Last month the CBO released its most updated estimates for employers offering health insurance coverage. To the surprise of many “policy experts” including the likes of Ezekiel Emmanuel and the McKinsey & Company, each of whom anticipated massive declines, approximately 155 million Americans continue to receive coverage through their employers. In fact, the CBO itself has dialed back its expectations of any near-term employer exodus, now expecting 152 million Americans to continue receiving coverage through their employers in 2019. This is a startling contrast from the images portrayed by these aforementioned experts suggesting 30-80% of employers are dropping coverage over the next decade.
Of course, those of us who work in reality and not abstract academics have anticipated this outcome many years ago. Why? There are three primary reasons — two of which were quite predictable when these gloomy forecasts were issued, and one of which was not.
1) Inequity in Tax Code: The fact that employer-sponsored coverage continues to be a tax protected benefit and individually purchased coverage does not (unless costs exceed 10% of AGI and deductions are itemized) explains why employers will continue offering coverage for the foreseeable future. We run countless simulations on behalf of clients and the fact that any termination of coverage must consider a newly created tax burden that gets placed directly onto employees’ backs creates an unsustainable economic picture for the employers. Compensation is dramatically reduced by this newly formed tax burden and employers have little appetite to absorb large wage increases to offset this burden—beyond any gross ups that would already need to be enacted to supplement the lost employer healthcare subsidy. Ironically, the ACA aggravated this tax hurdle by increasing the itemized medical expenses threshold from the previous 7.5% to the current 10%, making it even harder for the individuals to receive a deduction.
2) Labor Market Forces: One of the challenges to every innovation is inertia. Dropping coverage is an economic experiment few employers have the appetite to take. Employees are mobile and place a huge premium on benefits – partially due to their compensatory value, and more because of their psychological tie to the well-being of their family. Taking away benefits is quite personal and many employers have wagered that it would likely lead to significant attraction and retention concerns. This issue has been compounded as these last few years have ushered in some of the greatest labor market gains in this country’s history. Unemployment has fallen to 5% and over 10 million jobs have been created since the Great Recession. Regardless of any economic advantages it may foretell, employers are not apt to disrupt their workforce on a broad scale in a robust labor market for uncertain long term profit gains.
3) Exchange Plans Inadequacy: In the years following ACA’s passage and all the excitement around the advent of the “exchange”, few predicted how deficient the end product would be. After all, wouldn’t the insurers want to offer their best products so they can gain market share in what will surely be a major new market? Well the reality could not have been any worse. You cannot purchase traditional health insurance through the exchanges. There are narrow networks, sky high deductibles, poor administration, quirky benefit features, no out-of-network protection and so on. I read an editorial that called these exchanges “Medicaid Plus.” That’s probably being generous. The inadequacy of the exchange plans has exacerbated the issue of the 2nd point above. Any employer’s consideration in disrupting its labor supply is predicated on its employees finding a comparable benefit on their own. That simply does not exist.
Barring any major changes to the tax code, I don’t foresee the current reality changing. If the labor market should weaken and the exchange market strengthens, we may see some employers try exiting the market. Still it will be contained to the periphery with no mass exodus in sight. So policy experts and business owners should plan accordingly.