Get ready for a trip back to the 1950s.
Back then, fast-growing companies were in the habit of offering health insurance as a fringe benefit to help recruit workers, a practice that got started during World War II to reward loyal employees when wage controls were in place. It helped that the government had passed a few tax breaks making it affordable for corporations. So it was basically by accident that employer-provided health insurance became the norm in the United States, even though the government came to oversee healthcare in most other developed nations.
We may soon go back to a model in which employers provide healthcare more as a perk than as a routine benefit, requiring workers to get insurance from other sources. That could save big companies up to $700 billion by 2025, according to a new report from S&P Capital IQ. It’s hard to think of any other single change that could save companies that much money, indicating how powerful the Affordable Care Act (ACA) could become once it has fully impacted the U.S. healthcare system.
S&P predicts that companies will do the math and find it irresistible to move more and more of their workers off company-run plans and into the exchanges established under Obamacare, as the ACA is known. Companies with more than 50 workers will have to pay a penalty if they don’t offer insurance, but it could still be cheaper when factoring in the savings on healthcare; that’s because insurance costs have skyrocketed during the last 20 years, making healthcare one of the costs companies find most difficult to control.
The rising and unpredictable nature of healthcare costs led AOL CEO Tim Armstrong to make his unfortunate comment about "distressed babies" earlier this year. Armstrong took a lot of heat and later apologized, but many CEOs expresss similar frustrations (usually privately).
Health Benefits Phased Out
The migration away from employer-based coverage would probably occur in phases. Companies might start by moving part-timers and new hires off their plans, since they tend to get paid less than other workers and would be more likely to qualify for subsidies under the exchanges. Established employees might be the last to lose employer-based coverage, and companies would still be free to offer healthcare benefits as they choose.
Such moves would probably be controversial at first, given that just about everything related to Obamacare is controversial. And most companies will probably be reluctant to make big changes likely to produce negative headlines. “However, once a few notable companies start to depart from their traditional approach to health care benefits, it's likely that a substantial number of firms could quickly follow suit,” S&P Capital predicts.
S&P likens this change to the evolution away from defined-benefit pension plans toward employee-managed 401(k) plans and IRAs. It would put more burden on individuals to choose a plan from among dozens that might be offered. Out-of-pocket costs could rise, since employers today essentially subsidize premiums at many companies. Companies could offer stipends meant to cover some or all of the premium for workers who buy coverage on an exchange, just as many companies make contributions to workers’ 401(k) plans. Still, some people undoubtedly would go without insurance, just as many workers who ought to save for retirement don’t.
There’s sure to be an uproar over such changes, since workers tend to resist any disruption to the status quo. But the whole model of employer-based healthcare has become a fragile, outdated mess that unduly burdens employers and workers both. American firms often face cost disadvantages because they must bear healthcare expenses that foreign competitors don’t.
Most workers view healthcare coverage as an important benefit, without realizing that it is at least partly responsible for stagnant pay. Since healthcare costs have been rising far more than overall inflation, many firms have continued to offer coverage in lieu of raises. In 2000, health insurance accounted for just 5.9% of average total compensation, according to the Labor Department; it now accounts for 8.5%. Wages and salaries, by contrast, have fallen from 72.6% of total compensation to 69% during the same time span. So removing health insurance from compensation packages could allow companies to offer more generous raises -- and give workers a rationale to ask for them.
There are other potential benefits to workers. People wouldn’t lose healthcare coverage when they leave an employer, making their coverage portable and more stable, thus allowing workers to stick with preferred doctors and other caregivers no matter what their work situation. That could give some people more flexibility to find work that suits them best instead of taking a job just because they need insurance, a factor the Congressional Budget Office cited in February when it said 2 million Americans could decide not to work or work less because of Obamacare. (Of course, that became "Obamcare kills jobs" for ACA's opponents, but it isn't what the CBO actually said.)
If employers do begin to push workers onto exchanges, it could intensify pressures to push healthcare costs lower. The Affordable Care Act includes some provisions for tackling rising costs, but that was never the primary focus of the law -- despite its name. As more individuals feel the direct sting of rising costs—without an employer to absorb part of the blow—the price of care could become an even more volatile political issue than it is now. The battles over Obamacare may have only begun.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.