Ditching Employer Health Coverage Could Save Companies $700B

The Fiscal Times

Obamacare has attracted more than 8 million signups, and it even boosted GDP in the first quarter of the year, but the full effects of the health care reform law have yet to play out.

Among the most significant of those effects: more and more companies are considering dumping employer-sponsored coverage and shifting their workers to private policies sold on the law’s insurance exchanges.

The move is tempting for businesses, as it could result in huge savings —likely totaling hundreds of billions of dollars over the next decade. Meanwhile, the cost could come at a price to the federal government in the former of more insurance subsidies, or to employees who may have to directly shoulder more of the burden of their health care coverage.

Related: Obamacare Spells the End of Employer-Based Coverage

The idea of moving away from employer-sponsored coverage is nothing new. Ezekiel Emanuel, one of the lead architects of the health care law, earlier this year predicted that a combination of Obamacare provisions, most notably the employer-mandate, will incentivize employers to push workers onto the exchanges. Some companies would then pass on to employees at least some of the money they save in the form of higher wages. Some low and medium-income earners might qualify for federal subsidies to make their insurance more affordable.

Emanuel calls the shift an “unintended, but positive” consequence of the law. Health experts, for years, have favored individual markets over employer-sponsored coverage — since consumers have more flexibility if they’re not tethered to a specific employer’s health plans.

The price of that flexibility isn’t yet clear, but the authors of a new study from S&P Capital IQ say it won’t be cheap. “We project that the overall average contribution by employees moved to the exchange will increase an additional $2,744 per year in 2016, compared with if they had remained on an employer-sponsored plan,” they say in the report released Thursday. “This represents almost 50 percent more than what an employee would have traditionally paid when they were only supplementing the employer's contribution, as the employees will now be accountable for as much as the full market-based premium. However, for low-to-middle-income workers, the increased amount may be at least partially offset by government tax subsidies, as individual contributions are capped depending on income as a multiple of the federal poverty level.”

If the shift happens, and more and more companies do away with their employer-based plans, what will that mean? How much money will the companies save? Will the savings turn into profits or be passed down to their workers in the form of higher wages?

The S&P Capital IQ study answered these questions after talking with companies, insurers and experts.

Related: The Chart that Kills Employer Sponsored Coverage

The firm predicts that if all S&P 500 companies make the shift, they will save nearly $700 billion over the next decade. When accounting for all companies with 50 or more employees, that savings jumps to about $3.25 trillion through 2025, the study said.

Michael Thompson, managing director at S&P Capital IQ and lead author of the report, cautions that the model is only a working benchmark, and that things could change over time. Still, he said, the savings would likely be even higher than they anticipate, since the study doesn’t take into account retiree benefits.

Thompson said if the shift occurs, it will likely happen gradually — starting in 2016, after the full employer mandate kicks in. By about 2020, the study predicts about 90 percent of employees at large firms who currently receive health insurance through their company will instead be getting coverage through the exchanges.

Some insurance industry experts, however, don’t anticipate the shift happening anytime soon.

“So far we have seen very little serious motion in that direction, aside from part time workers and in some cases limited retiree populations,” Dan Mendelson, CEO of Avalere Health said. “The Fortune 500 move slowly since they are in competitive labor markets and value employee longevity.”

When the Floodgates Will Open

But as Emanuel says, all it takes are a few big companies to start the movement. 

In a few years, “a few big, blue-chip companies will announce their intention to stop providing health insurance. Instead, they will raise salaries substantially or offer large, defined contributions to their workers. Then the floodgates will open,” Emanuel writes in his new book “Reinventing Public Health care.”

Last fall, consulting firm Towers Watson released a survey that found 92 percent of employers said they plan to change their health insurance options by 2018, when the law’s tax on "Cadillac" insurance plans tax takes effect.

If the trend plays out and employees are shifted to the exchanges, it will result in a larger cost to the federal government, since more people will be qualifying for subsidies, though it is unclear how much more this would be.

“If the Fortune 500 do start moving populations into the exchanges, under current rules there would be puts and takes on the federal budget,” Mendelson said. “On the positive side, the federal government would collect penalties, and because the risk pools might be positive, it's possible that premiums would actually come down as a result…On the negative side, there would be some subsidy-eligible people coming into the federal construct.”

He said he doesn’t anticipate the shift away from employer-based plans to become a significant burden on the federal government, and added that if it did, lawmakers would likely take action to address that issue.  

“We expect that over the next decade, it's likely that penalties for employers who drop insurance may grow, and that subsidies for higher income people will be reduced,” Mendelson said. “I think it's unlikely that the Congress would allow this program to become a major drag on the budget over the coming decade.”

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