Obamacare And The End Of Employer

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According to the American Action Forum, 43 million American workers will lose access to employer-based health insurance coverage because of Obamacare. Critics of the Affordable Care Act (ACA) have warned that the creation of health insurance exchanges, and federal subsidies for people earning less than 400% of the federal poverty limit, practically invites employers to stop offering coverage to their employees, so the federal government picks up the tab. Some supporters of the ACA even celebrate this possible exodus from the employer-based insurance market, figuring it is prelude to a government takeover of the healthcare industry.

What is missing amidst all these claims and controversies is good old-fashioned data. Fortunately, recent research published in the journal Health Affairs provides some levelheaded evidence about what has been happening to employer-based insurance over the past decade, and what we can expect to happen in the future.

The first article was written by Thomas Buchmueller and colleagues, from the University of Michigan. The Michigan team began by analyzing trends in employer-based health insurance coverage in the United States from 2000 to 2011. Trend number one, illustrated in the picture below, serves to remind us that big companies - with 100 or more employees - have consistently offered health insurance to their employees over this period of time, while insurance coverage has been much more hit or miss for smaller firms. The second trend, also illustrated in the picture, shows that insurance coverage from small and medium companies dropped dramatically over the past decade:

The authors eloquently explain why health insurance makes so much sense for big companies. Because of their large size, these companies are able to negotiate lower premiums with insurance companies, because they have enough employees to reduce their actuarial risks. If a company employing 10 people is unlucky enough for one of their employees to experience a serious cancer diagnosis, for example, the insurance company offering coverage for this company will lose money on that company's business. By contrast, there is not much chance that a company with 5000 employees will have 500 of their employees develop cancer over the next year. Big numbers reduce risk. And reduced risk means lower insurance premiums.

As for the decline in coverage over time, the Michigan team did not speculate on what caused this trend. But a second picture from their article might offer an explanation. That picture, shown below, illustrates the percent of companies offering health insurance based upon how well these companies pay their employees. The Michigan team finds a huge difference in health insurance coverage, with low-wage companies - those paying the majority of their employees less than $11.50 per hour - being much less likely to offer health insurance to their employees, unless these companies have 100 or more employees:

Why this drop in coverage in these lower paying companies? To understand that, it helps to think of health insurance coverage as part of an employee's overall take-home pay. Suppose I am your employer, and am willing to pay you $50 an hour. Now imagine that you express interest in receiving health insurance coverage. I could offer you such coverage by reducing your take-home wages a little bit, and offering new health benefits in place. In fact, both you and I will get tax breaks for the money we spend on health insurance coverage, so the subsidy means that your overall take-home pay - wages plus health benefits - will be greater than if I only offered you wages and asked you to buy health insurance on your own. That is a large incentive for me to offer you health insurance coverage.

Now suppose instead that I'm paying you to flip burgers for me at minimum wage and that you want health insurance coverage. I cannot - repeat cannot - lower your wage any further to make up for the cost of offering you healthcare insurance. That means any money I spend on health insurance coverage is costing me, creating a big incentive for me not to offer you insurance coverage. The end result is a double whammy for you - lower pay and fewer benefits.

This relationship between wages and insurance coverage partially explains the decline in coverage that has occurred between 2000 and 2011. Our economy is becoming increasingly winner take all, with fewer people working for medium or high wages. As more employees work for lower wages, they also end up working for companies unable or unwilling to offer them health insurance coverage.

What does this mean for employer-based insurance coverage, now that the ACA is slowly kicking into gear? The Michigan team provides a lucid set of predictions, which I suggest you read by checking out their full article. But to briefly summarize: they think things probably won't change much for the vast majority of Americans, who currently receive health insurance coverage from the government or from large employers. Health insurance benefits, they contend, will still make sense for most large employers. Remember after all they get a huge tax break.

But for small and medium employers, things get more complicated. Very small employers, those with 50 or fewer employees, will get a new tax credit from the ACA if they offer insurance to their employees. And their employees will eventually be able to purchase health insurance through the exchanges. For medium-size businesses, on the other hand, trends in coverage will depend on how they view the balance between the benefit of offering insurance to their employees - the tax breaks and the avoidance of new penalties - versus the price of that insurance coverage. For high wage earners, they don't expect to see many problems. For low-wage workers, the ACA may accelerate earlier trends.

Another article in the same issue of Health Affairs shows just how dramatically things might change, if health insurance costs rise dramatically over time. The more it costs to provide employees with health insurance, the more incentive employers have to direct employees to the insurance exchanges, and to pay what is a fairly modest penalty. In the picture shown below, you can see what kind of insurance premiums are likely to lead most people end up in the exchanges:

The picture also shows just how much this will cost the federal government, if use of the exchanges rises dramatically among people making less than 400% of the federal poverty limit.

The US employer-based health insurance system has long been a complicated mess. Expect it to remain that way once the ACA is fully functional. If too many employers stop offering health insurance to their employees, the whole system might crumble. Then it might be time to take the job of insuring the American population away from the people who provide Americans with jobs.