Will Your Employer Drop Coverage Under Obamacare?
President Obama speaks about Affordable Care Act in June. New analysis in the journal Health Affairs looks at the likelihood that companies will drop coverage after the full law takes effect. Do you have questions about Obamacare? Submit them to the PBS NewsHour, and we’ll try to answer them in the days ahead. Photo by Stephen Lam/Getty Images.
The promise from President Obama was straightforward enough: “If you like your health care plan, you can keep your health care plan. Period. No one will take it away,” he said.
That was four years ago, during the build-up to the passage of the Affordable Care Act. Today, just months before several major provisions of the law take full-effect, many Americans still aren’t sure whether to believe him. And for good reason. Wildly conflicting predictions are being reported almost daily.
Last month, the consulting firm Towers Watson released a survey in which 98 percent of employers reported they will keep “active medical plans for 2014 and 2015.” But as the conservative Heritage Foundation points out, the same study found that 92 percent of employers said they would likely change their health insurance options by 2018, the year the law’s “Cadillac” tax on high-cost plans takes effect, with 47 percent saying they “anticipated significant or transformative change.”
Meanwhile, a new report from PricewaterhouseCoopers found that in Massachusetts — where the model for the federal plan was enacted seven years ago — employer-sponsored coverage rose rather than fell. “The number of people covered by insurance through the workplace increased by about 1 percentage point, running counter to the rest of the nation, which saw employer-based insurance decline by 5.7 percentage points,” the report said.
But will that hold true on a national scale? Maybe not. Many companies are heavily considering forcing retirees and part-time workers onto the exchanges after the ACA kicks in, according to a survey by the National Business Group on Health.
And just last month, UPS announced that it will stop offering coverage to the spouses of 15,000 workers because they will be able to find coverage elsewhere. The company wrote in a memo to employees that rising medical costs “combined with the costs associated with the Affordable Care Act, have made it increasingly difficult to continue providing the same level of health care benefits to our employees at an affordable cost.”
Whichever way it goes, the stakes are high, as analysis published Monday in the journal Health Affairs points out. Tom Buchmueller, a professor of risk management and insurance at the University of Michigan, explains why in four simple bullet points:
“The [health reform] provisions affecting employers directly … all increase the likelihood that firms will offer coverage.”
But if that doesn’t happen, “a reduction in employer coverage might increase federal outlays if it led to more workers’ receiving premium tax credits in the exchanges or enrolling in Medicaid.”
“If the employers that dropped coverage had relatively less healthy workers, that change would worsen the exchange risk pool and drive up average premiums as a result.”
- “Finally, the Affordable Care Act was presented to the American public as a reform that would not seriously disrupt existing employer-sponsored coverage. To the approximately 170 million Americans who have such coverage and are for the most part satisfied with it, a large-scale dropping of coverage by employers would be an unwelcome surprise.”
So what’s Buchmueller’s prediction? When it comes to large firms, very little will change, he said. For smaller firms, all bets are off. To find out why, the NewsHour spoke with Buchmueller late last week.
PBS NEWSHOUR: Thank you so much for joining us. Understanding how health insurance will change under the Affordable Care Act requires some basic knowledge of why employers offer health insurance in the first place. So let’s start there. Why do they?
TOM BUCHMUELLER: Well, when people ask the question, ‘Why do employers offer health insurance?’ what we really should be asking is ‘Why do employees choose to get their health insurance through their employers rather than buying it directly?’ And the answer is that employers have a comparative advantage in providing health insurance. They can basically purchase it at a lower cost.
And there are three main reasons for this:
One is that there are economies of scale. You can spread the fixed costs of marketing and administration across a larger base.
Employer-sponsored groups represent stable risk pools. You have a mix of old and young workers, healthy and sick. People are in an employer-sponsored group not because they want insurance but because of other reasons why they work for this firm.
- And then finally, and importantly, the tax code subsidizes employer-sponsored health insurance. Because employer premium contributions are not considered taxable income, there’s a substantial subsidy.
NEWSHOUR: So employees are getting a good deal. Why is it beneficial for employers?
BUCHMUELLER: Well basically it’s an efficient way to attract and retain workers because what employers really care about is the total cost of compensation — not how it’s split up between wages, insurance and other benefits. And so if employees recognize that they can purchase it more cheaply when they go through their employer and are willing to accept lower wages to compensate for the health insurance, then the employer is better off and the employees are better off.
NEWSHOUR: The health reform law stands to shake things up a bit. What provisions will impact this set-up?
BUCHMUELLER: The Affordable Care Act distinguishes between large and small employers, where large employers are defined as those with 50 or more full-time equivalent employees. For smaller firms, there’s no requirement to offer health insurance but there are some incentives. There’s SHOP exchanges, which are a new insurance option for small employers run as part of the state exchanges. Small employers with low-wage workers can qualify for premium tax credits if they purchase through the SHOP exchange. And so both of those factors would lead to tilting the needle in the direction of more small employers offering health insurance.
Indirectly, there’s going to be an effect through employee demand. And here, there are effects going both directions. Some workers from small firms will see that they’re better off getting a premium tax credit if they go through the exchange. And they’re going to prefer that their employer doesn’t offer health insurance — that they offer cash wages instead and then they go off to the exchange and buy coverage.
On the other hand, other workers that aren’t eligible for large exchange tax credits will decide that they want their employers to offer insurance because of the individual mandate. As the penalty for individual mandate over time becomes more significant, you’re going to have more employees taking up coverage offered through work and more employees wanting their firm to offer coverage so that they won’t be subject to the penalty.
Large firms will face a penalty if they don’t offer insurance at all or if they offer insurance but it’s not considered affordable to their employees. But most large firms now already offer insurance. Over 90 percent of firms with 50 or more employees offer coverage. So for most large firms that currently offer coverage, these new penalties are not going to be binding.
NEWSHOUR: Let’s talk about how employer-sponsored coverage has changed over time even before the law. Exhibit 1 in your analysis shows the percentage of private sector workers receiving offers of health insurance in both 2000 and 2011.
BUCHMUELLER: There are a couple of main points here. Although most firms are small — something like 60 percent of firms have fewer than 10 employees — most people work for a large firm. About two-thirds of all workers are employed at a firm that has 100 or more employees. The upshot is that if we want to think about what’s going to affect employer-sponsored coverage in aggregate, it’s really the decisions of large firms that are going to matter the most.
The second thing to take from this graphic is that it shows a really strong, positive relationship between firm size and employer offers of health insurance. And that comes from the fact that the cost advantage that I mentioned — the economies of scale, the risk pooling — are directly a function of employer size. The tax subsidy is not directly a function of employer size. It just happens that large firms tend to pay higher wages, so those workers are eligible for larger tax benefits. So this relationship with size is one of the defining features of the market and it’s really driven by these cost advantages.
The last thing that I’d say about Exhibit 1 is that if you compare the offer rates in 2000 to 2011, we see that there has been an erosion in offer of employer-sponsored coverage among small firms, but really not among large firms. Again, looking forward, we need to really focus on the large firms. We haven’t seen them respond to rising health care costs by dropping coverage the way that small firms have.
NEWSHOUR: In Exhibit 2, you look at the percentage of private-sector workers receiving offers of health insurance, with the emphasis on firm size and majority wage level. What’s most important here?
BUCHMUELLER: What you see here, and again, it’s not very surprising, is that within each size category, firms that employ mainly high-wage workers are significantly more likely to offer coverage than firms that employ low-wage workers. And it’s the low-wage workers that are going to find the new options in the exchanges especially attractive. Because they’re going to be eligible for large premium tax credits. So the workers that are most likely to want to go to the exchanges are workers who are much less likely to get coverage.
NEWSHOUR: Now let’s turn to your wider predictions. Do you anticipate employer-based coverage will change a lot under the ACA?
BUCHMUELLER: Well we focus on a bunch of analyses that use microsimulation models to forecast the effect of the law. And the way these models work is they have sort of an underlying model of economics of employer-sponsored insurance. Employers are choosing benefits to satisfy their workers and workers are looking at the costs and coverage options in the group market and individual market. And then these modelers implement the new incentives of the Affordable Care Act and the different organizations — the Congressional Budget Office is in some ways the most important because they score legislation, but then private groups like RAND and Urban Institute and the Lewin Group all have similar models — and these models end up giving fairly similar predictions.
I think the basic punchline that comes out of these models is that any changes in aggregate — number of people with employer-sponsored insurance — are probably going to be small. Some people are going to move from employer-sponsored insurance to exchanges, some people who are now uninsured are going to pick up both types of coverage, but at the end of the day, the net effect is going to be that there is not a lot of change.
NEWSHOUR: What would happen if those models are wrong — if employers start dropping coverage much more than anticipated?
BUCHMUELLER: There would be an increased cost in terms of the premium tax credits in the exchanges. Now that’s going to be offset somewhat by the fact that employers are currently getting a tax exclusion. So as employers shift compensation from insurance to wages, there will now be taxes paid on those wages. For large employers, they’ll be paying penalties if their employees are getting the credits. So it could turn out that if there was a much larger than expected shift from employer-sponsored insurance to exchange coverage, the fiscal costs would go up, but it wouldn’t go up by the full amount of the tax credits, because there would be these offsets.
NEWSHOUR: After these provisions of the ACA kick in, we’ll start getting data pretty quickly on what’s actually happening. What will we be able to make of that data and how quickly?
BUCHMUELLER: Just look in the last few weeks, when UPS announced that they were gonna restrict coverage for spouses and employees and not provide coverage if the spouse has an offer of coverage. In their press release, they attribute that to the Affordable Care Act, but there’s really nothing in the Affordable Care Act that would prompt that decision or make that the most logical response.
I think there’s going to be an impulse to attribute these changes to the Affordable Care Act, and it’s not clear that’s always going to make sense. If you look back at our Exhibit 1, we know that for small employers, coverage has been declining over time as they struggle with the increasing cost. So if we try to think about interpreting changes in terms of the effect of the Affordable Care Act, we have to recognize that in the absence of the law, coverage probably would have continued to fall. And so I think it’s going to be a few years before we have enough data to really get a clear sense — particularly now that the employer mandate has been delayed a year. Even when the data comes in, it’s going to be really tricky to try and disentangle something that really is a direct effect of the law from other things that are just part of the turbulence of the health insurance market.
NEWSHOUR: Tom Buchmueller, thank you so much for joining us.
BUCHMUELLER: Thank you.
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