Health reform won’t drive employers to terminate health benefits en masse, analysts at the nonpartisan Urban Institute say.
With funding from the Robert Wood Johnson Foundation, researchers released a report Friday explaining why declines in employer-sponsored health insurance will have nothing to do with the Affordable Care Act.
The report is a response to a recent survey from McKinsey & Co. that found 30 percent of employers will definitely or probably stop offering employer-sponsored insurance after 2014, because that’s the starting year for state-run health insurance exchanges.
McKinsey’s analysis points to health reform for inciting a possible benefits-reduction trend, and notes at least 30 percent of employers would gain economically from dropping coverage.
The survey soon fueled health reform criticism and aroused speculation from pundits like Wisconsin Sen. Ron Johnson and former CBO Director Douglas Holtz-Eakin, who wrote in a Washington Post op-ed that employers would “happily get out of the practice of health insurance, if they could do it without hurting their workers. Obamacare will encourage them to do so.”
With millions of employers following suit to drop coverage, Johnson and Holtz-Eakin estimate that costs for the health exchanges would run as high as $800 billion.
While electing coverage through exchanges would benefit some workers, authors of the Urban Institute report say there’s no overall opportunity for employers to improve their bottom line by paying a penalty that’s less expensive than health insurance. In fact, there’s more evidence that dropping coverage would actually increase costs for many of these employers.
In the next few years as health reform policy comes into full force, the decision to continue offering health benefits will not be based on the ACA penalty, authors say, but “whether given the alternatives the law creates for coverage outside the workplace, employers will still see offering coverage as essential to attracting and retaining the workforce they want.”
With that, here are four reasons from the report for why most employers will choose to continue providing health benefits:
1. Employers will likely only drop coverage if most workers would benefit from switching to the exchange
Analysts agree only firms dominated by workers earning at or below an income of 250 percent of the federal poverty level are likely to drop coverage and substitute extra wages for lost benefits.
These firms will make their low-wage workers better off because the combination of premium and cost-sharing subsidies makes exchange coverage for these workers as good as or better than employer-sponsored insurance (ESI).
But only about one in five workers with ESI are below or at 250 percent of the federal poverty level, according to the report. Given this distribution, researchers write, “the share of workers who would benefit from dropping—based on income and subsidy calculations alone—will likely be far smaller than the share of workers who will not.”
Nondiscrimination rules don’t allow employers to decide not to offer coverage to workers who have access to subsidies in the exchange while offering it to workers who don’t. If they deny coverage to those eligible for subsidies, they’ll have to drop coverage for everyone and face a penalty ($2,000 per full-time employee after the first 30 workers in firms with 50 or more employees.)
On top of that penalty, researchers write, keeping workers as a “whole” would require employers to pay “additional wages both to cover extra unsubsidized premium and benefit costs (for workers eligible and ineligible for subsidies) and to offset the fact that any premium payments would now be paid by employees out of after-tax, not pre-tax, dollars.”
Employers won’t be able to simply pocket savings from having the government subsidize their workers’ health care, the authors argue. Instead, there would be an overall increase in the firm’s compensation costs.
“80 percent of U.S. workers overall—and the group most likely to dominate most workers’ firms—would lose out if employers drop coverage,” the authors write. “Since compensating them for the loss of benefits would increase costs to employers, and thus create a disincentive to drop, most employers will continue to provide coverage.”
2. Better-paid workers remain better off with employer-sponsored insurance
When a higher-earning worker loses employer-sponsored insurance and purchases coverage in the exchange, they lose the tax benefits that come with work-based premiums and will have to pay exchange premiums with after-tax dollars.
These workers will have to get exchange subsidies equal to or greater than the tax advantages they’ve lost.
Because subsidies decrease as income increases, and tax subsidies for employer benefits increase as income increases, better-paid workers are better off with employer coverage.
And it is the preferences of the workers that are most difficult to replace (usually higher earners) that tend to carry the most weight in employer decision-making.
3. Employers are unlikely to drop coverage due to complexities in assessing employees’ preferences
Where there’s a mix of high- and low-wage workers, assessing employee preferences will be complicated by workers’ particular circumstances—factors not taken into account by those who claim that dropping will be widespread, report authors write.
Factors that make dropping coverage unattractive to workers include:
Age – Higher income workers tend to be older. Because health reform allows insurers in the exchange to charge higher rates to older workers, these workers would be particularly averse to an employer decision to drop coverage.
Smoking – Health reform also allows insurers in the exchange to charge higher but still constrained premiums to smokers. “Smokers are disproportionately represented among low-wage workers, whose subsidies will not be increased to reflect the higher premium cost,” report authors write. “As a result, low-wage workers who smoke might actually be averse to having their employer drop coverage.”
Family status –Family circumstances might make exchange coverage unattractive. (For example, when a low-wage worker with income from an employed spouse may not be eligible for subsidies in the exchange.)
4. Employers are unlikely to make decisions to encourage some employees to drop coverage and not others
There’s an alternative strategy to accommodate low-wage workers without disrupting higher-wage workers: Continue to offer employer-sponsored coverage, but reduce the employer contribution so that the low-wage worker’s share exceeds 9.5 percent of income—that’s when, under the ACA, employees are allowed to receive exchange subsidies.
Employers would still face penalties but potentially smaller ones – either $3,000 per worker receiving a subsidy or $2,000 per full-time worker, whichever is less.
There are a few problems with this, however. First, a competitive market will force employers to increase wages for employees going to the exchange. If they don’t, they’ll lose these workers to a competitor that will.
Second, employees aren’t saving money by having only some workers go to the exchange. They have to pay for wage adjustments to keep those workers, and this may not leave money left over for penalties.
Third, lower-paid workers likely to benefit from the exchange are also likely to be younger workers. “If they voluntarily drop ESI coverage and go into the exchange, the employer will remain responsible for the older (and, more important, sicker and costlier) workers, without the ability to spread those costs across all workers’ wages,” researchers write.
“For the employer to avoid an increase in total compensation, that means higher premium contributions and lower wages for those who stay—likely for the very workers the employer most wants to keep.”