? Either the
employer absorbs the cost increase, or the employee will be more
responsible for savings and healthcare.

Scenario #1: The Employer

All else the same, the increase in salary will increase expenditures,
driving down overall net profit. Even though profit will decrease, the
responsibility of the company remains the same, to increase profitability.
For publicly traded companies, this puts limitations on quarterly revenue
goals and, ultimately, shareholder value. For privately held firms, the
lack of operating profit will place a barrier on company growth. Where will
everyone cut costs? The price to build widgets or manufacture computers
remains constant. The employer will leverage employee costs through
benefits. Yet, one major issue occurs in recruiting and retaining
employees. Costs must not shift to employees in fear of turnover.
Potentially, employee turnover outweighs the net profit loss in the short
and long term. Yet, absorbing the increased cost counteracts employee
dissatisfaction and saves the cost of hiring and training new employees.
Not only will the option to retain all costs result in net profit loss for
the employer, but may also limit cash flow. The ability to invest profits
in new projects and expansion efforts diminishes.

Scenario #2: The Employee

For the average wage earner, the cost of healthcare equates to
approximately 10% of salary. With such a high healthcare cost, how will the
employee respond if the employer shifts the cost to him or her? Like the
company, the employee has a set budget of annual expenditures. An increase
in healthcare costs would push employees to find alternative means of
coverage – either in the form of new employment or the public exchange. If
an employee moves to the public exchange for affordable coverage, the
employer will face compliance issues and tax implications. Without seeking
new coverage or employment, a change in employee lifestyle occurs. For
example, a decrease in salary through increased premiums results in the
decreased ability to spend on non-essentials such as restaurants, shopping
and other luxuries.

Conclusion

Soon, the government’s decision to increase the federal minimum wage level
will occur. An upward movement will exist, most likely not as radical as
$15 per hour, but a change remains inevitable. With Puzder at the helm, and
a new cabinet in place, the economy could see levels north of $10 per hour.
With any increase, an upward pressure on business costs appears. Expenses
continue to increase, which will lead to decreasing profits. The employer
and employee will both feel cost pressures to not only find sustainable
coverage for individuals and families, but also afford the plans provided.
Limited availability to offer and utilize the robust benefits of the past
will transpire. Because of the rapidly increasing healthcare cost trend and
projected changing labor laws, both employees and employers will share a
greater responsibility in not only costs, but also finding avenues to
safeguard earnings. Now, more than ever, company and industry leaders must
become creative in their efforts to mitigate risk by adapting, evolving and
seeking expertise.