Why Employers Won’t Stop Offering Health Care Coverage

Critics of the Affordable Care Act argue that the law encourages businesses to stop offering health insurance coverage by imposing a penalty on large employers whose employees receive tax-payer subsidies within the state-based exchanges. Since the penalty is lower than the cost of offering benefits, employers will have an incentive to dump their workers into the exchanges, increasing the costs to taxpayers, the critics say.

But other health economists have long claimed that this kind of analysis — advanced by Douglas Holtz-Eakin and others — misses the complexities involved in employer decision making and today Linda Blumberg, Matthew Buettgens, Judy Feder and John Holahan of the Urban Institute are out with a new study explaining why firms would be discouraged to dump their workers:

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. The strength of employee preferences may be hard to read in the short term, and some employers may seek immediate financial gain in benefit reduction as markets adjust to new circumstances. But over 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.



In general, if an employer drops coverage, better-paid workers will be worse off. Even if they receive higher cash wages to offset the loss, they will face taxes on these wages which, keeping overall compensation at the level of their value to the firm, will not be offset. Exchange benefits will also be unattractive, relative to employer provided benefits, for better-off earners. Exchange-based subsidies are limited to plans with an actuarial value no greater than 70 percent, a value much lower than provided by the typical ESI plan (85 percent).

The whole report is worth reading here. Generally, my take is that we’ve seen fluctuation in the employer health insurance market before reform and will continue to see changes as we move through implementation. But employers, who are very interested in controlling their health care costs, will likely continue to offer insurance for the forseeable future and when they don’t, Americans will have a sensible and affordable options to fall back on.