Will Employers Choose to Save Billions By Eliminating Employee Health Insurance Coverage?

A new report on the health care costs of 71 of the nation’s most prosperous companies indicates that the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) may threaten the current employer-based health insurance system.

The report, by the House Ways and Means Committee Majority Staff, is based on a survey of cost and coverage information from the health insurance plans of 71 of Fortune 100 companies.

The 71 companies who responded to the survey employed more than 5.9 million full and part-time workers in the United States in 2011. The average employer responding employed 84,279 full and part-time workers in the U.S. and spent $433.7 million (after tax) on health care coverage for its U.S.-based employees in 2011. Cumulatively, these companies spent $30.8 billion (after tax) on health insurance in 2011, covering more than 10.2 million Americans.

The Dilemma—New Employer Obligations

Sections 1513 and 10106 of PPACA and Section 1003 of the Health Care and Education Reconciliation Act of 2010 (HCERA) (P.L. 111-152) contain requirements that, beginning in 2014, require employers with an average of at least 50 full-time employees to offer “affordable” and government-approved health insurance to their employees. Employers with at least 50 full-time employees who do not offer government-approved coverage must pay a per employee penalty if at least one of their full-time employees purchases a qualified health plan through an Exchange and receives a taxpayer-funded premium subsidy for his or her coverage. This penalty will amount to an annual $2,000 fine for every full-time employee in 2014. After 2014, this penalty amount would be indexed to the average per capita premium for health insurance in the U.S., as determined by the Secretary of HHS [I.R.C. §4980H(c)(5)].

Even if employers offer government-approved health insurance coverage, they would still be penalized if such coverage is deemed “unaffordable” and at least one full-time employee purchases a qualified health plan through an Exchange and receives a taxpayer-funded premium subsidy for his or her coverage. Employer-sponsored coverage is considered “unaffordable” if the employee’s annual contribution to the premium exceeds 9.5 percent of the employee’s household income. These employers would be forced to pay an annual $3,000 penalty in 2014 for every full-time employee that receives an Exchange premium subsidy, despite the fact that these employers would already be offering government-mandated health insurance to their employees. This penalty amount is also indexed, as described above.

How Much Will Employers’ Save If They Drop Coverage?

In total, the 71 responding companies could save an estimated $28.6 billion in 2014 by eliminating health insurance coverage for their more than 5.9 million employees and paying the $2,000 per full-time employee. This calculation is based on an estimated $38.4 billion spent on health care coverage for full and part-time employees in 2014 versus $9.9 billion in mandate penalties for their full-time employees.

The responding employers spent an average of $5,197 on health insurance benefits, after taxes, per employee in 2011. In 2014, this average would increase to $6,487 per employee, which is much greater than the $2,000 per full-time employee penalty they would pay for not offering coverage. Over a 10-year period, these employers could save $422.4 billion if they dropped coverage. On average, these employers could save $5.9 billion during this period.

 The Results of Other Surveys

As indicated previously, several independent analyses have warned that PPACA could lead to a drop in employer-sponsored insurance:

  • A report released by the McKinsey Group showed, overall, 30 percent of employers say they will definitely or probably stop offering health care coverage after 2014.
  • A survey by Market Strategies International estimated a 10 percent net decline in access to employer-sponsored health benefits as of January 2014.
  • A report released by Mercer has estimated that 9 percent of employers with 500 or more employees and 19 percent of small businesses (1-499 employees) are likely to terminate their health care plans.
  • A report by Price Waterhouse Coopers warned that 84 percent of firms surveyed are likely to re-evaluate their overall benefits strategy.

Will the Employer Mandate Put Jobs in Jeopardy?

As a result of PPACA’s employer mandate, many businesses that cannot afford to provide health insurance coverage for their workers will face increased costs – which may exceed their profit margins. Will these businesses have to lay off employees or will they actually shut down?  Cited in the House Majority report is a recent Economic Policy Report prepared for the International Franchise Association by the Hudson Institute which determined that the employer mandate penalties could place more than 3.2 million full-time jobs at risk in the franchise industry alone.

Will the Floodgates Open?

With these PPACA mandates set to go into effect in 2014, are millions of Americans poised to lose their employer-based health care coverage? It will be interesting to see what happens when the first major employer decides to drop health insurance coverage. Will other employers follow, particularly those in direct competition?  And will the floodgates open at some point?  Stay tuned.