Much has been made in recent days of Tennessee Governor Phil Bredesen’s Wall Street Journal op-ed suggesting that many employers will use the health care law’s passage as a reason to exit the group insurance market. It’s a critically important issue, and not just because such a choice will determine whether or not millions of Americans will get to keep their current coverage. If many employers decide to place their workers in Exchanges, receiving taxpayer-funded insurance subsidies, the federal budget deficit will necessarily skyrocket.
So it’s worth taking a few moments to analyze the claims made by health care law supporters as to why employers will continue to maintain coverage, and see the extent to which they have merit.
- The tax benefits of group coverage will keep workers in the employer-based system.
The tax benefits of group health insurance inure largely to the EMPLOYEE, not the EMPLOYER, due to the exclusion for employer-provided health coverage. Employers can write off both salaries and health insurance contributions from corporate income taxes as a business expense – the income tax code is neutral toward the components of compensation (i.e., cash vs. benefits). Granted, employers who provide salary increases instead of benefits will have to pay the employer’s share of FICA payroll taxes (from which health insurance benefits are exempt), but these are small by comparison – on a $10,000 family insurance premium, an employer pays $765 less in taxes than he would had he given the worker a $10,000 raise in wages. It would be perfectly rational for employers to drop coverage and give their workers an offsetting increase in wages – knowing they may pay a bit more in FICA taxes in the short term – because by doing so, they will protect themselves from the liabilities associated with rising health care costs over the long term. (Whether and how employers consider their workers’ preferences – including the tax benefits most employees gain for group health insurance – is something I’ll address below.)
- Employers will see savings as a result of the health care law that will encourage them to maintain coverage.
Tom Daschle made this argument in a BNA article Tuesday, citing a November 2009 Business Roundtable (BRT) report to claim that “employers offering health coverage to their workers could experience a savings of as much as $3,000 per person from the new law.” Over and above the significant fact that the report was released BEFORE the enacted health care law was written – meaning it’s speculative for Daschle to claim the promised savings were actually achieved by the language – here’s what the operative paragraph of the BRT report stated:
If the cost trends of the past 10 years repeat, by 2019, employment-based spending on health care at large employers will be 166% higher than today on a per-employee basis. This equates to an average of $28,530 per employee when employer subsidies, employee contributions, and employee out-of-pocket costs are combined. We estimate that if enacted properly, the right legislative reforms could potentially reduce that trend line by more than $3,000 per employee, to $25,435. If we are able to enact broader market reforms that eventually lower future cost increases to an average of 4% per year, we could potentially reduce average per-employee costs further to $23,151 per employee by 2019.
In other words, under the ideal scenario Daschle described, health insurance premiums would “only” more than double over the next decade, from $10,743 in 2009 (also cited in the BRT report) to $23,151 in 2019. That’s not a savings of $3,000 – that’s an INCREASE of $13,000. (It’s also far from the $2,500 per family reduction in premiums that candidate Obama promised.) Such a rapid increase, coupled with new insurance options for employees, would give firms a strong incentive to drop their current plans. After all, even under Daschle’s “ideal” scenario for cost-savings, in 2019 firms could pay the $2,000 per employee tax for not offering coverage, give their workers a $20,000 per year raise to offset the loss of their employer insurance policy, and STILL come out $1,151 per employee ahead. Granted, most firms aren’t paying the full cost of workers’ premiums, particularly for family plans, but the same logic still applies. If an employer promised you a $10,000 per year salary increase as a trade-off for accepting new Exchange coverage instead of your current policy – a realistic number, given the projected cost of family plans for most firms – how many workers wouldn’t take that deal?
- The individual mandate will increase demand for employer coverage.
There are several problems with this argument. First, the low penalty of only $695 for not buying health coverage will likely encourage individuals to flout the mandate and purchase coverage only when they need it, just as carriers in Massachusetts found. Second, if individuals decide to comply with the mandate – and it may not be a rational choice for many to do so – it’s not entirely clear that individuals will prefer group insurance to the federal Exchanges. For instance, low-income individuals by definition will receive a small tax subsidy for buying coverage from their employer (because they’re in a lower tax bracket), but a large taxpayer-funded subsidy if their employer doesn’t offer coverage and they buy a policy through the Exchanges. Thirdly, whether an employer offers coverage is ultimately a decision for the employer, and not the employee, to make.
- Massachusetts saw an increase in coverage as a result of its reforms.
Jonathan Gruber, among others, has made this argument. Unfortunately, it’s hard to equate how employers will respond to a statewide initiative to their possible responses to a national reform effort. When Massachusetts passed its reforms, national employers (e.g., Wal-Mart, General Motors, etc.) couldn’t drop their health plans ONLY in Massachusetts – they still needed to provide coverage for their workers in 49 other states. But now, if they so choose, they can shed their employee health benefit obligations entirely.
It’s also worth noting two other important points. First, the Massachusetts legislation included a more robust Exchange “firewall” than the federal law. Under the Massachusetts plan, individuals with an offer of employer-sponsored coverage CANNOT utilize the Commonwealth Connector to buy unsubsidized plans using only their own money. Conversely, the federal law includes no such prohibition – so if employees believe they can get a better deal by buying a plan with their own funds on the Exchange, they can and will do so. This potential “leakage” from the employer system could encourage some firms to drop coverage entirely, particularly if the individuals migrating from employer plans to the Exchanges are their young, healthy employees (leaving them with an older, sicker, and costlier population).
Second, the federal initiative expanded taxpayer-funded insurance subsidies further up the income scale – Massachusetts subsidizes insurance for families with incomes under three times poverty, while the federal effort gives subsidies up to 400% FPL. According to the Census Bureau, in 2007 there were 121.5 million non-elderly Americans (46.4%) in households with incomes under three times poverty, but 158.2 million non-elderly Americans (60.4%) in households with incomes under four times poverty. In other words, nearly 37 million more Americans will be eligible for income-based subsidies under the federal statute than if the Massachusetts law were extended nationwide. That fact – more than three in five Americans will qualify for taxpayer-funded health subsidies based on their income – will only encourage employers to drop health benefits, because the majority of their workers can get new federally-funded insurance instead.
- Employers will not anger their workers by dropping health benefits.
There are several responses to this criticism. First, as explained above, many firms will save so much money by dropping their coverage that they can afford to give their workers an offsetting pay raise to “sweeten the pill” of losing their current coverage. Former CBO Director Doug Holtz-Eakin has previously run the math about the millions of workers who would benefit – as would their employers – if firms dropped coverage and raised salaries instead, with workers relying on federal insurance subsidies in the Exchanges.
Second, employee goodwill only goes so far when compared to basic economic realities. If a struggling firm faces a choice between dropping coverage and laying off workers – or closing entirely – it will be much more likely to do the former than the latter. Laying off workers or other efforts to reduce a firm’s costs could reduce its productivity and future earnings potential. But particularly once workers have an acceptable alternative source of insurance coverage through the taxpayer-funded subsidies on the Exchanges, dropping coverage may seem like the best possible way for a firm facing financial difficulties to streamline its expenditure base.
And once one company in an industry drops coverage, others will be forced to follow suit in order to remain competitive – witness what happened with pensions and health benefits in the auto, steel, and airline industries (to name but a few). As one consultant put it in an Associated Press story, “What we are hearing in our meetings is, ‘We don’t want to be the first one to drop benefits, but we would be the fast second.’ We are hearing that a lot.”
Long story short: Most of the arguments used to suggest employers will not drop coverage under the health law’s new order cannot withstand rigorous scrutiny. Even some Democrats appear to admit this reality: A former staffer for Finance Committee Chairman Baucus acknowledged (subscription required) that the law could push industry toward a “tipping point scenario, where some large employers in particular sectors make a decision to drop, which then makes it acceptable for their competitors to drop coverage as well.” Unfortunately, such a scenario would also point the federal budget deficit well past the tipping point – where skyrocketing expenditures on new health care entitlements, coupled with soaring health care costs, overwhelm future generations in an avalanche of debt.