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Other than the egg-laying exercise surrounding the ACO regulations, 2011 was a quiet year among Washington health policy experts until June 6 when McKinsey released the results ofa survey of employer plans under the Affordable Care Act. The McKinsey study found that roughly 30 percent of employers were considering dropping their employee insurance coverage and encouraging their employees to receive federally subsidized health insurance through the Exchanges created in the Affordable Care Act. This compared to low- to mid-single digit estimated drop rates based upon economic modeling by the Urban InstituteLewin and, importantly, the Congressional Budget Office (CBO).

To judge by the storm of angry political reaction, you would have thought that McKinsey had advocated mass psychedelic drug use. Senator Max Baucus (D-MT) sent McKinsey a letter demanding that the firm disclose its methods and questioning its motives. There followed a flurry of hostile press coverage of the study, echoed in the progressive blogosphere. Horrified, McKinsey released its study methodology, survey instrument, and tabulations of responses.

Why such a sharp reaction? If McKinsey turns out to be right about employer intentions, the cost estimates of the federal subsidies for individuals to purchase coverage through the Exchanges (roughly $777 billion from 2012 to 2021 according to CBO’s March, 2011 analysis) are far too low, making the program even more vulnerable to Republican efforts to cancel it. And if a third of employers drop coverage, President Obama’s pledge that “if you like your health insurance coverage, you can keep it” won’t look so great either.

But these two problems are not the whole story. The larger problem is that the struggle for public support for health reform is not going well. Fifteen months after passage, only about a third of the American public thinks health reform will be good for the country (according to the June Kaiser Family Foundation Tracking Poll). The Democratic base does not love the ACA, believing that too much was given away to the health insurance industry. It’s a politically sensitive time for an influential firm like McKinsey to be questioning the administration’s economic assumptions.

On my review, McKinsey’s survey seemed both thorough and workmanlike, a typically high quality work product by the elite consulting firm. A surprisingly large percentage of the survey’s respondents were not aware of many specific features of the legislation that will directly affect them. Indeed, most seemed only to have begun to analyze its economic impact on their firms or workers. Absent the regulations to implement the insurance reforms, this is probably sensible.

McKinsey’s Findings Hit The Mark On Employer Thinking

However, based on what I’ve learned in my not-entirely-random walk through the health insurance market, McKinsey’s findings accurately reflect current employer thinking. The ACA’s incentives to move toward a consumer market and away from employer-provided health insurance could prove to be far stronger than its drafters intended. I was surprised that only 37 percent of employers under fifty employees “probably or definitely” intended to drop coverage, since there are no penalties for doing so and the subsidies for their workers to get Exchange-based coverage are so compelling. If anything, McKinsey’s survey understates the likely employer abandonment of the small group market.

According to Urban Institute’s Eugene Steuerle, a family of four with cash income of $30,000 a year is almost $14,000 to the good by going through the Exchange and picking up the premium subsidies rather than getting coverage from their employer. Even at $42,000 in family income, the Exchange advantage is close to $7000 a year. On this point, my employee benefit friends are virtually unanimous: except for high wage employers like law firms or consultants, it doesn’t make sense, for small employers or their workers, for small employers to continue offering coverage given these incentives.

How large employers will respond is a conundrum. The angry reaction to the McKinsey study was clearly intended to tamp down a stampede for the exits (as well as to deter further studies which reached a similar conclusion). There is no consensus among the employee benefits community about what large employers should do. Some analysts rightly point to corporate inertia, the “malign paternalism” of corporate human resources managers, and collective bargaining agreements as supporting continued provision of employer sponsored health benefits. There is also the “what is my competitor doing?” factor. McKinsey’s study findings probably significantly overstate, (in the mid 20 percent range) the number of large employers that will ultimately drop coverage. Far more likely is a shift to some type of defined contribution model.

What If McKinsey Is Right?

The controversy over McKinsey’s survey begs a question: what if McKinsey is right about the ultimate employer response? The forces sustaining the employer-based system are already weakened by the economic crisis and the eclipse of labor unions’ influence. After all, if consumers choose their own health benefits, they can make President Obama’s pledge about not being forced to switch plans a reality.

What the President addressed is only a problem if the employer continues to limit health plan choice. Rather than twist ourselves in knots to keep the employer in the game, federal policymakers should consider nudging employers toward the exit and moving more aggressively toward a consumer-driven health insurance marketplace.

Little appreciated in Washington is that the large employer’s influence on benefit design has been a major enabler of escalating premiums. The main influence hasn’t been first dollar coverage, but rather their preference for open access, point-of-service plans, which replaced more accountable “closed panel” or HMO-type health plan products. The open access products markedly reduced health plan bargaining leverage and rewarded provider cartel behavior. Individuals in the Exchanges won’t care if every provider in their region is covered by the health plan they choose; they will only care about the narrow network they already use (and they will love the significantly lower premiums).

A formidable barrier to encouraging employers to exit health benefits is the potential cost to the federal budget. If employers are voluntarily contributing north of $800 billion a year to health insurance costs, it is troublesome fiscal strategy to substitute borrowed federal dollars for these corporate funds. By way of comparison, the 2020 premium subsidy cost estimate for ACA is $130 billion a year, according to CBO’s March, 2011 report. Wyden Bennett’s orphaned alternative to ACA included an employer maintenance of effort provision in its first few years, replaced by an explicit payroll tax, to control this substitution.

Some way must be found to assure that employers pass through a significant fraction of their current premium outlays to their workers in increased cash compensation to justify the increased federal subsidy cost. Perhaps penalties for dropping coverage could be increased if employers don’t increase cash compensation and are waived if they do. Encouraging employers to get out of the health benefits business would be a compelling fiscal stimulus if, as is possible, the US dips into a “double dip” recession — the equivalent of a huge corporate tax reduction that also raised worker pay.

If Employers Exit, How Could Greater Subsidy Costs Be Financed?

If McKinsey’s study is even close to predictive, policymakers need to begin searching now for the resources to finance the higher subsidy expense needed to cover a more vigorous employer exit. The tax subsidy to private firms and individuals for the health benefit is the largest “tax expenditure” in the current tax code (larger than the mortgage interest deduction) — more than a trillion dollars over the next five years. Markedly reducing this subsidy is scary, but it’s the most attractive revenue source to finance the shift. Phasing out the employer’s tax subsidy over a decade and capping the individual’s tax subsidy are desirable elements of a responsible tax policy.

Possible alternative funding mechanisms are to accelerate the Cadillac tax to 2014, or broaden ACA’s premium tax to non-profits and self-funded benefits plans, or institute a consumption tax on soft drinks or transfats. The premium subsidies could also phase out at 250% or 300% of poverty. A final, and more complex, cost-saving possibility is making the “minimum essential benefit” in ACA truly “minimum” and “essential”, rather than a somewhat skinnier version of today’s comprehensive benefit, by covering catastrophic costs plus ambulatory services and prescription drugs, and encouraging employers to offer only supplementary coverage.

Not all employers would elect to drop coverage even with these changes. How many employers ultimately elect to drop coverage is a huge uncertainty about the future cost of the program. The employer’s decision to offer health benefits is a business decision, not a policy decision. Employers will examine the incentives and financial impact of whatever structure ACA has created, and make decisions that are right not only for their workers but also for their customers and equityholders. Right now, the prudent business decision for most small employers and larger ones with a lot of low wage workers is to exit the direct provision of health insurance coverage, and give their workers both additional cash compensation and full control over health plan choice.

Right now is not a good time to broach changes in ACA. The two political parties are locked in a futile struggle over outright repeal, whose main purpose appears to be to mobilize their respective electoral bases for the 2012 election. Outright repeal of ACA would be a disaster for citizens as well as the care system. Other than the disillusioned “progressive” wing of the Democratic party, that continues grieving for the lost “public option”, the rest of the country might look favorably upon a modification of ACA’s insurance reforms that reduced employers’ health benefits paperwork, increased worker’s cash compensation and truly empowered consumers to determine their own health benefits needs.

Jeff Goldsmith is president of Health Futures Inc. He is also the author of “The Long Baby Boom: An Optimistic Vision for a Graying Generation.” Health Futures specializes in corporate strategic planning and forecasting future health care trends. This post was first published at Health Affairs Blog.

This post first appeared at Health Affairs Blog on 07/22/2011. Copyright ©2010Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.

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12 Responses for “Letting Go Of Employer-Based Health Insurance”

  1. “Possible alternative funding mechanisms are to accelerate the Cadillac tax to 2014, or broaden ACA’s premium tax to non-profits and self-funded benefits plans, or institute a consumption tax on soft drinks or transfats. The premium subsidies could also phase out at 250% or 300% of poverty. A final, and more complex, cost-saving possibility is making the “minimum essential benefit” in ACA truly “minimum” and “essential”, rather than a somewhat skinnier version of today’s comprehensive benefit, by covering catastrophic costs plus ambulatory services and prescription drugs, and encouraging employers to offer only supplementary coverage.”

    Jeff, if McKinsey is correct, the only way to cover the deficits that would result from the huge gap between what the CBO estimated of 12m and the 54m would be to raise the tax employers paid to dump employees to an amount equal to the actuarial equivalent of the plans that they would be pushed in.

    Second point, Minimum Essential Benefits are due from IOM to HHS for consideration. expect “generous” minimum essential benefits. Expect insurers to argue for a more rationed access to these rich benefits using primary care based gate keepers, preauthorization and utilization review — all elements designed to control a generation of consumers who have come to love $ 5 co-pay island and open access PPOs. Forget about ” minimum” minimum essential benefits, it is a misnomer. People may love their new rich benefit plans but loathe the change is policy as insured plans tightly manage access and self referrals as a means of controlling costs. CMS head Don Berwick said his vision of reform is ” empty hospital beds”.

    Third point, employer sponsored plans are still the best opportunity to drive fundamental behavior change in consumers. Those who oppose the “nanny state” penalties for non compliance with biometric testing or certain preventive services cannot offer up a more cogent method of driving consumer engagement. Washington lacks the will to promote these kinds of changes including having the guts to tax “guts” and the food that causes them e.g. tax sodas etc.

    Point 4 – Exchanges are hardly the panacea. They will be community rated, tightly run utilities that will pass on an average of 10% cost increases on to recipients. It is true that those in the exchanges that have the discretion to choose their own plans via a defined contributions approach ( grossed up salary or rich federal subsidies ) are generally happier than those with an employer sponsored defined benefit design. They almost always choose a lower cost plan than what they had previously. However, I can see an interim step – where employers consider private exchanges and cafeteria plans first while watching the exchanges for a good two years before they dump people into the water and encourage them to swim.

    Finally, it is just too damned expensive to allow for 54m people to enter the system and for employers to arbitrage the difference. The public won’t take the bait and the GOP will hold hearings and elevate the discussion to make it a focal point to the 2012 elections.

    I do think employers have had it with offering healthcare and are in some stages of denial. My recent article on THCB and at http://usturpin.wordpress.com/Employers-Health-Reform-and-the-Stages-of- Death-and-Dying/ bear this out.

    McKinsey’s report is provocative but makes the basic premise that the social contract that existed between employers and employees around healthcare has a price tag and if that cost exceeds the $3,000 penalty, the contract is null and void. Since the average American makes $ 40k a year, and the average subsidy will be estimated to be around $5,000, I can see why some would be better off. I just don’t think the government can afford it or modify reform again to appropriate additional revenues to pay for the miss on participant estimates.

    I have yet to see a good alternative proposed to counter the notion of exchanges. We have had community rated plans in NY for years and costs keep rising. I am also wondering if anyone has bothered to understand that by moving self insured larger employers who generate low single digit margins for insurers and larger insured plans now tied to an 85% MLR under reform into exchanges that are governed by an 80% loss ratio, insurers are given an additional 500 bps of margin for earnings.

    I applaud your noble thesis but urge you to remove the rose colored glasses and face the option of an eventual single payer or employers rising up to drive market based reform. I am a sober optimist and believe in the end, employers will throw in the towel — unless someone comes out in Washington in defense of employer sponsored plans. Short of this exchange based purchasing is merely an interim step and hardly a panacea to ameliorate the underlying factors driving healthcare costs which have yet to be addressed.

  2. Jonathan H says:

    I think this sentence alone is worth the time it took to read this article: “Little appreciated in Washington is that the large employer’s influence on benefit design has been a major enabler of escalating premiums. The main influence hasn’t been first dollar coverage, but rather their preference for open access, point-of-service plans, which replaced more accountable “closed panel” or HMO-type health plan products.”

    it isn’t just large employers, though, but mid-market employers as well and even small employers to a lesser extent. The Massachusetts experience reinforces the point. When people buy insurance for themselves, they are more likely opt for closed network plans to save money. And the reason is clear: the employer wants to satisfy as many employees as possible, who each use different doctors. The individual only has to please him/herself and possibly a family, and all that matters is whether your doc and preferred hospital are in the network.

    The MA experience also goes a long way in explaining why there was such a strong reaction to the McKinsey study. In MA, you just didn’t see anything like a 30% drop in employer coverage. In fact, if there was any change it was to increase employer coverage. The national law has richer subsidies and the social contract is not as strong in some states as in MA, but still, 30% dropping coverage would be way out of line with the little experience we have.

    One other thing to consider: large employers generally self-insure. They don’t follow state laws on coverage, but ERISA. There are benefits to this (like retention of profits from reserves, uniform benefit design) that the state-based exchanges won’t match. Also, these large companies tend to have deeper pockets so can use benefits to attract talent. They have the luxury to seek control over benefits and may be willing to pay a little more to get that (they also may believe they can do a better job cutting costs than the exchanges). For all those reasons and more, I doubt there will be any near term drop in large employer coverage.

    Ultimately, who knows…it may all go to the individual market, with various defined contributions from employers and government. But as the law is written now, a 30% drop in 2014 seems very unlikely.

  3. Are there any numbers showing that people with similar demographics and income choose narrow networks with gatekeeping in the individual market more than they do through employers?
    And if they will do so because of increasing prices, how long before the sob stories flood the front pages of every newspaper in the country?
    I have to agree with Mike, if employers pull out, there will be a period of turmoil followed by administration changes and some form of single payer, say, about mid to late 2020s.

  4. Jeff Goldsmith says:

    These are great comments.

    There is no way a Republican House or Senate will raise the penalties for employers dropping out, so raising them until you reach some kind of equilibrium level that keeps employers in the game is not going to happen.
    The simple fact is that the penalties are too low AND the incentives for individuals to get exchange based coverage are too lucrative to keep employers involved. Lots of luck cutting the Exchange subsidies. . .

    It doesn’t matter if employers are self-insured or not. The health benefit is still negative cash flow whether they transfer the risk to an insurer or not. Cafeteria plans give workers most of the power they need but they still keep the employer on the hook. I suggested that larger employers will move in the short term to defined benefit, but as a path to exiting coverage, not as a permanent resting place.

    Nor did I suggest that employers are going to pull out in one cataclysmic “pop” in 2014. There is too much inertia. The shift I’m talking about is going to take years, and it will be just like water rising in our already flooded fiscal basement. We need to begin thinking now how to bail ourselves out.
    We’re going to need more revenues from somewhere. . .

    I don’t understand why people keep beating the drum for single payer solutions. Isn’t it abundantly clear that we just don’t trust government enough to give them the power? For all its bumbling compromises, ACA was far more expansive of governmental power than the electorate was willing to tolerate. Look at the Kaiser poll numbers. Look at the governance debacle going on right now as we struggle with how to pay bills we’ve already incurred. There’s no “white knight” out there. We’re going to have to figure this out without the assistance of some omniscient Health Ministry and their noble Congressional supporters.

    I also wish people would stop using Massachusetts to predict how Texas and Georgia and Florida are going to behave. Massachusetts is a weird, collectivist place, with the most expensive healthcare in the nation. It’s largest employers are healthcare providers and higher education institutions. Massachusetts is more like Norway or Denmark than like Oklahoma. It’s not even the same country as most of the other parts of the US. Texas, Florida, Michigan, Pennsylvania, New York and California- keep your eyes on the big places.

    Mike is correct about the so-called ‘minimum essential benefit”. This was, in fact, legislative fiction- the benefit is ultimately a political benefit determined (after “advice”) at the discretion of the Secretary- a recipe for a deafening chorus of sob stories and higher employer costs. I just don’t think we can afford a generous benefit if the individual market surges as much as we think. And people will bridle against being forced to buy coverage for services they themselves don’t want to use. Mandated benefits, whether by states or the Secretary, are a form of “guaranteed income” to providers. It’s way better to get the insured dollar than to fight to get onto peoples’ VISA cards.

    I don’t think most employers have the stomach for “carrot but mostly stick” engagement strategies. I think the best engagement strategy is an informed consumer who’s fully in charge of their benefit, and sees the cost to them rise as they fail to manage their own identified risks. The highest and best use of the medical home is to foster consumer engagement, the reason why we need to get this right.

  5. Jonathan H says:

    Jeff, I thought the reason for the uproar over McKinsey was the suggestion that employers would make their switch in large numbers starting in 2014 rather than wait a few years. If you’re talking about a decades long change I think the uncertainty too great to make a bet.

    I disagree on the self insured. They are used to having control over benefits, having access to claims information they would lose if their employees joined various fully insured plans on exchanges, integrating benefit design with wellness programs, and more. They will not easily give all this up. Small businesses never had most of this so there is nothing to give up plus there is lessno stigma for them to send their employees to exchanges

  6. As a society we must get away from employee sponsored health insurance. This practice has produced too many generations of people that have no clue what their health plan truly costs. This incentive is no longer needed to attract the labor force. Independent, individual, health insurance allows the consumer to make the choices, be aware of the true cost, and provides the portability that today’s labor force needs.

  7. Nate Ogden says:

    “Little appreciated in Washington is that the large employer’s influence on benefit design has been a major enabler of escalating premiums. The main influence hasn’t been first dollar coverage, but rather their preference for open access, point-of-service plans, which replaced more accountable “closed panel” or HMO-type health plan products. The open access products markedly reduced health plan bargaining leverage and rewarded provider cartel behavior. Individuals in the Exchanges won’t care if every provider in their region is covered by the health plan they choose; they will only care about the narrow network they already use (and they will love the significantly lower premiums).”

    What? Why do you think employers moved to open panels, first HMOs have a small footprint and can’t be bought everywhere, but mainly EMPLOYEE demand. I would love to cut Cleveland Clinic out but the employees would revolt, no matter the premium savings. Narrow networks are available now and individuals are not responding, I have implemented some so I know firsthand. It’s the way we need to go but this will be forced on the market not embraced, in fact I would be willing to bet you before its all said and done at least one politician proposes an open network billing that would make it illegal to limit an individuals choice of providers, any willing provider laws, which already exist, on a national basis.

  8. bob hertz says:

    Several additional points:

    1. The small to medium-sized employers who will drop health insurance are almost entirely non-union.

    It is extremely unlikely that they would increase taxable employee compensation. This was a rather egregious dishonesty in the scoring of the original ACA bill.

    Also, once some employers get a taste of not providing health insurance,
    it will be incredibly hard to ever get them involved again.

    2. Every exchange I have been involved with has run into anti-selection.
    As I understand the coming process, if a person loses employer coverage and goes to the exchange, that person might well get a $10,000 subsidy for family coverage — but they still have to write a $5,000 check to the exchange. (or $400+ a month) The $5,000 is not going to come out of a reliable payroll deduction.

    A healthy person might well decide to just wait until they are sick or pregnant before they join the exchange. Then they will quit when the episode is over.

    Insurance companies understand this, and so some carriers will not participate in the exchange. Those which do take part will offer very high premiums.

    The actuarial goal of the mandates and exchanges was to deliver an enormous swath of healthy young workers into the individual insurance marketplace.

    We would require draconian enforcement to make this happen, and the resistance would be bitter. The Democrats would be the villains for many years.

    A better alternative would be a simple and barely-noticed increase in the Medicare payroll tax, say one-half of one percent to employers and employees alike. This would generate about $60 billion a year.

    That would be more than enough to make Medicare Part A the payor of last resort, when the uninsured do need hospital care.

    Not a perfect solution, but a decent incremental one.

    Bob Hertz – The Health Care Crusade

  9. Tracy says:

    The impact today on small businesses is almost to the point of absolute craziness. Has anyone asked a small business how the current structure and rate increases are working for them. Please don’t but into the excessive insurance company profits. Just look at there financial statements and true profits. They are no different than any other major corporation in America struggling to survive. We are going to fix the problem by only taking one piece of the puzzle. The solution lies in a multi faceted reform among all players including doctors, hospitals, malpractice attorneys, Medicare and Medicaid. When are we going to get our heads out of Washington DC and take this debate to the people that really pay for this day in and day out?

    Just wondering???

  10. miriam says:

    just to reply to 1 thing the last few lines a better alternative : good point alot of countries have this idea its called socialisted medican its how it is set up in the uk europe, places all over the world. anyway its broader it includes both employers and employee’s paying a national tax called national insurance uk in all work places. tax is paid for the tax all the time so their is no sudden bill and no one is refused treatment.

  11. miriam says:

    just to reply to 1 thing the last few lines a better alternative : good point alot of countries have this idea its called socialisted medican its how it is set up in the uk europe, places all over the world. anyway its broader it includes both employers and employee’s paying a national tax called national insurance uk in all work places. tax is paid for everyone’s standard of health care through their pay packets and employers contrbution and no one is not included. no one grumbles cause they don’t have the money anyway and we all know that we are able to talk to a doctor when ever we need to.
    plus we have no sudden bills at the worst possiable time that are very costly. we pay over time and no one is refused treatment.

  12. I’m just wondering how much lawyers charge for insurance claims. What percentage of final settlement do they usually take?

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