By Brian Schilling
The single biggest test of the overhaul of the nation’s health care system doesn’t come for more than two years, but that hasn’t stopped researchers and pundits from speculating about how employers will respond to the launch of more than 50 regional health exchanges. Will employers drop coverage and push workers to exchanges? Will the status quo reign? Will levels of employer-sponsored coverage actually increase? Studies and surveys on the subject aren’t hard to find, but they are hard to reconcile. Just since June 2010, there have been at least seven surveys on the subject.1 So, will 2.7 percent of employers drop coverage as this survey suggests? Or will 18.8 percent drop coverage, as this survey, conducted one month later, suggests? Or were researchers at RAND correct when then calculated in late 2010 that employers would offer coverage to an additional 13.6 million workers once the exchanges, penalties, and various subsidies are all up and running?2
Beginning January 1, 2014, when the exchanges open their doors, speculation will finally give way to observation. Large employers won't be eligible to participate directly until 2017, but that still leaves the possibility that they might drop coverage and nudge, guide, or direct employees to join on their own. If they don't drop coverage—or if more employers choose to offer coverage—the reform effort will have been vindicated on a key point. It will have been proven possible to offer a viable, government-organized mechanism for extending coverage to individuals and small employers alongside the market-based system without necessarily undermining the market. On the other hand, if employers do begin to drop coverage in significant numbers, we may be on the front end of a broad national trend away from employer-sponsored health benefits.
Don’t expect a quick resolution.
"Nothing is going to happen overnight," says Paul Fronstin, Ph.D., director of the health research and education program at the Employee Benefit Research Institute. As a comparison, Fronstin points out that the shift away from employer-sponsored early retiree health benefits took nearly 20 years to go from the point A to B. In the past, 40 percent of large employers (i.e., those with 500 or more workers) offered it to employees; now, about 20 percent offer it. The widespread adoption of managed care took roughly as long.
Many observers are looking to Massachusetts for insight on the question of what will happen in 2014. In 2006, Massachusetts passed a state health reform plan (also featuring an individual mandate, penalties, and a statewide exchange) that served as a model for the national effort. Since then, the percentage of individuals between ages 18 and 64 in the state with any form of health insurance has increased markedly, from 87.5 percent in fall 2006 to 95.2 percent in fall 2009, despite a protracted, statewide recession.3 Notably, during that same span, the percentage of individuals receiving coverage through their employers also increased, from 65.7 percent to 68.3 percent. State residents also reported increased satisfaction with their health coverage.4
"A lot will hinge on the state of the economy in 2014," says Bill Kramer, executive director for national health policy at the Pacific Business Group on Health (PBGH)."But regardless of how weak or tight the labor market is, I doubt that most large employers will be eager to drop coverage. Most of them view health benefits as critical for employee recruitment and retention, and they're not going to want to give away that tool by shifting the responsibility for designing and managing health benefits to brand new public entities."
Fronstin is quick to note that he's not comfortable predicting what employers will do in 2014 and beyond, and that those who are comfortable making such predictions probably shouldn't be. But he does offer a short list of factors that large employers will be considering as they make their decisions. In order of importance, they are:
Early adopters' experiences. Whenever a new survey on the subject comes out Fronstin tends to look at the small numbers first. "There's never a zero," he says, meaning that no survey thus far has found that zero percent of employers are considering dropping coverage. That, he says, is significant. "Employers that actually do drop coverage will be watched carefully and they'll talk to other employers. If they save money, don't lose or alienate employees, and otherwise have a seamless transition, others will certainly follow." At least three different surveys conducted since June 2010 have found that if some employers drop coverage, a great many more will at least consider following suit.5
Cost. There is no simple or standard way to calculate the cost to employers of dropping coverage and encouraging employees to seek it on their own through the exchanges, but the bottom line will certainly weigh heavily on many employers. At first glance, dropping coverage might seem like a reasonable cost-cutting strategy. After all, the penalty for not providing coverage is only $2,000 per employee and the average cost of providing coverage is almost $10,000. That $8,000 differential is quickly eaten up, however, by the costs associated with increasing the salaries of employees (especially those not eligible for premium subsidies) so they could afford to purchase coverage on their own. The higher salaries alone would tip the balance in favor of maintaining coverage for some employers; on top of that, employers that drop coverage would also face higher Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare.
Recruitment and retention. The state of the economy in 2014 will be a major factor in how health benefits might affect recruitment and retention of key employees, says Fronstin. Even at the present 9 percent unemployment rate, there's still tough competition for talented workers, and workers consistently rank health benefits as the most important employer-based benefit.6 "No employer will want to be the outlier that doesn't offer good benefits, unless the economy takes a turn for the worse," he says. If the economy slows down and unemployment ticks up significantly, though, all bets are off.
Concerns about productivity. Also on employers' list of factors to consider is whether moving employees to the exchanges will have an adverse impact on productivity. Large employers have embraced the idea that healthier workers are more productive workers and many will be loathe to cede responsibility for keeping workers healthy to an untested, government-run exchange. "Quality-conscious employers would need to feel comfortable that exchanges have the same focus on wellness that they do before they could really feel comfortable moving employees to the exchanges," said Fronstin.
Viability of the exchanges. Many key aspects of the exchanges remain unknown at this point. How much will they cost? Will adverse selection make them unstable? Will enrollees be satisfied with the plans? Employers will look at these and other factors to determine their comfort level with a given exchange. But because states are being given a high degree of flexibility in terms of designing and managing their exchanges, employer reaction can be expected to vary considerably from state to state.
PBGH's Kramer adds another factor to the list: administrative hassle. "For multistate employers, it's going to be very difficult operationally to drop coverage and push employees into the exchanges," he said. "Unless there is a reasonably high degree of standardization, the exchanges are likely to vary from state to state in terms of eligibility and enrollment procedures, premium processing, and so on. Multistate employers won't want the hassle of explaining to their employees how to enroll in exchanges if every state has a different approach."
Don't expect the chatter—or the steady stream of surveys—to go away any time soon. But don't pay too much attention either, says Fronstin. Writing in a recent blog post, Fronstin concludes that, "There is no reason to believe that any survey conducted today can be used to determine the percentage of employers that might be dropping coverage three or more years from now."
1 R. Coccia, "Survey Finds Employers Are Unlikely to Drop Health Care Benefits," Workforce Management, April 2010; S. M. Natchek and C. J. Kabacinski, Health Care Reform: What Employers Are Considering, (Brookfield, Wis.: International Foundation of Employee Benefit Plans, May 2010); Towers Watson, Health Care Reform: Looming Fears Mask Unprecedented Employer Opportunities to Mitigate Costs, Risks and Reset Total Rewards, (New York: Towers Watson, May 2010); Fidelity Investments, "Fidelity Investments Survey Finds Majority of Employers Rethinking Health Care Strategy Post Health Care Reform," July 29, 2010; HR Policy Association, "2010 Summer Chief Human Resource Officer Survey: Questions on the New Health Care Law," Sept. 2010; HR Policy Association, "2011 Annual Chief Human Resource Officer Survey," March 2011; Lockton Companies, Employer Health Reform Survey Results, June 2011.
2 C. Eibner, P. S. Hussey, and F. Girosi, "The Effects of the Affordable Care Act on Workers' Health Insurance Coverage," New England Journal of Medicine, Oct. 7, 2010 363:1393–1395.
3 S. K. Long and K. Stockle, "Massachusetts Health Reform: Employer Coverage From Employees' Perspective," Health Affairs, Nov./Dec. 2009 28(6): w1079–w1087.
5 Fidelity Investments, "Fidelity Investments Survey," 2010; HR Policy Association, "2010 Summer Chief Human Resource Officer Survey," 2010; Benfield Research, Special Report: Employers and Healthcare Reform, 2011.
6 Eibner, Hussey, and Girosi, "Effects of the Affordable Care Act," 2010.