Health Law: A Tough Diagnosis

One of the biggest decisions for many companies this year will be what to do about their health benefits.

They have just 12 months before the major provisions of the federal overhaul law take effect on Jan. 1, 2014, reshaping health coverage in the U.S. Employers with at least 50 workers will owe penalties if they don't cover full-time employees. Most Americans will face a parallel "individual mandate" to obtain insurance. And new online marketplaces called exchanges will sell insurance plans in each state, paired with federal subsidies for lower-income people.

Certain employers could see health-related costs go up as a result of the law's requirements, and they are weighing how to respond. One possibility would be to opt out of providing health coverage altogether, as employees will have new coverage options outside the workplace—for the employer, the penalties are lower than the typical cost of insurance. But employers are considering a range of more moderate steps to limit their expenses. Decisions will need to be in place well before next fall, when benefits enrollment typically begins and the new exchanges are supposed to begin operating.

The large segment of employers that already provide relatively rich benefits—a group that includes many of the largest companies and firms with higher-income or unionized workforces—will feel only limited immediate impact from the law. These companies likely won't take radical action this year, though they could weigh longer-term changes, depending on how the exchanges and other provisions of the law play out.

"They want to measure twice and cut once," said Bryce Williams, managing director for exchange solutions at consulting firm Towers Watson & Co. (TW). One first step may be trimming or eliminating coverage for retired workers, particularly those who aren't old enough for Medicare and will have many more insurance options in 2014 than today.

But 2014 will bring significant change for many smaller companies above the 50-worker threshold, and those in industries such as retail and restaurants that have lots of lower-income and part-time workers. Some offer no health benefits today, or limited coverage that won't meet the law's standards. Upgrading to richer plans could raise costs substantially; failing to do so could trigger the penalties, which can amount to $2,000 or $3,000 for each uncovered worker, depending on the circumstances, with the first 30 employees exempted from the count.

Companies that already provide health benefits may see their spending go up as workers who had opted out of such plans in the past decide to take them because of the individual mandate.

The law requires larger employers to automatically enroll eligible employees in health benefits, a shift that promises to further boost enrollment, though that provision isn't currently slated to go into effect in 2014. The law also says that employees who work at least 30 hours per week should be covered, a threshold that could sweep in many workers now not offered health benefits.

Companies seeking to trim the impact on their expenses will have to weigh the possible downsides in employee morale and recruitment, operational headaches and public image, as well as the tax advantages of employer-provided coverage. Darden Restaurants Inc. (DRI), which had been experimenting with keeping some workers' hours beneath the threshold, recently announced it wouldn't expand the effort after it generated backlash among consumers.

Dots LLC, a women's-clothing chain based in Glenwillow, Ohio, projects that its health costs could go up by around a third because of the law. That is largely because only about 55% of the employees who are currently eligible for health benefits take the coverage, and the retailer thinks that share could jump sharply.

Dots has been preparing for that increase for two years, trimming its costs with moves such as boosting workers' premium contributions and putting new employees into a more basic health plan for their first year, said Joanna Curran, benefits and payroll manager.

In coming months, Dots' top executives will have to decide what else to do. One possibility: more cost-sharing for employees. Dots also will consider more strictly enforcing existing limits on the hours of a small group of part-timers who occasionally go over 30 a week today, to avoid the complexity of having workers bounce back and forth into the law's definition of full-time status. "We are facing the fact that we are going to have to spend more money," said Ms. Curran. Her company won't drop its coverage because it would hurt recruitment and retention of employees, she said.

The Obama administration, for its part, is "optimistic that, by and large, employers will continue providing coverage," said J. Mark Iwry, a senior adviser to the secretary of the Treasury.

But employers affected by the law will likely consider other cost-cutting approaches: offering only higher-deductible plans, perhaps, or giving workers a set sum of money and a choice of plans and letting them pay more if they opt for pricey coverage. For certain employers, the law could prove "the impetus for them to have very bold strategies," said Tracy Watts, national leader for health-care reform at Mercer, a consulting unit of Marsh & McLennan Cos. (MMC).

Other employers may end up prodding only certain employees toward the health exchanges. Lower-wage workers may qualify for federal subsidies—and find the exchange plans a better deal—if their employer coverage is "unaffordable" under the law because premium contributions represent too big a share of their income. Companies could also simply not offer health benefits to certain classifications of workers.

In a survey by the International Foundation of Employee Benefits Plans, nearly a quarter said they were at least somewhat likely to provide coverage to some employees but direct others to the exchanges.

"Employers are going to be doing rigorous scenario-planning, and they're going to be doing it deep in a bunker" because of the sensitivity of the issue, said Michael Turpin, executive vice president at USI Holdings Corp., a major insurance brokerage.

One client, he said, asked him to examine the possibility of structuring employee premiums so that some workers would become eligible for federal exchange subsidies, but only if they decided to forfeit financial incentives tied to a wellness program. The likely upshot: the lower-income workers who were the least engaged in health-related activities, and thus potentially the priciest to cover, could end up opting out of the company's plan.

Mr. Turpin said it still wasn't clear if federal rules will allow employees to qualify for the federal subsidies under these specific circumstances.

Indeed, splitting the workforce by pushing certain workers toward the exchanges is an idea that might face barriers from regulators, though detailed rules for meeting nondiscrimination standards haven't yet been issued. "We have to wait and see what regulatory agencies develop," said Julie Stich, director of research at the benefit-plans foundation.

Employers that aren't forced to make short-term shifts because of the health law may eventually see opportunities.Houghton Mifflin Harcourt Publishing Co. won't see much immediate impact from the 2014 changes, but it will be watching the development of the exchanges, said Carl Cudworth, director of benefits.

The publisher is using a Towers Watson exchange for its Medicare retirees, who get a sum of money to choose their plans, and could consider exploring a similar option for pre-65 retirees and, possibly, active employees, he said. But its potential interest would hinge on regulators' rulings about such approaches, including the tax treatment of the employer contributions, and what happens to the post-2014 individual market.