President Obama: Employer-based Health Coverage Will Not Be Impacted By Health Care Reform

Great Debates
1

I’ve not looked around for a quote of him saying this exact statement, but he certainly did his best to imply it so I assume it’s not disputed.

Speaking from my vantage point as an actuary specializing in health care at an employee benefits consulting firm, I can give you the early returns on this front, and they are not looking good. Most employers are at least considering eliminating employee health care entirely (beginning in 2014), and those that don’t are likely to cut the level of coverage significantly (beginning in 2018).

Employers are looking at significant increases in health costs from this bill, and from several primary sources. 1) subsidies/surcharges for lower paid employees who join exchanges, 2) increased costs from employees who currently opt-out of employer coverage but who will opt in to avoid the “mandate” penalties under the bill, and 3) the excise tax. The first two of these take effect in 2014 and the third in 2018. (This is in addition to some relatively minor cost-increasing provisions like dependent coverage to 26, elimination of lifetime maximums, and so on.)

More significant than the above, is the creation of the exchanges. The truth is that employers would rather not be paying anything for employee health coverage even now. (Frankly they’d rather not pay salaries either, but they particularly object to health coverage, with its rules and complications.) What keeps them in the game is the fact that there’s no other game. Individual health coverage is prohibitive, and most employees value health coverage and simply won’t work for an employer that doesn’t offer it. If you are an employer who employees a lot of middle-aged family types, not offering health coverage is not a realistic option at this time. What could change is if the exchanges offer a meaningful alternative, such that an employer could stop offering coverage and inform their employees that they can sign up for the exchange instead.

Of course, none of the above is new, and this was predicted by many who opposed the bill to begin with. What I can say at this point, is that this option is in fact very much on the minds of employers that my company consults with, and that my company consults with the largest employers and the ones most likely to offer coverage (and afford our services :)).

It’s not a certainty that this will come to pass, and a lot depends on how realistic the exchanges will be. Right now the thinking in the actuarial community is that they’ll be prohibitively expensive. And I know of an employer who reported about a discussion in a conference of HR executives from their industry in which the topic came up. And the thinking there was that “we can do it if we all do it”. But I would imagine that a financially distressed company might be the first to do it, followed by others in the same industry, and so on.

The other issue is the excise tax. We’ve been doing a lot of modeling for our clients, and so far it looks like the vast majority will be subject to this tax. (“So far” is an important qualifier, because we’re modeling things that are 8 years out so it’s heavily assumption-driven. And the excise tax is a particularly volatile number, because it’s leveraged against the threshold, which is more-or-less fixed (for 2018). Also, some of the details of the tax are uncertain.) And it’s a prohibitive tax - once you hit it, it’s a 40% marginal rate. And it is projected to rapidly increase year over year, since the excise threshold will not increase as fast as employee medical costs. I think it’s almost a certainty that employers will scale back their plans rather than pay it.

The magic number here is 60%. That’s the percentage of covered charges that a plan has to pay in order to be considered a valid plan and avoid penalties for not offering sufficient coverage. (Employers are not going to want to offer coverage and also pay a penalty for not having sufficient coverage.) But most of the employers that we’ve tested are significantly above this point and have a lot of room to cut and stay above the line.

The thing is that the ratio from the employees’ perspective is very different than from the employer. Suppose an employer is currently paying 80% of covered charges. If they cut this back to 60%, they’ve only cut their costs by 33%. But the employee sees his/her share go from 20% to 40%, which means their out of pocket cost is doubled. (Truth is that some employers might simultaneously cut contributions in order to avoid the surcharge/penalties, but don’t bet on it. Among other things, the Free Choice Voucher apparently penalizes employers for having generous coverage, by making them match that subsidy for employees who enroll on exchanges - if the employers keep their net subsidy low, this is minimized.)

Again, things could change and much is unclear about the regulations and how things will develop, particularly WRT the exchanges. But that’s how it looks at this time.

2

It’s hard for me to avoid the conclusion that employers dropping coverage is an intended consequence of the bill. Some of Obama’s statement suggest that this bill is a first step - we are left to draw our own conclusions what the end point is.

A model I would refer to is what has happened to company paid pensions over the last few decades. Once upon a time pensions were widespread, then laws were passed and employers have been getting out of the pension business - offering 401ks instead. I can foresee a similar movement away from employer paid health insurance, with employee paid marketplaces (exchanges) being widely adopted. Whether the employers will act as “plan administrators”, as they do with 401ks, is probably less likely, as there are not provisions (that I am aware of) that would make that advantageous to the employers.

To me - the long game is:
[ul]
[li]Employers are removed from the mix[/li][li]Individuals find the exchange costs unworkable - too expensive[/li][li]We finally wake up to the fact that the cost problems are really on the delivery side, not the insurance side. [/li][li]The government is called to step in and solve it all.[/li][li]Single payer looks better and better.[/li][/ul]

3

Thing is, we were already moving away from an employer based system before the UHC bill. Fewer and fewer Americans were getting insurance through work, which was one of the reasons we had so many unisured in the first place. The main difference now is there’s a viable alternative.

Of course, the side effect of having a viable alternative to a failing system is that it will increase the rate people leave the old system. But I don’t think there was much of an alternative. No one wanted to try and prop up the employer based system, and leaving ever increasing numbers of people uninsured was becoming less and less tenable as time went on.

Interesting OP though. One point: you don’t mention the mandate for companies above a certain size to insure their employees. One would presume this mandate would put a limit on how many employers dropped coverage.

4

This is interesting. A while ago I asked if employers would stop offering coverage and was told that that was ridiculous, but if I’m reading the OP right, even if hit with penalties for not offering coverage some companies might drop it anyway, or at least drop employer contributions to 60%?

5

I work in the benefits dept of a company with over 80,000 empoyees and I will confirm that we are doing the same kind of analysis the OP describes (I wouldn’t be terribly surprised if he were one of our conslutants). I’m not saying that employers getting out of health care is a bad thing, though.

6

Bingo! Single payer has always been the end-game. One purpose of HCR is to increase the pain felt by companies so that employer based insurance becomes a thing of the past. And, of course, the government will have a plan to fix the problem.

I find it interesting that the penalties are not stiff enough to make sure that employers continue to offer coverage, or to make sure that people will purchase a policy. It is almost as if it is designed to allow the worst case scenario to play out.

7

Well, plan contributions, although that might be what you mean. IOW, it’s not that the employer pays 60% of the premiums/claims and the employee contributions pay the rest. Rather the plan pays 60% of the covered charges and the employee pays the rest in the form of deductibles, copays, coinsurance etc.

It wouldn’t put a limit. The cost of insuring an employee is significantly higher than the cost of paying the penalty for virtually all large employers. It does act as a brake, though. But not enough. Companies care very little about their employees, if at all. “We won’t be able to attract/retain employees and make money to pay our executive bonuses” is a powerful brake. “We’ll save a lot of money but not as much as we’d like to” is not.

That was an idea that had no constituency. Liberals didn’t like the employer system anyway and were not anxious to prop it up. Conservatives didn’t want to sock it to businesses.

8

Oops, my mistake. Anyway though it still means that plans will either be reduced or dropped.

9

WHAT?!?! A socialist president and complicit Congress are moving people towards further dependence on the government?!?!?! Damn! First The Fat Boys break up and now this!

10

If only someone could have predicted this.

11

I am amazed at the lack of interest in this thread. It’s as if all the Obamacare supporters knew this would be the end result and have no interest in defending it. On to the next crisis.

12

Moving away from employer-based coverage of health insurance is good. It’s the only step that can be taken to decrease spending on health care. Whether that leads to more individual-based private insurance or centralized, public health care doesn’t really matter so far as cost is concerned, but given the mandate that people purchase individual care if they aren’t covered, the former option seems the more likely (which is good).

Where things may be bad is if the government mandates an arbitrarily high level of coverage for individual health care plans. When that’s the case, people might well ask for more care than is medically relevant, not seeing the relation between their low medical bill and their high monthly insurance bill.

13

The difference is that money given to employees in the form of health cover is a fringe benefit that can be used to replace money given to employees in the form of cash. If you spend $3,000 providing employer-sponsored health insurance to an employee, they aren’t going to have to spend as much of their own money on health insurance, meaning they get the same benefit out of a smaller paycheck. If you spend $3,000 on penalties paid to the government, you might as well have thrown that money into the incinerator, because you’re not getting anything back for that expenditure.

14

I don’t follow your logic. Employees won’t work for employers who don’t provide insurance, but employers seem to think this will disappear if there are insurance exchanges? Elucidate.

Only very short-sighted employers will convince themselves that they can remain competitive and attract the most competent employees by dropping group health insurance. Those who do will end up with the employees who have no other choice. The free market works again!

If there is any effect, it will be to force employers to pick up more of the premium as an inducement for highly skilled employees. When people have the option of the reasonably priced policies from the exchanges, they can afford to be more selective in who they work for, instead of taking what ever they can get. This will increase competition for the most desirable employees, who now have more discretion in choosing an employer.

This is baseless scaremongering at its worst.

15

I’d be glad to. All the employer has to do is provide an option to take a payment instead of health insurance, and the employee will do the rest.

The reason for this is because the subsidies available for purchasing insurance through the exchanges are much higher than the subsidies available to employers (or the penalties of not providing insurance).

For example, let’s say a company is paying $20K per year for your family coverage. If it cancels it, it pays a $2000 penalty. That’s an 18K savings. If you’re an employee making $40,000, you might be eligible for a $10,000 subsidy for your health insurance. If that’s the case, and the exchange offers equivalent coverage for an equivalent price, then the employer can offer you a $10,000 raise in lieu of health insurance, and you can get off his plan and onto the exchange for no cost out of your pocket. Or, if he needs to encourage you, he can can offer you a $15,000 raise. You take $10K of it and the government’s subsidy and insure your family and you come out 5K ahead. Everyone would take this offer.

These numbers aren’t exactly correct, because I can’t remember the specifics. But I ran the numbers against the actual subsidy and penalty rates a month or two ago, and the gist of it is correct.

In fact, I think there’s another hidden agenda here - I think the new health care bill includes a major wealth transfer from the rich to the poor. Because it looks to me like if you’re a lower income employee who gets health coverage today, the system has been set up such that your subsidies will be much higher than the current cost to you of health care, and such people could easily find themselves getting bigger raises in lieu of health care than the money they have to put out to buy health insurance in the exchanges.

The only thing that works against this analysis is if it turns out that health insurance through the exchanges is significantly more expensive than insurer-provided health care. And that might be the case, but if it is, it’ll blow the budget for the health care bill wide open because people won’t be able to afford it and it will have to be subsidized even heavier by the government.

That’s not necessarily the case. If system is set up such that moving an employee off a group plan and onto the exchange results in a $10,000 savings in health care per employee, the company could split the money with the employee, which would lower their costs AND increase the effective salary of the employee by $5,000 while maintaining the same level of health coverage. Companies that don’t do this would be the ones at a disadvantage.

I don’t follow this logic at all. It may be true for highly paid employees who are not eligible for government subsidies at all. They’ve have to be making over $80K per year. That’s a small percentage of employees. It also tends to be older employees, who have high health care premium costs.

Actually, we just don’t know how the market is going to adapt to this. Even my ‘predictions’ above could turn out to be wildly wrong once the plan hits reality.

The Law of Unintended Consequences could have been invented just to describe the nature of this bill. It’s so complex, and touches so many areas of society, and was written in such haste, that it’s pretty much guaranteed to cause all kinds of effects that no one predicted. We’re starting to hear about some of these now, and the plan hasn’t even gone into effect. This bill is a giant multi-trillion dollar roll of the dice.

For example, the existence of these large health care subsidies will result in a very high effective marginal rate for employee salaries. As a result of that, employees may start seeking compensation forms other than wage - longer vacations, better working conditions, whatever. This is a major change in worker-employee relations, and we have no way of predicting how it will ultimately shake out.

My prediction: Whatever happens, it’s going to be a bloody mess.

16

What impact has the Massachusetts system had on employer sponsored health benefits? My understanding is that the Federal plan matches the Mass plan closely, so it might be a predictor of future changes nationwide.

17

You better hope not. The health care costs in MA have gone up, not down, by 7% each year of MassCare’s existence - just as they did for the six years before MassCare so if ObamaCare is just like it, the fearmongers who predict higher healthcare costs rather than deficit neutrality will soon be proven right. As for your question about employer-based coverage, it was 3% higher before MassCare, according to the findings of this study.

18

I figured this was a risk of health insurance reform, companies find it cheaper to drop the $12,000 a year policy and tell the workers to join an exchange.

By saying ‘they all do it’, do you mean that if one company drops insurance the best employees will just leave for the company that still has it, so the only option is for all companies to drop insurance together so their employees don’t quit en masse?

Why aren’t they doing that now though? You say there is no alternative, but all the part time and contract workers out there have been going w/o health coverage for years while more and more people who work for small and medium businesses have lost their health coverage. In fact the % of jobs that offer health care has dropped from about 75% in 1993 down to about 56% now. So whats to stop them from doing it now?

If employers stop contributing to health insurance, and everyone is forced onto the exchanges, where is the revenue going to come from to fund the subsidies for the health exchanges which I think say people need subsidies so their health insurance expenses do not top 6-10% of their annual gross income?

19

The employers don’t drop their employees from health insurance now for one simple reason - they find they have a competitive advantage if they don’t. The reason is because employer-group plans are cheaper than individual plans, so an employer can buy insurance for you cheaper than you can buy it yourself.

The mix of employer insurance, the percentage of employers offering it, and and type of coverage they offer varies due to the nature of the employment market. If health insurance increases in price, more people may wish to go uninsured (especially young people, who are of better than average health and make lower-than-average money). Competitive pressures change all the time. The market adapts.

Then the government comes along and throws a huge wrench into the mix. Now it’s subsidizing low-income workers heavily. It’s penalizing some employers and not others. It’s got exemptions for company size. There are thousands of new rules and regulations.

How does this all shake out? I can imagine lots of potential problems, and potential solutions, but no one knows exactly what the market will do until it’s done it. It’s unpredictable. What is the effect of a system that gives workers who make $50,000 a huge subsidy for health care, but gives workers who make $100,000 nothing at all? What happens to company growth when the governments puts an arbitrary threshold on company size and fines companies above it $2,000 per employee?

How does this skew the market for employment with regards to age? What happens to the competitive relationships between companies who already offer health care today, and those who don’t? Which products win, and which ones lose? How does this affect companies that have large labor pools of relatively low paid people vs those whose products are less labor intensive or sophisticated enough that its employees are highly educated and therefore highly paid?

Nobody really knows. Certainly not the clowns in Washington who voted for this. Most of them have never run a business in their lives, and have no clue about how the market really works. They simply listened to a bunch of lobbyists tell them what to do, then wrote up a bill and splattered it all over the economy. Now we all get to watch how it gets absorbed.

What you can be sure of is that the people who have the ear and pocketbook of the current government - big labor, big business - have skewed the deal to their advantage. And as usual, small businesses and individuals not connected to Washington will take it on the chin.

Let me give you a slightly off-topic example: Last year, Congress passed a bill requiring lead testing for pretty much every toy. Not just new toys, but even used toys. They didn’t think much about the consequences of this. Hell, no one wants their kid to get lead poisoning, right? It sounded good, so they passed it.

The result was that the Salvation Army and Goodwill had to destroy over 100 million dollars worth of used toys - toys that typically are bought by poor families. The Consumer Product Safety Commission has refused to enforce parts of the bill, because taken literally it would make garage sales impossible (the government actually suggested that communities get together and buy lead-testing gear for yard sales - at $30,000 a pop). A number of priceless old childrens books have been destroyed by used book stores, because the lead content in the ink and bindings is unknown.

So who could possibly benefit from such a law? Well, the guys who helped write it, of course. Mattel already tests for lead in their new toys. And they helped author the bill. With a few hundred thousand dollars in political donations they got access to the process - and wiped out one of their main competitors, the used toy market. They’ve also made it much harder for the small toy manufacturers and sole proprietors who were using modern virtual factory businesses to make custom toys and sell them on the internet.

And according to the CPSC, the bill was completely unnecessary. The blanket testing for lead has almost no public health benefits. At the very least, the law could have been written to exclude used toys and small manufacturers. But then, that wouldn’t have helped Mattel.

20

Cost containment is a critical element, that no one seems willing to address. I fear for all of us as well. At least per your figures, reforms did not accelerate cost increases.

I could not find the 3.0 decrease you noted for employer coverage. However, according to the second study you linked - it appears that in Mass, employer coverage increased after passage of the reforms. It says:

[ul]
[li]Employer-sponsored insurance remained strong. Some 71.4 percent of workers had employer-sponsored coverage in 2008, compared with 66.5 percent in 2006. (Policy Brief)[/li]
[li]There was no evidence that employers were less likely to offer coverage to their workers in 2007 than they were before the law passed. Employer coverage increased for people of all income levels.[/li][/ul]

If those statements hold true for the national reform, then the fears of the OP may not come to pass.