Will Employers Drop Coverage? Don’t Bet Against It…
A few weeks ago, the Urban Institute released a paper regarding its own analysis of the impact of the health care law on employer-sponsored coverage. While the institute’s model alleges that employer sponsored coverage will remain largely intact, the paper itself notes that their simulation model is based on individual preferences for insurance. In other words, if employers decide to drop coverage, the Urban model outlined in the paper is largely irrelevant, as individuals won’t be able to keep their current group health plan.
The Urban paper attempts to refute claims by former CBO Director Doug Holtz-Eakin, whose previous analysis concluded that millions of workers would benefit – as would their employers – if firms dropped coverage and raised salaries instead, with workers relying on federal insurance subsidies in the Exchanges. The Urban study concedes that some individuals might be better off if their firm dropped coverage, but maintains that, because the existing tax subsidies for group insurance will exceed the value of the federal health insurance subsidies for most high-wage workers, most large firms will maintain their coverage plans. (The study does predict a small net decrease in coverage for firms with fewer than 100 workers.)
The above analysis however comes with a big caveat that’s worth examining closely:
The extent of dropping due to the ACA could be larger than we predict, however, if workers and firms were to re-sort or reorganize into ones employing mainly low-income workers and others employing mainly high-income workers substantially more than is the case today. Because firms already face such incentives and because a diverse mix of skills is needed for most enterprises, we think the scope for ACA-induced restructuring of firms is limited and dominated by the other considerations we have described. It is, however, an additional source of uncertainty in our estimates.
In other words, the authors concede that re-structuring that results in a bifurcation of labor into lower-income and higher-income workers would raise significant questions about the continued viability of employer coverage for the former group. But in the corporate world, restructurings are relatively common – Yum Brands (which operates KFC, Taco Bell, and Pizza Hut outlets) was spun off from Pepsi, AOL was spun off from Time Warner (after the former acquired the latter a decade ago), and telecom company Avaya was spun off from Lucent Technologies (which itself was spun off from AT&T). More recently, some suggested that financial institutions holding “toxic” assets could spin those assets off into a “bad bank” (how Ireland is handling its burst real estate bubble).
All this raises an obvious question: If corporate spin-offs and re-structuring efforts are relatively common, why won’t businesses just spin-off (or otherwise re-structure) their operations to separate lower-income from higher-income workers? The lower wage workers would receive higher wages but no health coverage – being sent instead to Exchanges, to purchase insurance on federal taxpayers’ dime – while higher-income workers would continue to receive employer-provided benefits under the current tax exclusion. In the past, airline and auto firms used re-structuring under the bankruptcy code to shed their retiree health costs – and there is little reason to believe that firms, particularly those facing major competitive pressures, wouldn’t use a corporate re-structuring in a similar way, to minimize their financial obligations for health coverage while maximizing new federal subsidies available to their workers for same.
Even Jonathan Gruber – a paid consultant to the Administration on the health care overhaul – admitted the uncertainty behind his estimates of health coverage. Writing in last month’s edition of Health Affairs (subscription required), Gruber admitted that employer “reactions may differ when broad market reform and large subsidies make non-group insurance more attractive,” and that “if large employers react to the new situation by reducing insurance coverage, their action could start a wider trend toward reduced employer spending.” In other words, the Urban Institute’s claims that employer-sponsored coverage will endure in a post-reform environment are highly speculative and uncertain at best, and – if one presumes employers are willing to undertake re-structuring efforts in order to shed themselves of significant health care liabilities, as they have in the past – all but guaranteed not to materialize at worst.