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Midsize employers restructure workforce to lower health reform costs

Original article from businessinsurance.com

By Matt Dunning

Many midsize employers say they are considering restructuring their workforces in order to mitigate projected cost increases associated with new health care coverage requirements beginning in 2014, according to several recent surveys.

While the potential for savings is substantial, benefits experts say employers should not let the desire to rein in health care costs blind them to the potential business and regulatory risks of making sudden, drastic changes to their staffing strategies (see related story).

Beginning next year, employers with more than 50 full-time workers — defined as employees working 30 hours or more per week — will be required to offer health benefit plans to 95% of their qualifying employees under the Patient Protection and Affordable Care Act or else incur a $2,000-per-employee tax penalty.

The new coverage requirement is of particular concern for employers in industries dominated by part-time employees, many of whom have traditionally been excluded from group health eligibility, experts say.

“There are seven or eight critical industries being impacted by this,” Christopher Ryan, vice president of strategic advisory services at Automatic Data Processing Inc. Those industries include hospitality, food service, educational services, health care and manufacturing, Mr. Ryan said.

Considering that between 7% and 8% of employees work between 30 and 35 hours per week, and that 72% of the country works for an employer with more than 50 full-time workers, according to ADP’s research, “it becomes a huge number of lives that are going to be eligible for health care benefits starting next year,” Mr. Ryan said.

To manage the costs associated with an influx of new members to their group health benefit plans, 32% of mid-market employers said they believe their peer companies will likely reduce the number of coverage-eligible employees by shifting workers to part-time schedules totaling fewer than 30 hours, according to a March 2013 study by New York-based Willis North America Inc. Another 22% said peer employers are likely to cut staff altogether.

However, experts say an employer considering shifting some or all of its full-time staff to part-time schedules — or cutting staff entirely — should weigh any projected savings in its health care expenses against the financial costs of the potentially negative effects those changes could have on their broader business operations.

“For every business, there’s an optimal mix of full-time and part-time staffing, and if you’re off in one direction or the other, it’s going to have an adverse impact,” said Tracy Watts, a Washington-based senior partner at Mercer L.L.C.

In particular, overinvesting in part-time workers could be detrimental to an employer’s overall productivity and profitability, Ms. Watts said. Part-time employees who are less motivated and/or less experienced than full-time workers may take longer to complete the same amount of work at the same level of quality, and could be more prone to costly errors.

Those effects can quickly translate to millions of dollars in lost revenue, wiping out any savings achieved through limiting access to group health benefits, Ms. Watts said.

“We’ve worked with a fair number of employers that have gone too far in the direction of part-time staffing to save money on benefits, and it’s come at a huge cost from a productivity and profitability standpoint,” Ms. Watts said.

Employers also should carefully consider how any planned changes to their staffing strategy in response to the health care reform law’s coverage requirement will be communicated to its employees and the public at large, experts say.

Several high-profile employers, including Darden Restaurants Inc. and Regal Entertainment Group, have incurred intense criticism from employees and customers recently over reports of wide-sweeping staffing changes in response to the health care reform law’s coverage mandate.

“The way companies convey these kinds of things is incredibly important,” said Andrea Kinkade, president and CEO of Maumee, Ohio-based Kaminsky & Associates Inc.  Specifically, Ms. Kinkade said, it is crucial from a public relations and compliance standpoint that employers planning to execute broad changes to their workforce structures in response to the reform law frame their plans as a measure to avoid incurring the tax penalty prescribed by the law rather than the related increase in health care costs.

“You have to make sure that anyone who is communicating with your employees about your hiring practices or your benefits eligibility knows what to say and what not to say,” Ms. Kinkade said.