Health Reform Won't Dismantle Employer Coverage, Report Says

Posted by: John Tozzi on October 21, 2011

Health reform won’t lead most companies to drop insurance benefits, according to an analysis out today from the Robert Wood Johnson Foundation and the Urban Institute.

Some critics of the health insurance reform law suggest that it will lead to the end of employer-based coverage. If workers can buy cheaper plans subsidized by the government on state exchanges, companies will reduce their coverage, the argument goes. In June, consulting firm McKinsey & Co. published a report saying that many more employers than previously thought intended to roll back their health benefits. From the McKinsey report:

Our survey found, however, that 45 to 50 percent of employers say they will definitely or probably pursue alternatives to [employer-sponsored insurance] in the years after 2014. Those alternatives include dropping coverage, offering it through a defined-contribution model, or in effect offering it only to certain employees. More than 30 percent of employers overall, and 28 percent of large ones, say they will definitely or probably drop coverage after 2014.

Health reform backers including Sen. Max Baucus and White House officials attacked the McKinsey study. The firm initially refused to release its survey and methodology. When it did, it added a statement saying the “survey was not intended as a predictive economic analysis” of the law. The Robert Wood Johnson report today is a response to McKinsey’s survey.

The new report’s conclusion: Companies won’t drop coverage en masse. Employers that offer insurance today do so because they compete for labor. That competitive pressure will remain once the health law takes effect. Employer-sponsored coverage is already subsidized (because it’s compensation that’s not taxed), and most employees that already have coverage wouldn’t get better deals buying plans through exchanges. From the report:

The bottom line is that most workers’ firms will be dominated by workers who will receive better benefits and, through the tax system, better subsidies through employer-provided coverage than through newly created insurance exchanges. … [O]ver time, coverage reductions inevitably would make the workers that employers most want to keep worse off, and if those workers sought employment elsewhere as a result then the firm would be worse off as well. It is therefore unlikely that large numbers of employers currently providing insurance coverage will change their decisions to offer it.

The exchanges will provide a health insurance option for employees at companies that can’t (or don’t) currently offer coverage, which are overwhelmingly small businesses. (They’ll also offer coverage to the unemployed and self-employed.)

Meanwhile, The New York Times reports that Wal-Mart is rolling back health benefits, particularly for part-timers. From the Times:

This is a big shift from just a few years ago when Wal-Mart expanded coverage for employees and their families after facing criticism because so many of its 1.4 million workers could not afford or did not qualify for coverage — rendering many of them eligible for Medicaid.

Under pressure from states saddled with rising Medicaid costs and from labor unions and community groups, Wal-Mart had agreed to offer part-time employees, even those averaging less than 24 hours a week, health care insurance after a year on the job, shaving a year off the eligibility requirement.

Wal-Mart says the health reform law isn’t the reason for reversing those changes. The Times suggests it has more to do with rising health costs and the poor labor market:

These moves are also occurring in a postrecession period when Wal-Mart has been struggling to regain its footing after months of disappointing or flat sales. And with unemployment still hovering around 9 percent, employers may feel less compelled to offer expansive benefits to people desperate for work.

So, to review, health reform may not dismantle employer-based insurance coverage. But if Wal-Mart is any indication, the lousy labor market might.

Reader Comments

Pam

October 24, 2011 11:43 AM

Ha Ha don't believe this one. Already commercial insured (yes us that actually pay for our insurance through our employers) have seen massive increases in our deductibles and co payments and reduction in our benefits.

John Kaegi

October 24, 2011 1:07 PM

The RWJ Foundation report appears to be focused on larger employers. Other studies which consider all size employers tend to disagree with RWJ's findings because the employers most at risk of dropping coverage ARE the small to mid-sized employers. But, after all, they make up over 1/2 of all employment in the country. And, if smaller companies successfully improve their price position by reducing their benefits spending and sending employees to state exchanges for coverage, then larger companies may follow them. Simply stating the "sky isn't falling" based on large companies' need to compete for employees isn't considering the extend of the problem for American businesses which are struggling to survive.

DG

October 24, 2011 2:31 PM

"Wal-Mart says the health reform law isn’t the reason for reversing those changes. The Times suggests it has more to do with rising health costs and the poor labor market."

PPACA has and will continue to increase the cost of healthcare, and some economic studies have shown it to be a leading contributor to the concavity introduced into the labor market starting spring 2010.

So I would argue that the Times is not necessarily incorrect; however, they are not precise in identifying the true underlying cause of these issues.

Torsten Bernewitz

October 24, 2011 7:06 PM

I think there has been too much focus on the black or white impact(dropping ESI or not). This question may be missing the point. It may also lead to strategic mistakes. Those who conclude that ESI will not change dramatically may be tempted to call off the alarm and continue business as usual. Those who conclude that ESI will be dropped left, right and center, may shift too much of their attention away from one of their core (and very profitable) customer groups, the employers. Both groups will miss opportunities.

There is more discussion about this topic here: http://payer-strategies.blogspot.com/2011/10/to-drop-or-not-to-drop-that-is-not.html

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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