Friday, February 25, 2011

ObamaCare Shift

A colleague pointed this out to me recently, and I think he has it right: While more people will have health insurance as a result of the federal health care reform act, a side effect will be to reduce the number of people insured through the employer-based insurance plans that have characterized the US health care system. These people will either be insured as individuals through the state exchanges that are to be established or, if eligible, through Medicaid. There are three aspects of economic hydraulics that are likely to lead to this result.

First, the penalty to be assessed against employers for not offering coverage -- $2000 per year -- is dramatically below the cost of providing insurance. If you are an employer and can save, say, $5,000 by paying $2,000, why wouldn’t you do that? And the $2000 is not even indexed to inflation, while the annual charge for an employer-sponsored plan is likely to go up over time. Hence the differential will grow every year.

In the past, the provision of a health care benefit was viewed as competitive factor in hiring and retaining a firm's work force. But for the vast majority of businesses, that may be a less important factor than saving a few thousand dollars per employee and being able to offer a portion of those savings in higher wages and/or improving the profitability of the firm. Sure, some businesses might still want to attract workers by having their own semi-customized insurance benefit, but the power of that is likely to diminish over time.

A second factor is that the so-called “Cadillac” tax will make employer-sponsored health care even more expensive if you have a plan with generous benefits. Health coverage in excess of $10,200 for individual plans and $27,500 for family plans will be hit with a 40 percent excise tax on the amount in excess of the floor. The tax is indexed for inflation plus 1 percent.

Finally, to help avoid the excise tax, employers are going to “dumb down” plan designs by raising deductibles and co-pays. As they do so, the substantive difference between their own plans and the ones that will be offered through state exchanges or Medicaid will diminish. Even if you have a residual concern that your workers may want an employer-based plan, their desire might be diminished as you make your plan less attractive, so you lose little in competitiveness by referring them to the non-employer based plans.

There are those who believe that there was an ideological basis for this construct, that the Administration and a majority of Congress wanted people to move away from employer-based health insurance as part of an eventual movement to a federally chartered single-payer regime. Others say that it is just a natural extension of a bill that created important protections -- benefit mandates, a floor for medical loss ratios, guaranteed issue, restrictions on medical underwriting -- all of which act to increase the cost of insurance products.

Whatever the reason, we should expect that the world of employer-based health insurance that was created in the 1940s in the United States will rather rapidly move away from that system to one in which government-controlled insurance exchanges and direct government pay (Medicare and Medicaid) will rule. On the latter point, I have have now heard a couple of people estimate that the percentage of the US population covered by government payers can be expected to rise from the current mid-30s% to about 50% over the coming five years or so, abetted by the factors mentioned above but also by expanded income eligibility for Medicaid.


Barry Carol said...

I think there is a good chance that the mandate to buy health insurance will be overturned by the Supreme Court. If it is, there are viable alternatives to replace it. The most promising, I think, is for people who don’t buy insurance when they first become eligible, they will either be subject to medical underwriting or any pre-existing conditions will not be covered for at least two years.

To the extent that people are forced to switch from employer coverage to buying a policy through an exchange, administrative costs are higher when policies are sold one at a time vs. dozens, hundreds or thousands at a time. For those who wind up with Medicaid coverage, it may be quite a challenge to find doctors willing to accept the low reimbursement rates.

Currently, large employers who self-insure are, in effect, subject to medical underwriting for their group. As a result, they have more incentive to care about costs because there is nobody else to pick up the cost if they don’t. They are more pro-active than smaller employers in areas like wellness and disease management and many are experiencing lower growth in their group’s healthcare costs as a result. The bottom line is that larger employers may prefer to maintain the current system than to dump their employees onto an exchange or into Medicaid. As for the Cadillac tax, it is most likely to affect employees who are members of public sector unions or powerful private sector unions, along with the executive class. I don’t see any of those employees being forced to buy health insurance through an exchange even if employers offer to raise their pay by an amount equal to the cost of their health insurance.

Paul Levy said...

Thanks, Barry. Great perspectives, as always.

Unknown said...

Another cause of this is that employer-sponsored health insurance has been the only realistic option in our time, despite not making much sense: why should one's ability to afford appropriate health care depend on having a job? If you think it should, then why should getting ill, which can cause you to lose your job, result in loss of health care? Once non-employment-dependent health insurance is widely available, it will make more sense to consumers than the current, already shrinking, paradigm.

No system will control health care costs well, though, unless the patient feels significant financial effect of their lifestyle and treatment decisions.

wrinkledman said...

As a former small employer (restaurant owner) with a staff of about two dozen employees, I can tell you that the thinking outlined here is right on. I'm not sure if there was an idealogical underpinning to the legislation, but regardless the tendency to push people toward the public plans are undeniable. And welcome.

In the 90s as I was confronted by rising health care costs, I gradually reduced the insurance plans I offered by requiring higher employee contributions, as costs continued to rise I excluded anyone working fewer than 40 hours/week, then non-management personnel, then finally, I excluded everyone. I eliminated all company insurance benefits. I simply couldn't afford to pay anyone's insurance, including my own and stay in business. There are many businesses in that predicament. A government plan that targets the individual, not the employer allows businesses to continue to operate, thereby maintaining jobs that might otherwise be lost. But that's not enough.

As a small employer, I welcomed the change because I simply couldn't compete with the national chains. In my calculations, when "good" health care plans were only offered by employers, it automatically created a class of second rate businesses, namely the mom and pops, the poorly funded start-ups who were long on ideas and short on capital and the sole proprietors.

Personally, I would rather there be no corporate offered insurance plans. Those plans have contributed generously to our current problems by generally favoring better educated and economically advantaged people and businesses. Healthcare ought not to have a preferential institutional face, even if it is in a well managed employer underwritten environment.

If there is anything close to consensus or even a simple majority opinion that everyone should be insured, then it follows that we are a national risk pool and the cost of that system should be parceled nationally in a very broad based tax system, i.e. SS, Medicare, etc. Single payer should be back on the would be good for business and great for individuals.

Janice McCallum said...

Another consequence of moving away from employer plans: because individual plans provide little or no negotiating power to those insured under these plans, those who can least afford it pay the highest fees for care.

Unless we rationalize the payment system, those not insured under employer-sponsored plans will increasingly avoid utilizing the health care system. There's already evidence of reduced utilization and it will continue if self-insured consumers continue to get hit with high and unpredictable fees for health care services. In short, the current high-deductible plans don't meet needs of the market they're supposed to serve. Maybe health insurance exchanges will help, but I'm not holding my breath.

Gail Kerr said...

There is another change happening that affects employer-sponsored plans. Quietly, many (if not most) large employers are changing the workforce composition to rely heavily on contingent workers. These are full time employees, at will, with no benefits and when their usefulness (or project) is done, they are gone. Other methods large employers are using is requiring employees to have offices at home so they can avoid the expense of running offices. This is just another example of employers pushing overhead like benefits and office space off on federally funded programs (since office-at-home qualifies for a tax deduction.)

Bill said...

From Facebook:

Interesting analysis. Both the right and the left can use this to rail against ObamaCare. The right: see it is a first step toward the ultimate goal of single payer socialized medicine. The left: see it is a plan to help the corporate elites and take benefits from the working class.

MMR said...

Health insurance as an employee benefit was offered through both unions and employers beginning in the 1930s. Wartime regulation froze wages in the 1940s but did not freeze benefits, so health insurance spread as an employment incentive.

( Read more: History of Health Care as an Employee Benefit | benefit.html#ixzz1EzFYiYUW)

There is no "magic" about employer based health insurance - it is an artifact of the depression and WWII. We certainly can provide better and a wider range of options now. I see no reason to embrace as "normal" and "necessary" a system that sprung up as a response to a world wide depression and world wide war.

FYI, the analysis presented above has been out there since before Obamacare was enacted. Extensive discussion is at

Keith said...

The fact of the matter is that we have steadily been moving away from employer based health insurance for years as the high cost has caused many small buisinesses to drop this benefit. Will there be alot of buisinesses that are currently providing health insurance, who will see an opportunity to drop coverage for their employees as a result of dropping the expense per employee down to 2000 per year? This seems unlikely. After all, these employers are not currently obligated to offer insurance and could cut their cost to 0 by simply dropping this as a benefit. Buisinesses offer insurance as a way to attract and maintain an educated and productive workforce; not because they are forced to.

Most of the mandates that will supposedly increase costs, likely are already cost shifted to the goverment payors. Patients who can't get reasonable primary care and preventative treatment end up eventually in emergency rooms, often receiving very expensive tertiary services when their unmet health needs are not addressed. Emergency rooms are clogged with the uninsured and hospitals often use this unfunded indigent care as their excuse for cost shifting and the need to increased sticker prices and costs to commercial insurance plans. Other than the mandate for first dollar coverage for screening tests, I would not agree that these mandates will all increase costs; it may simply shift where those costs are being born.

If the penalty had been set higher, you would of undoubtedly heard screams from the buisiness sector and republicans about job killing taxes on small buisinesses and indeed, they may have been too onerous for some small buisinesses (I think of restaurants in particular that rarely offer health insurance) to tolerate. This may need to be adjusted with time depending on the actions of employers.

The bottom line is insurance has become too costly for a large segment of our population. The result is goverments have to provided billions for care to this population, often when they become critically ill. Moving toward a shared responsibility where everyone pays into the system according to means is the best way for us to sustain a workable health care system that cares for those at the lower end of the income spectrum adequately. Just as goverment had to create the Medicare program to fulfill a need that private commercial insurance could not meet (insuring elderly patients over 65), we again see govermetn trying to plug the holes.

I would welcome your ideas on how to do things differently.

Anonymous said...

Rand Corporation actually modeled the effect of PPACA on employer coverage and found a net increase in the number of people with employer sponsored coverage:

That mirrors what happened initially in Massachusetts, until people lost coverage because of the recession. Many people who'd had an employer offer of coverage but had not taken it up, did so because of the mandate. And the percent of employers offering coverage also increased.

Nancy Turnbull

Paul Levy said...

Thank you, Nancy. As I recall, at least one other firm, in an unpublished study, estimated the opposite. However, maybe both that firm and Rand agree that the percentage of people on government-sponsored or chartered insurance plans would rise dramatically.

Anonymous said...

Oh, and with regard to what Bill (from facebook) said about the left & right's ability to rail against Obamacare. As strange as this might sound, I am afraid that both sides are absolutely correct.

Paul said...

Another response to Bill from Facebook:

I concur. In the Seattle area, both Medicare and Medicaid are paid to physicians at LESS than overhead, so if you are correct, it also means the collapse of private practice.

Anonymous said...

Can we call this Healthcare Reform rather than "Obamacare"?

Some change was needed and these changes force the healthcare industry to include millions of Americans who had been effectively shut out of the insurance system. Like it or not, hospitals and physician groups were complicit in the shutout by continuing to accept and support insurance company businesses which were taking advantage of their customers.

Paul Levy said...

Complicit? Please, that is just a silly thing to say. The rules in place at the time were what they were. They have now been changed to give people the chance of getting insurance. That is a good and important change.

As to the nickname, if I were the President, I would be proud that people attribute the new law to me. In any event, it is now in the vernacular.

Anonymous said...

I have to agree with anon 12:27 that it's my impression that the term 'Obamacare' is usually used by those opposed to the law. However, anon, I do not know a single practicing doctor who supports an insurance company; most hate them.

nonlocal MD