Question of the day

Employers [under ACA] save $422 billion if they dump health coverage. Will they?

From Sarah Kliff, here is an argument that the answer will be no.  I am less convinced.  I believe national effects will be larger than single-state effects (Massachusetts), and that employers will offer their employees some compensation for taking their chances on the subsidized exchanges.  I suppose we will see, or then again maybe not.


Sarah Kliff not Suzy Khimm.

If the incidence of healthcare costs are already on employees (which we think they are) then does it matter? Shouldn't wages just adjust and it's a wash?

Adam, the problem is that the tax break for health care applies to employers, so much of the incidence that currently falls on the federal government will now fall on employees.

So the increased cost of the ACA will be offset by the tax revenues?

I'm not sure but my guess is these sorts of things are the reason the ACA was budget neutral.

The CBO was predicting many billions in increased income tax revenues from it last I heard, although they seemed to be assuming 100% of the money saved by dropping coverage would go to employee incomes

Yes, it matters a lot. Incidence isn't the question, but enormous taxpayer subsidies that will result from employers dropping their coverage.

That $422 billion figure is only for the country's 100 largest companies.

Of course, dropping health coverage should only "save" employers that money if the economy is suffering from low AD and qualified workers are a dime a dozen. If instead we are in a period of skill mismatching/recalculation and so many of the unemployed being ZMP, employers would have to give much of the savings back to their workers in straight cash in order to keep compensation competitive, right?

Employers have an even better option available: they can stop offering health insurance but continue to offer company doctors, wellness programs, etc. In other words, they can get the expensive stuff covered by the exchanges. But anything that the exchanges do badly will still be offered within the firm. It just won't be called insurance. This shifting might result in a reduction of measured health spending. But it won't cahnge anything real.

How big would a company have to be for it to be worthwhile to have all that stuff in house? Huge. Most people do not work for multinational megacorps.

I am all for employers dropping health insurance coverage. Health insurance should not be tied to employers in the first place because it restricts movement between jobs.

That's like saying all tax breaks are good. The question is "In lieu of what?" And that matters!!

At least if everyone has to buy their own health care we'll have more cost transparency in the market.

Oh and I speak as someone who currently buys his own health care, and has done so for most of the last 10 years.

I don't understand your point. Tax breaks to employers for health insurance aren't good because they distort incentives. Why should employers be making health insurance purchasing decisions? They should pay their employees more so the employees can buy health insurance.

Sometimes it makes sense to purchase together if the demographics and/or claims are correlated. Some examples (which may or may not be true), plumbers would group costs because they are more prone to chronic back injuries and would like more expensive coverage on that health risk, or a large majority of your workplace is homogeneous, say blacks with sickle cell anemia or male/female dominated companies. Of course in a diverse workplace, this doesn't make much sense but I'm saying in certain cases, the company might be in a better position to determine the health risks.

It is almost always cheaper to get insurance via a group plan (i.e. employer coverage) than as an individual. An individual employee will pay much more for insurance on the individual market than his employer will pay to incorporate him into the company group plan.

That is not true. It is almost always cheaper to get an individual plan if you are young and healthy. Much cheaper. How could it be otherwise?

Comprehensive coverage--not "disaster insurance"? Yes, usually cheaper via the employer. I think this holds true, unless you are talking about a tiny company with only a few employees, a large share of whom are very sick.

I am young and healthy and my employer gives me a statement each year telling me how much they pay for my insurance--it is much less than what Kaiser and Blue Cross quoted me when I was in between jobs.

Why do employers offer coverage now? It costs them money and there is no penalty for not doing so. I presume the reason they do it is because enough employees value the insurance more than its cash cost to the employer. Some of this is due to the tax system, but I would argue that much more of it has to do with the health insurance market. Unless under ACA dramatically improves the market for health insurance, I do not see employees or employers radically changing their approaches, especially given our aging workforce.

Basically, small employers will have a choice of community rated plans, rather than small individually rated plans. For the small groups, this will be a good deal. Large employers who basically self insure could be better off to since free riders will shift less costs to hospitals and other providers.

If employers can shift the costs onto the federal government, why wouldn't they?

"I do not see employees or employers radically changing their approaches, especially given our aging workforce."

The ever spiraling risk of major insurance premiums hikes and the associated massive amount of paperwork will drive medium to small sized employers to dump the health insurance as soon as it's a viable option.

The paperwork and administration resources needed will remain about the same. An employer will have the choice they currently have: to either shift what they would others pay for insurance to employee's general wages or keep offering insurance. It's all part of the package.

Think about job searching: would you expect a company to pay you a whole lot more if they didn't offer health insurance? Yes, because health insurance is quite costly now. Employers can't just dump health insurance without becoming much less attractive to workers or having to dramatically increase their wages. That tax write off for coverage is looking pretty good...

"Why do employers offer coverage now"
This is due to the fact that individuals are taxed on gross income, and corps on net income.
If a corp buys it, it counts as an expense and thus it isn't taxed. If the individual buys it, the income that went to buy it was already taxed.

Won't health care costs still count as expenses after ACA goes into effect?


Yes, but prices will rise substantially due to the expanded various types of coverage mandates. This was also seen in MassCare

Although requiring that coverage include things like prescription drugs and annual physicals may very well save the health care system--and the insurance providers--money. It will cut down on the "disaster incidents" that can end up costing much more in the long run.

In my field, retail and restaurants, I expect most group plans to disappear and migrate to the exchanges. This is the dynamic I see:
As an employer, I only care about total cash compensation cost, we are indifferent as to how much is wages or benefits.
In a competitive industry, our total labor cost must be comparable to our competition.
If we offer insurance and some of our competitors don't, then the question is does $10/hr with benefits attract a better workforce than $12.00/hr without benefits.
If we offer insurance, over time, we attract/retain a workforce that is sicker on average than our competitor.
Even if they are equally productive, Insurers will only write policies where premiums exceed the expected cost. (duh.)
Costs are very concentrated in a relatively few cases. We would see 7-8 people account for 2/3rds of the cost of a 125 person self -insured plan.
As the employee pool gets sicker, the premiums rise even faster than medical inflation.
In an attempt to keep premium costs in check, the plan is made less and less generous, and the monthly paycheck deductions increased. Healthier employees increasingly reject the plan.

It's a death spiral.

Healthy employees rejecting the plan can be rational behavior. If you are young and healthy with few assets, earning relatively low cash wages, a couple of bucks an hour is a lot of quality of life, and even if you have insurance and get sick, you may not be able to cover the out of pocket costs anyway. Does it matter if you file bankruptcy over $10,000 or $100,000?

An additional factor is that healthy individuals can often obtain medically underwritten individual policies more much less than the group plan premiums which must accept all comers.

Celestus: Giving the much of the cash back to the employees is a feature, not a bug. We do lose some recruits over health insurance, but we can attract the folks we need. The "right" insurance plan is a very individual choice with a host of tradeoffs in benefits v. premiums. Let each employee make those choices.

Going forward we don't face this annual renewal crisis where we absorb a painful premium increase and explain to the team why they are paying more for less again this year.

One real reason that these plans hang on so long is the human cost. If you have met with a long term employee with medical conditions and to tell them the plan is terminating, you won;t soon forget the experience. Or perhaps their spouse is currently fighting terminal cancer. They are facing a disaster, they might end up in a high risk pool if they can swing it, there is no rational private market for them

I'm not a big fan of the health care reform, and I don't see how employer based coverage is sustainable. I am a market-based guy, but what to say to someone who inherited the wrong set of DNA?

I think if you make insurance individual and allow there to be whole-life type insurance, that could fix the problem for the genetically unlucky.

To some extent, the answer might be "what to say to someone who got struck by lightning"? That sucks?

"Going forward we don’t face this annual renewal crisis where we absorb a painful premium increase and explain to the team why they are paying more for less again this year."

+1, My small/medium company deals with this every year and it's 'more for less' on a reoccurring basis

Why haven't we seen this dynamic play out amongst small companies in MA over the past 4 years??

Two additional points. One, the whole fine vs. insurance cost thing is not a limiting factor. If the gov't deems that "too many" people are being dumped on exchanges, there's no reason they can't rachet up the fine. On the other hand, it's unlikely that the health exchange plans will be allowed to suck as much as individual insurance sucks right now, for political reasons. So the incentive to dump will be greater than it is right now.

Totally screwy and unpredictable, but that's what happens when you're predicting a market that's fundamentally driven by political incentives.

It has become obvious that low-wage industries such as retail and food service cannot carry the burdens of current health care costs. When your average wage is something like $15.00 an hour and health insurance is $15,000 per employee per year, the numbers do not work. As health care costs continue to increase at a rate faster than wage income, however, more and more industries will start to suffer the same fate.

Good. This trend will just encourage labor-saving machinery like self-checkout computers and A.I. administrative assistants which make no demands for health benefits.

So the workers displaced by automation do you think they are going to find higher paying jobs? Those people will still need health insurance...

No, they need health care

If you really need health care that probably implies a need for health insurance. Any significant injury or illness will probably cost more than most people can afford. From what I understand emergency hospitals are obligated to provide care to those who urgently need it. And at times it is probably difficult to determine if someone has insurance before emergency care is provided. Put those things together and requiring health insurance seems justified.

"Any significant injury or illness will probably cost more than most people can afford."

Probably not true. It is true in the sense that houses cost more than we can afford, which is why we have credit aggregation just like we have risk aggregation in insurance. But we can't pay more collectively for something that we can't afford.

There is cancer or organ transplants that we can't afford for everyone to get, but that's different.

"And at times it is probably difficult to determine if someone has insurance before emergency care is provided. Put those things together and requiring health insurance seems justified."

This is the logic used but it is wrong.

First of all, it would be really easy to determine if someone had insurance. There are also ways we wouldn't need to.

For the extremely rare cases where this was impossible the cost of ACTUAL medical emergencies is trivial. Think about it. It's often done by EMTs.

The people using the logic you put forward are completely and obviously putting forward fraudulence.

I predict that incentives will matter.

The tax write-off for offering health insurance is an incentive.

Lots of things are incentives

It's an incentive as long as the coverage for insurance is greater than the cost of insurance and the cost of medical treatment.

Let me explain. When you are happy that you have a job that provides insurance, what are you happy about? You are happy that if you have a medical economic hardship you are covered for that risk. You are NOT happy, primarily, that they are going to pay for your contact lenses.

This is how the benefit to you of insurance is greater than the actual benefit to you. You know that is a less than 100% chance you will need the service, and yet there is an almost 100% chance someone in your pool will need it. Your employer or insurance company hopes that there is a less than 100% your pool will need it.

Once the probability reaches 100% all the incentives are hosed.

It won't happen all at once, but unless the fine is raised, it will happen slowly but surely. And I don't really view this as a bad thing, but it is clearly something that isn't factored into the cost projections of ACA.

Isn't the low-hanging fruit for dropping health care coverage under ACA state and local government employees in states with Republican-dominated legislatures? You have to figure state & local employees are overwhelmingly Democratic voters (2008 NES says only 20% of current government employees including federal identify as Republicans), and unlike private employers state and local governments don't really derive any tax benefits that I'm aware of from offering health care to their employees; if they did drop coverage and pass through the cost of health care to employees as income, surely they'd shave off the employer's share of FICA and Medicare from it (and probably lop off some more for good measure to help balance the books). And according to this CRS report state and local employers don't even have to pay the tax penalties under PPACA. So why wouldn't they dump their coverage problem onto the federal budget?

"So why wouldn’t they dump their coverage problem onto the federal budget?"


Except that most of the states under GOP control don't have strong public sector unions.

I'd say it's more like;y that the strongest unions in Red states tend to be the Public sector unions.

That's like saying Buttercup is the manliest of the Powerpuff Girls.

OK, which states do you expect to push public sectors workers onto the exchanges first?

I heartily endorse your plan.

I suspect they will get taken to court, though. That may actually be the largest disincentive.

See "How elastic is the firm’s demand for health insurance?" Jonathan Gruber, Michael Lettau

As a MA resident living (happily) under Romneycare, I'd offer the observation that community plans are not the low cost option for sole-proprietors looking for health insurance. Far from it. Before the reform, I was buying pricey non-group insurance from BCBS. Despite all the hoopla, MA Health Connector (the State organized community plan aggregator) did not offer significant savings over non-group pricing. As a purchaser of health insurance, the arrival of Romneycare community plans was non-event from a pricing perspective.

I now obtain health insurance through a small business services org (SBSB) at 10-15% discount to comparable plans offered thru MA Health Connector.

Chew on that.

What is the relevance of this observation? Is the MA Health Connector subsidized? If not, would we expect the price to be any lower?

It is just a tool that is supposed to make it easier to shop for insurance. It is probably more helpful for people who qualify for the subsidized plans, because those are featured prominently on the website and they aren't available through all insurers.

She asks a really dumb question, and it seems to be something a lot of people focus on in this debate.

"Rising health-care costs generally underlie predictions of employer dumping: Why bother paying $15,000 for an insurance policy when the penalty for not doing so is a paltry $2,000?"

That's a really good question... until you realize the "penalty" for dumping them right now is zero. If the 15k in cost savings today doesn't do it, why does 13k a few years in the future do so?

I believe the claim is that insurance costs for employers will increase greatly after ACA thus they will save more than the current 15k (even with paying the 2k penalty). I have not yet seen anyone convincingly answer this fairly simple question.

The penalty for dropping employee health coverage is currently probably around $2000.

Tax preferences allow employees to avoid paying taxes on employer provided health coverage. Companies that don't provide it would have to pay more in wages to make up for this loss. The extra amount needed would be the cost of the health coverage multiplied by the employee effective tax rate. I'm guessing that's around $2000 but it would obviously vary on an individual basis.

Employees covered by exchanges would get a direct subsidy from the government. This means that it could be a better deal for both companies and employees to move to exchanges.

Even if it's a budgetary wash or small loss for companies, they'll be inclined to eliminate their health coverage to reduce premium risk and overhead.

I don't know whether or not I should bother, but here goes:

They don't drop it now because there are no subsidized exchanges for their employees to purchase individual policies. If I am running a company today, I offer the insurance at $15,000 because my employees might need $25,000 in additional pay if I dropped it (I won't save anything by doing so). With ACA and the subsidized insurance, my employees might need only $10,000 in extra pay to buy individual polices, so my calculation tells me I save $3,000 by dropping it if the penalty is only $2,000. In other words, the larger you make the individual subsidy, the larger the penalty will have to be to keep employers offering insurance coverage as part of the pay package.

I find it hard to take her arguments seriously given her basic mistakes. First, she argues employers will keep offering healthcare as an incentive to attract employees because 122 million people have pre-existing conditions which make them uninsurable in the individual health market. She totally ignores the fact that pre-existing conditions will no longer be allowed to be excluded under the law. Next, she claims that the deductibility of health care premiums make it more valuable than wages ("Employers get to pay for health insurance with pre-tax dollars, making a dollar of health-care benefits work (sic) more than a dollar of wages.") Apparently she doesn't know that wages are a deductible expense. Finally, she repeats the HR consultants touchy-feely mantra about healthier workers being more productive. That doesn't fly in the board room (and besides, nobody saying they shouldn't be healthy, it's just a question of who should be paying the premiums). I expect that it won't be the largest companies that will dump first, it will be the medium-sized ones. Within a couple of years, larger companies will see the world didn't end, and they will start doing it. The system will start groaning, and eventually collapse.

We are, of course, using the label "insurance" for something other than its risk transfer meaning. While some risk transfers may be involved, we are really talking about Health Care Plans (and there are even issues of what should be in that rubric).

Some large employers "self-insure" the provisions for "Health Care Benefits" to employees, usually hiring an external "Administrator" (often a licensed insurer) as a buffer between the actual cost bearer (employer) and potential claimants to avoid morale issues. In some cases there are other efficiencies. The structures are congruent with taxation impacts, financial reporting requirements and other legislation. Those cases will require separate consideration.

The potential shipwrecks of the current routing of requirements under PPACA might be mitigated in number, cost and other losses of "cargo" through some transition provisions.
Instead of allowing a deduction for "premiums" incurred by employers for plans, allow a deduction for "a cost supplement" paid to employees (not to the Exchange or Plan) for obtaining their coverage from a "State Exchange" or other form of Plan. Initially, those payments should be exempt from wage and income taxes; but with taxation to be "phased-in" over some period of time. That would lessen the impact of the costs for the charges of State Exchanges that would result from proposed federal subsidies. There can be some "playing around " with the amounts allowed for deduction, the forms of verification of coverage provided the employers, creating "shopping incentives" for the employees in where they choose to apply their supplements, etc. It won't be a smooth "take-off," but it can fly and get us to the next stage. It's only a transition.

The structures of the benefits, whether provided through Exchanges or Plans, will determine the costs and their rates of increase and need for suplements to costs charged to employees who obtain their coverages there. That will require removing the determination of benefit structures form centralized control (currently HHS) and allow adjust ment of Plans and Exchange benefits congruent with participant needs, resulting in true (not imposed) community rating. That is going to have to be faced anyway. Indiscriminate National cost-spreading of an arbitrarily selected benefits basket "is unsustainable," like so much else under centralized dirigisme.

No. Adding health benefits doesn't increase total compensation; why would taking it away decrease it?

That's a pretty massive misunderstanding of the meaning of compensation in employment. Everything provided to an employee as a result of their employment is compensation. You may or may not value it - and one of the big problems with the employer-provided model of care is that employees DON'T value it appropriately - but it's still part of your compensation. As is access to retirement plans, even if there's no contribution match, vacation time, sick time, etc.

We'd all be a lot better off if people would stop saying anyone is "given" things, whether you're left or right or breathatarian. Everything costs, everything is only provided because it helps attract and retain labor. Yes, some things are mandated to be provided... but nowhere near as much as most people think.

It's a Health Spending Account. Type your question in the white Search Box at the top of this page. (It won't cost you any potins.) This question has been asked before, and you'll find the complete explanation there. (The first question is yours, and the second question has the whole explanation.)

Some things to ponder:

- The tax exclusion for health insurance applies to EMPLOYEES not to employers-- several people have misstated this above. Employers can deduct all forms of compensation; there's nothing special about healthcare on their side of the ledger; it's all the same whether they pay 10K in wages or 10K in benefits. Employees will be taxed on 10K in wages, but not in health insurance. This alone will create some pause before people embrace the exchanges. As far as I know the ACA has not changed this arrangement: people will be taxed on money used to purchase their own policies (as currently, excepting the self-employed). Those taxes will not be trivial.

- People are resistant to changes, and in healthcare they seem especially resistant, hence the fracas over "Obamacare". Will people embrace it? I would not bet even the Friday night party money on that proposition. In the long run (say, 20 years), the ACA may find acceptance, but in the short term?

- Employers do not cancel the company health plan now because they would lose workers-- yes, even in this economy. At the very least their best people (who are very employable) would go elsewhere. I do not see that that exchanges would be such a good deal that people would gladly flock to them (and my first two points above play into this). The dynamic of workers leaving if the health plan is canceled will continue to exist

- If a company cancels its health plan it must do so for everyone at the company: the law requires that benefit plans be open to all full time, regular employees. Which means that the C-Level guys will be canceling their own health plans and throwing themselves on the exchanges too. They make enough so as to be disqualified for subsidies-- and any extra $$ they pay themselves will be taxed at the top rate. Can someone make a case that they will find that a desirable course, putting the company's bottom line over their own?

- And yet: Much of the stupdity of our healthcare financing system derives from the idiocy of workplace-based benefits. In the long run (20-40 years) we ought want that system to die on the vine, albeit slowly and without great dusruption. If the ACA achieves that, alowly and suddenly, it will be worth every penny we spend on it.

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