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Cutting Through Barrasso’s Simplistic ‘Employers Will Drop Coverage’ Argument

Sen. John Barrasso (R-WY) explains why he thinks employers will drop coverage as a result of the Affordable Care Act in today’s Deseret News:

Under the law, businesses are permitted to drop out of paying for employer-provided coverage so long as they pay a fine of $2,000 per employee. This number is far smaller than the $15,000 it costs businesses to provide family health benefits to each of their employees. Small businesses face an even clearer incentive to drop coverage for their employees. They are not required to pay this fine for the first 50 workers who lose coverage.

But economists and economic studies disagree. They argue that Barrasso’s calculation of whether or not dropping coverage and paying the employer penalty in ACA would be more financially beneficial to employers is too simplistic. Once businesses account for other factors — firms would need to compensate workers from whom they remove a current benefit, offering insurance helps recruit top tier employees — they find that the cost per employee actually increases. As the Urban Institute explains, “[T]here is little scope for firms being able to save money from dropping ESI [employer sponsored coverage] coverage except perhaps in firms where most workers have low wages as well as low family incomes, and these types of firms are the least likely to offer ESI today.”

For that reason, the Congressional Budget Office estimates that “the number of people obtaining coverage through their employer would be about 3 million lower in 2019 under the legislation” and actuaries at CMS found that just 1.4 million would move out of employer coverage. In fact, a comprehensive review of all the available employer surveys concluded that “the ESI market will be fairly stable after 2014 when key ACA coverage provisions go into effect.” The only analysis that found otherwise (Douglas Holtz-Eakin’s effort) relied on Barrasso’s simplistic model:

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Interestingly, Barrasso attributes his claims to just two sources, “a study co-authored with my colleague, Sen. Tom Coburn (R-OK)” and “a June study by McKinsey and Company.” Barrasso’s study speaks for itself, but the now-debunked McKinsey survey has been all but abandoned by the company. As McKinsey explained after the public outcry, the survey “was not intended as a predictive economic analysis of the impact of the Affordable Care Act. Rather, it captured the attitudes of employers and provided an understanding of the factors that could influence decision making related to employee health benefits.”