Canadian companies face benefits cost sticker shock when setting up shop in the U.S.

As U.S. President Donald Trump’s administration seeks to keep trying to repeal and replace the Affordable Care Act, how would any change affect employer benefits costs, including Canadian businesses with U.S. operations?

Canadian employers that decide to set up shop in the United States will notice a big difference when it comes to benefits costs. In the United States, the average premium for family coverage for employer-sponsored health-care benefits was US$17,545 in 2015, according to an annual survey by the Kaiser Family Foundation. For single coverage, the average premium was US$6,251. Conversely, in Canada, the average cost of providing benefits for employees was $8,330 (in Canadian dollars) per full-time equivalent that same year, according to a study by the Conference Board of Canada.

“The costs are going to be very different, and I think the primary reason is in Canada, you’ve got a provincial-based health-care system so that everybody’s got a basic level of care and what some employers are doing is purchasing supplemental or additional coverage to fill in some of the gaps of what’s not covered by the plans in Canada,” says Richard Wald, consulting managing director at Deloitte Consulting LLP in Minnesota. “In the U.S., we don’t have an underlying health-care plan, so employers are providing the whole package.”

Read: What does a Trump presidency mean for U.S. employers?

With Canada’s provincial health-care plans providing basic coverage for issues such as visits to doctors and certain vaccines and diagnostic services, employers face a lower overall burden on their benefits plans, says Jyoti Vasdani, a senior consultant at Deloitte in Toronto. So with Statistics Canada reporting a significant boost in Canadian foreign direct investment in the United States in recent years, having increased by eight per cent in 2016 following a more dramatic rise of almost 27 per cent in 2015, the outcome of the U.S. health-care debate will resonate with a number of Canadian companies.

The impact of the Affordable Care Act on benefits plans

The Affordable Care Act has definitely increased health benefits costs for employers, says Wald. “What we’ve been able to measure is a two to three per cent increase.”

First, employers that offer health benefits have to pay a fee that helps fund the Patient-Centered Outcomes Research Institute, an organization that investigates the effectiveness of medical treatments, says Wald. The act also introduced a tax aimed at helping to stabilize insurance premiums in the individual and group markets, adds Wald, noting the government eventually phased out that component.

Read: Tips for controlling out-of-country benefits costs

More importantly, the Affordable Care Act mandated all employers with 50 or more full-time workers to provide health benefits plans that meet certain actuarial value thresholds, says Lenny Sanicola, practice leader at WorldatWork in Phoenix.

“So for employers that didn’t offer coverage pre-Obama care, it probably had more of an impact because a lot of smaller employers here in the United States do not necessarily offer health coverage. Or they have part-time people, and the law basically said if someone worked 30 or more hours per week, they had to be offered coverage . . . which means that even if you had seasonal or temporary employees, they might be in the mix,” says Sanicola.

Some employers may also have had different definitions around how many hours an employee should work in order to be eligible for health benefits, says Tami Simon, managing director and global practice leader at Conduent Inc. in Washington. “That may have caused their health insurance coverage costs to go up.”

Read: 51% of executives predict benefits plans to be more generous by 2037

But beyond those costs, what has really irked employers of all sizes are the strict reporting requirements that came with the Affordable Care Act, says Sanicola. Under the law, employers have to regularly provide information about their benefits to the Internal Revenue Service and other government agencies.

“The purpose of the reporting is that the IRS can determine if per chance someone who’s getting coverage in the individual marketplace should not be getting a subsidy or has access to employer-level coverage, so employers have to give certain reporting,” says Sanicola. “And that has been the biggest headache. Many employers have had to go out to hire third parties to meet these demands and provide the exact type of information that the Internal Revenue Service requires.”

The administrative burdens increased costs for employers because they required time and effort to keep up with all of the legislative developments, says Simon. “In addition to the hard dollars with respect to claims, for example, you’re also talking about a lot of effort on the soft-dollar side, which I think a lot of people overlook sometimes.”

Read: Saskatchewan tax on insurance premiums ‘not good public policy’

And on top of the administrative burdens, employers will likely face additional costs from a 40 per cent excise tax that’s going to come into effect in 2020, says Chatrane Birbal, senior advisor for government relations at the Society for Human Resource Management in Alexandria, Va. She notes employers that provide more than $10,200 per year for an individual plan or $27,500 per year for a family plan will be subject to the tax.

The tax will likely prompt employers to consider reducing or restructuring their benefits offerings so they don’t hit the threshold, says Birbal. “So a lot of the employers, in anticipation that they may hit those numbers, they’ve started to reduce their benefits offerings.”

And while large employers may offer competitive benefits packages, they’re not necessarily rich, says Sanicola. Health-care costs rise much faster than other areas of the economy, he says, noting they also vary according to where the company provides benefits. “If you live in a high-cost area and provide an average health-care plan, it would meet the rich threshold just because of where you live.”

Read: Shift towards DC approach to health benefits inevitable

Indeed, companies face different premiums for health care depending on which state they operate in, says Birbal. She notes health costs in some U.S. states are higher than elsewhere because of their population and standard of living.

“You have to think about the region of the country,” says Birbal. Health-care costs in Florida, for example, would likely be higher because of its older population, she says.

Repealing the Affordable Care Act

While the Affordable Care Act has introduced many changes for employers, do they want the U.S. government to repeal it? In late July, after the Senate struck down a bill aimed at repealing certain provisions of the Affordable Care Act, Trump was so angry that he threatened to cut subsidies to insurance companies.

Read: League expands to U.S. health benefits market

But the chances of a forthcoming repeal of the Affordable Care Act look slim to none, says Wald. “We don’t think they have the votes for an outright repeal.”

But if Trump’s administration eventually achieved its goal, Wald says the outcome for everyone, including employers, would be complex. “You can’t simply turn back the clock and say it’s 2009 again. There have been changes made in the infrastructure of health care that would be difficult to unravel.”

Sanicola agrees, suggesting it may be better to address the specific concerns. “I think most employers you sat down with are saying, ‘We don’t want it gutted. We want good things to be emphasized and we want a lot of the compliance stuff to go away because that’s all we’re spending our time on and we need to spend more time on strategy and less technical stuff,’” he says.

Read: A look at the prevalence of cost-control measures in private drug plans

In addition, a complete repeal may cost employers even more because eliminating the individual insurance exchanges may shift costs to employer-sponsored benefits plans, says Sanicola, noting insurers would likely try to recoup losses from private insurance premiums.

As for the specifics of the proposals to replace the Affordable Care Act, Birbal notes they included reducing the penalty to zero for employers that don’t provide benefits. They also included delaying the excise tax to 2026 from 2020 and provisions to make health-care spending accounts more flexible by allowing employees to put in more money.

While some employers might welcome a repeal because they wouldn’t have to offer health benefits anymore, many are more concerned with the recent uncertainty surrounding the legislation, says Wald. “It’s a big concern. If nothing else, employers would like consistency. They would like to know what the law is, even if they don’t agree with the law. They’re in better shape knowing what it is versus the state of uncertainty, of perpetual change. That makes it hard to build long-term plans, it makes it harder to comply. It just costs a lot of aggravation for employers.”

And with employers currently discussing their annual benefits offerings with insurance companies, the latest standstill has left many of them anxious as they look ahead to enrolment season in November, says Birbal.

“Given the fact that there’s still a lot up in the air or unknown about the future of the Affordable Care Act, I think it provides a great sense of uncertainty to both the employer-sponsored system and the exchanges,” she says.

Read: Feds propose regulatory changes to reduce costs of prescription drugs

Health costs in the United States, meanwhile, are on track to rise by five per cent in 2018, according to a new study by the National Business Group on Health. The organization, which released its annual survey on benefits costs this week, estimates the total cost of health care, including premiums and out-of-pocket costs for employees and dependants, will be US$13,482 per employee this year. It projects that number will rise to an average of US$14,156 in 2018.