Would Sears’ Health-Care Approach Work for Your Business?

Call it coverage without the middle man. Last week, two major companies announced plans to shift their health-care model, giving more control to employees.

Sears and Darden Restaurants Inc. plan to implement a new way of providing benefits to workers—giving them a flat sum of money and allowing them to choose their coverage and insurer from an online marketplace, according to the Wall Street Journal.

The Journal reported Darden claims employees will have the same contribution out-of-pocket that they currently have for the same level of coverage, and those who choose more coverage will have to up their own payments to cover the difference. The same goes for those who choose less coverage—their out-of-pocket costs will drop. The plans are still considered employer-sponsored, rather than individual coverage.

But would the flat-rate model ever work for small businesses?

This model would be efficient for small employers depending on how they are attempting to compete in the job market, according to Gary Kushner, president of Kushner & Company. Benefits are obviously a competitive advantage, especially at a smaller company. However, he said, under Obamacare there is no penalty for not offering coverage for businesses with fewer than 50 workers. Offering workers a flat amount to go shop in an online exchange may work best for a company like Sears or Darden, with many part-time workers, because they are not necessarily looking for “lifers.”

"Let’s say I am a McDonald's franchisee. I am going to hire all sorts of people, training takes a short period of time, and I don't need to provide expensive benefits to attract and retain. Having that defined contribution may make financial sense for different employers, where the overall HR strategy is not about pursuing lifetime career employees,” he said.

Diane Pfadenhauer, president of EPA Advisors, said that while it is unclear how employers will handle the changes that will occur under Obamacare, one thing is sure-- they will do whatever is cheapest. If that means offering plans via Web exchanges until the state-sponsored exchanges kick in for small companies in 2014, it’s a potential solution. "Employers are more inclined, as the cost of health care goes up every year, to pass that cost along to their employees," Pfadenhauer said. However, large companies like Sears have more buying power when approaching insurance companies. They will be receiving better rates than smaller companies without a doubt, she said. "Sears can negotiate, but for a little company, they will have to get whatever the company offers them," she said. "They don't have the same leverage."

Even once the Affordable Care Act kicks in, Kushner said those businesses with 50 employees or more may very well consider implementing options like this rather than opting for group coverage. However, small employers must begin using state-sponsored exchanges in 2014, so this model would not exempt small-business owners from that $2,000 fine per-worker, per-year, because a business-sponsored site isn’t necessarily “adequate health coverage,” Kushner said.

“As long as one of my employees [at a company with 50 or more workers] goes to the state exchange and qualifies for the premium subsidy, my business will pay the penalty,” he said. “If the employee doesn’t take me up on the [flat rate] offer, then I will pay the fee.”

However, offering the flat rate for insurance via a company-sponsored site, and still paying the penalty of $2,000 per worker annually is likely still going to cost a business less than insurance would, at around $4,000 annually, Kushner said.

Celeste Hilling, CEO of Skin Authority in San Diego, Calif., said the health-care costs for her small business of 50 employees mount every year. As a result, she is always trying to manage costs more effectively.

However, having employees shop from a business-sponsored site in the vein of the Sears and Darden wouldn't necessarily be the solution. "It's appealing for people to have control over their own destiny, and to let employees spend money on the insurance plan of their choice," Hilling said. "But from an administrative concern, our employees can't get the equivalent amount of health care for the same price." Because employees would be purchasing plans for themselves and their families, rather than having their employers purchase the coverage, Hilling estimates the cost for workers would be much higher. "We get a reduced rate [from carriers] because we can cover a larger amount of people. Workers will incur higher expenses," she said. Using an insurance company and having that middle man eliminates the administrative tasks associated with this model, she said, and is less of a headache for business owners. Currently Hilling offers 50% coverage for her employees and their families through Kaiser for medical insurance. She said for small-business owners, there would be some concerns to offering coverage through such exchanges. "You are writing 40 different checks to 40 different people, how can you be sure they are really spending the money on health care?" she said. "It also takes more thought, because if you are a small business with 15 or 20 people, do you want to take the time to administrate those checks each month?"