If your organization utilizes contingent or temporary staffing services most likely your provider has just passed along a cost increase citing the 2015 changes with the Affordable Care Act (ACA). You as an organization understand that Obamacare and the Affordable Care Act do have an impact on staffing agency costs but you struggle to understand just how much of an impact it should have on your cost and if the increase is fair and justified.

The reality of the situation is that staffing agencies are making "play" or "pay" decisions; play meaning paying the additional cost necessary to meet compliant coverage or pay meaning pay the $2000 non-compliance penalty per year for each employee who is not covered with the minimal requirements. Regardless, both options mean that your costs with using third party staffing providers will increase. Many staffing companies have communicated to their clients that they will be receiving 2-4% increases to their current bill rates. From a markup standpoint this can be a rather significant increase.

Let's assume you are utilizing a temporary staffing agency for some of your administrative and clerical positions. The current bill rate is $17/hr. with a pay rate of $12/hr. Citing ACA compliance your provider had announced a bill rate increase of 4%. This translates into your markup moving from 41.67% to 47.33%, or a 13.6% increase from your old markup%. Using this methodology you would assume correctly that you would rather have the increase applied directly to your markup (e.g., your markup increasing by 4 percentage points, current markup% + 4%). The truth is both methodologies can be disguised as a rip off. Increasing the bill rate or the markup for each hour the employee is working might be the most simple approach for addressing ACA compliance but it is not the most cost effective.

Simply adding additional cost for each hour worked is not considering the marginal cost factor. Marginal cost of production in economics is defined as, "the change in total cost that comes from making or producing one additional item. The purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale." In this case the one additional item being temporary employee's hours worked since the increase has been applied to either markup% or billable hour. Therefore the marginal cost of insurance and administration is dependent upon volume of eligible temporary employee hours and the total cost incurred of the staffing firm's current healthcare program declines with the continual addition of eligible temporary employee hours worked.

This is why a blanket increase such as the increases outlined above may be a rip off. With this methodology the agency is maximizing their profit margin dependent upon hours worked by the employee, whereas the cost for ACA compliance should be a pass-through (the actual increased cost for insurance and administration due to ACA compliance). One solution is the provider bills on a monthly basis for the actual cost of the program for each employee utilized on a prorated basis, dependent on employee hours/days worked out of the year. Work strategically with your staffing provider(s) to come up with a solution that is fair to both parties. The provider should be able to clearly lay out the additional costs incurred and be able to demonstrate how these costs are passed down to you the customer.
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Michael Croasdale

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