Will PPACA Cause Employers to Drop Employee Health Insurance?

Even before passage of the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148), opponents were predicting that the new law would have a negative effect on the availability, cost, and quality of our health care.  One specific prediction was that the availability of state insurance exchanges would result in employers dropping their health care insurance coverage for their employees.

In response to these concerns, President Obama assured us, in his June 2009 address before the American Medical Association House of Delegates, that this was not the case, stating “[I]f you like your health care plan, you will be able to keep your health care plan. Period. No one will take it away. No matter what.”

This article examines a cross-section of relevant studies from 2011 and 2012 and describes a likely economic evaluation process by employers.

The McKinsey Report Intervenes

After passage of PPACA, in February 2011, McKinsey & Company, a global management consulting firm, commissioned a survey of 1,329 U.S. private sector employers to measure their attitudes about health care reform.

The McKinsey survey respondents were drawn from a panel of nearly 600,000 people maintained by Ipsos, the third largest market and opinion researcher in the world. The respondents worked for companies that ranged in size from under 20 to more than 10,000 employees, representing a cross section of industries and geographies.

According to the survey, 30 percent of respondents who said their companies offered employer-sponsored health insurance said they would “definitely” or “probably” drop coverage in the years following 2014. Nine percent said “definitely,” and 21 percent said “probably.” Among employers with a “high awareness” of reform, that number increased to 50 percent.

The White House Responds to McKinsey Report

The White House was concerned enough with the results of the McKinsey survey to provide an official response on the White House blog. In this response, Nancy-Ann DeParle, Assistant to the President and Deputy Chief of Staff, termed the McKinsey survey an “outlier” that was “at odds with history” and further characterized it as a “discordant study [that] should be taken with a grain of salt.”

DeParle supported her White House response with findings from other research organizations, such as Mercer, a global leader in human resource consulting, outsourcing, and investment services, whose study found that the number of employers who were likely to terminate their health plan and have employees seek coverage in the individual market after 2014 to be:

  • 19 percent of small employers (those with 10-499 employees).
  • 9 percent of all employers with 500 or more employees.
  • 4 percent of those employers with 5,000 or more employees.

Midwest Business Group on Health

On March 26, 2012, the Chicago Tribune reported that “most employers who said they would drop health insurance coverage for employees because of new health reform legislation, have not done so.”

The Tribune based its report on a survey, in its third year, conducted by the Midwest Business Group on Health (MBGH), a non-profit whose members include human resource and benefits executives, and co-sponsored by the National Business Coalition on Health, Business Insurance and Workforce Management, which surveyed 437 employers in 34 states for their perspectives on PPACA. The survey reportedly found that only 6 percent of employers would likely pay the penalty fee and drop health coverage benefits for employees.

Larry Boress, MBGH president and CEO, is quoted by the Tribune as saying, “as employers have evaluated their options, the vast majority have determined there is value in continuing to offer coverage in order to retain and recruit talent, as well as to ensure a productive workforce.”

Crain’s Chicago Business also analyzed the MBGH survey results, and reported that “Fears are easing that the law will prompt employers to drop their health care plans. Half if the companies surveyed said they would not drop employee coverage, while 14 percent said it was likely or very likely that they would stop coverage.”

Towers Watson Annual Survey

According to the 17th Annual Towers Watson/National Business Group on Health: 2012 Employer Survey on Purchasing Value in Health Care, “looking to the end of the coming decade, employers are much less confident that health care benefits will be offered at their organization.”  The Towers Watson survey offers the following breakdown of employers and their likelihood of dropping employee health benefits:

  • Only 3 percent of employers are somewhat or very likely to discontinue health care plans for active employees with no financial subsidy in 2014 or 2015;
  • 45 percent are somewhat to very likely to offer an employer-sponsored health plan to only a portion of their population and direct ineligible employees to the Exchanges; and
  • Today, 23 percent of companies are very confident that they will continue to offer health care benefits for the next 10 years, down from a peak of 73 percent in 2007.

 CBO/JCT Estimates

In an original analysis by the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation (JCT) regarding the impact of PPACA, the two agencies estimated that the number of people obtaining coverage through their employer would be reduced by about 3 million in 2019.  However, the CBO and JCT now estimate that about 3 million to 5 million fewer people will obtain coverage through their employer each year from 2019 through 2022.

The March 15, 2012 CBO/JCT report further notes that other analysts who have carefully modeled the nation’s existing health insurance system and the changes in incentives for employers to offer insurance coverage created by the PPACA have reached conclusions similar to those of CBO and JCT or have predicted smaller declines (or even gains) in employment-based coverage owing to the law. For example, the Office of the Actuary at the Centers for Medicare & Medicaid Services concluded that, on net, about 1 million fewer people would have employment-based coverage under PPACA in 2019 than under prior law.

Another relevant piece of information contained in the CBO/JCT report is the apparent increase in employment-based insurance coverage in Massachusetts since that state’s reforms were implemented.

Economic Evaluation of the Decision to Drop Coverage

When an employer only looks at the fact that their health care insurance premium costs can be several thousand dollars per employee, the $2,000 PPACA penalty per employee for an employer that terminates its health insurance plans beginning in 2014 can look like a pretty attractive option.

In addition, there is no question that some employees would receive an economic benefit from health care plan terminations by their employer. For example, under PPACA, lower paid employees would be entitled to a refundable health insurance premium assistance credit to help them buy coverage through the state insurance exchanges. These premium assistance credits would result in some employees paying less for coverage than they do under their current employer-sponsored plans.

The premium assistance credit operates on a sliding scale that begins at 2 percent of income for taxpayers at 100 percent of the federal poverty level (FPL) and phases out at 9.5 percent of income for those at 300-400 percent of the FPL.

For example, if a family’s annual income is $29,000 (approximately 133 percent of the 2010 FPL), and the premium for their family of four coverage was $11,500, the premium credit would be $10,920 ($11,500 – $580 ($29,000 x .02)), because the taxpayer would be expected to pay only 2 percent of income, or $580, for health insurance premiums.

However, if a family of four had annual income of $88,000 (approximately 400 percent of the 2010 FPL) the credit would only be $3,140 ($11,500 – $8,360 ($88,000 x .095)) since the taxpayer would be expected to pay 9.5 percent of income, or $8,360. In addition, higher income employees (those with family incomes exceeding $88,000) would not be eligible for the premium credit. Therefore, these higher paid employees would suffer a significant reduction in their net compensation if their employers dropped health insurance coverage and they had to pay their health care insurance premiums entirely or with reduced employer contribution.

Finally, in order to offset the increased cost of premiums by these higher paid employees, employers might have to consider raising salaries, which, of course, would also result in the domino effect of a corresponding increase the both the employers’ and employees’ share of withholding taxes, Social Security contributions, and Medicare taxes.

Hopefully most employers will apply some kind of meaningful wage calculation process before dropping health insurance coverage for their employees.  However, if the wage calculation process results in a large number of employers opting-out and paying the penalty, or if employers simply decide to avoid the health insurance hassle and pay the penalty, then the state insurance exchanges could become overburdened, requiring additional federal revenue to make up for the increased cost.