Washington Health Policy Week in Review
Employers Won't Abandon Health Insurance Coverage, Study Says

By Jane Norman, CQ HealthBeat Associate Editor

October 21, 2011 -- A new study by the Urban Institute bolsters the Obama administration’s contention that the health care law won’t prompt employers to drop their workers’ health insurance.

The liberal-leaning institute says that employer-sponsored insurance likely will remain a staple of the workplace because it is an essential factor in keeping a good workforce for many employers. Decreases in the numbers of people who have such insurance may continue, driven by rising health care costs. But it won’t be because of the health care law, says the study, which was funded by the Robert Wood Johnson Foundation.

The argument that it will go away “ignores the fact that employers have been offering coverage for decades, with no threat of a penalty for not doing so,” says the study. “They do it for good economic reasons—they are competing for labor—and these economic reasons will determine whether they continue to do so or change their behavior.”

Employers who drop coverage also will risk driving away highly skilled top earners who would prefer sticking with employer sponsored insurance than into the exchanges, they say.

The issue is a major one as full implementation of the law (PL 111-148, PL 111-152) looms in 2014, when almost all Americans will be required to have health insurance. Republicans and business groups have warned that employers faced with additional costs might choose to pay penalties rather than provide health insurance because the fines would cost them less.

If large numbers of workers move onto the exchanges, the government’s costs also would increase because lower-wage workers who go to the exchanges for their insurance would be eligible for subsidies.

A widely publicized study last summer by McKinsey & Co. consultants predicted a major drop in employer-sponsored insurance. But Democrats attacked it, saying the questions in the study were slanted and an original report made the study sound more scientific than it was.

The Urban Institute study by Linda Blumberg, Matthew Buettgens, Judy Feder, and John Holahan says that it is incorrect to conclude that an employer who drops health insurance coverage will save money overall. Employers who drop insurance but fail to raise wages “will inevitably lose these employees to competitors,” they say — so they will be forced to raise wages to offset the loss of benefits and might even wind up increasing their total compensation costs.

However, the authors do say there might be an exception—companies dominated by low-wage workers. For people at or below 250 percent of the federal poverty level, there’s probably better and cheaper coverage through the exchanges. So the study authors predict that firms with lots of low-paid workers are likely to drop their own coverage and substitute extra wages.

But “a leap from that fact to the conclusion that employers have a powerful incentive to drop coverage runs counter to standard economic theory,” they say. Employers who say they will drop insurance may be focused on an immediate cost advantage. But eventually, those employers will be competing in the labor market and will have to bring total compensation— both wages and benefits—into line to attract workers, they say.

Urban Institute Study

Jane Norman can be reached at jnorman@cq.com.  


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