After a year of false starts on “repeal-and-replace,” rarely a day passes now that some action isn’t taken on healthcare reform. After the Individual Mandate zero-out surprisingly made it into tax reform at year-end, we’re already on to considering association health plans and work requirements for Medicaid. Yet, the largest single segment of health insurance coverage in the U.S. — employer-based coverage — keeps trucking along, contending with decades of unbroken premium and service cost increases. Will that pattern change soon?
On the surface, the impacts of Obamacare have been relatively minor in the employer market. Some requirements of group-based coverage arguably caused an early spike in costs, but premium cost increases on employer coverage have actually slowed in the Obamacare years.
Yet premium costs aren’t the whole story. The largest new cost of Obamacare to employers has been administrative — the Employer Mandate.
The Mandate, once thought to be the canary in the coal mine of employer-based health insurance coverage, is intended to serve the same role for employers and employer-based health insurance as the now-zeroed-out served the individual market. Namely, it’s meant to discourage employers from not offering their employees coverage by instituting tax penalties for non-compliance. It also changed the employee eligibility requirement from 40 hours average weekly to 30 hours — hence the need among large employers for extensive (and costly) ACA reporting to determine what, if anything, employers owe for non-compliance.
Alas, like the Individual Mandate, the penalties set by the Employer Mandate are widely believed to be too weak to make the market-altering difference in company behavior noted in the 2011 McKinsey study — too little for companies to feel threatened by noncompliance and too much for companies to drop coverage and take the tax hit as a way to save money and “opt out” of covering their employees. (This decision was referred to extensively as “pay or play” in the early 2010’s.)
With that said, policy is secondary to the to the key factor driving the insignificance of the Employer Mandate, which is the same one that gave rise to the uniquely American employer-based healthcare system 75 years ago: competition.
Since the ACA passed in March 2010, with the worst of the Great Recession in the rear view, the U.S. economy has grown nearly uninterrupted for seven years. Unemployment has remained below 6 percent for the past three years and below 7 percent for four years. From there, basic economics have applied: When unemployment is low, competition for workers is high; when competition for workers is high, benefits are a crucial tool for recruitment and retention. The most important employer-based benefit in the United States is health insurance. As such, the Kaiser Family Foundation’s “2017 Employer Health Benefits Survey” shows that health insurance offerings among large employers (50-100+ employees) has only declined by 3 percent since 2010.
Yet the same chart shows that, among small employers (50 or fewer full-time employees), where the Employer Mandate penalty for noncompliance does not apply, the decline over the same 7-year period is 16 percent. (Even after accounting for the noted statistical anomaly, the decline is still above 10 percent in just seven years.) When accounting for companies of all sizes, the decline is also 16 percent.
That number represents millions of employees who once got benefits from their employer and no longer do.
Why such a steep decline in the small market and not in the large market? The two reasons we’ve seen and heard most commonly from employers are pure costs and availability of alternatives. In the first, healthcare costs, which are far higher in the United States than similar countries and are the significant driver of the cost of health insurance across the board, are generally an even greater burden for small employers than for large ones. Small companies in most industries cannot weather non-operating cost (or operating cost, for that matter) increases as effectively as large companies. Since the ACA provided no Employer Mandate for small companies (i.e. no penalty for non-coverage) and actively promoted the individual market as an option for both small employers and employees who weren’t getting coverage from their small employers, these employers could drop employee coverage without looking, and feeling, like the bad guy. As such, the 16-percent decline in coverage is likely a more accurate natural decline than the lower percentage among large companies, which are subject to the Employer Mandate.
Large employers must consider the $3,000 penalty for non-coverage of each eligible full-time employee. That amount is almost always less than the cost per employee to provide coverage, which a recent survey pegged at $14,000 per person in 2018. But the Employer Mandate is a pure penalty, i.e. they get nothing in return, and they also lose thousands of dollars in tax breaks per employee by dropping coverage. And anyway, they’re competing for the best talent. With health insurance still the cornerstone of benefits packages, large employers aren’t going to drop it until they either can’t bear the costs of keeping it or their competitors drop.
Or are they?
In our frequent conversations with large employers across a broad spectrum of industries, we hear two consistent messages about health coverage: 1) We want to take care of our employees by offering them coverage, but 2) doing so is getting increasingly costly and complicated, and we can’t bear the financial and administrative burden much longer without significant changes. This conflict is what may ultimately lead to a shift among large employers to not offering health insurance the way they do now — but not without potential policy updates first.
While efforts to repeal and replace the ACA have largely failed thus far, the Employer Mandate hasn’t been a resounding success in either keeping large employers in the health insurance game, nor has it generated a ton of additional tax revenue. As of this writing, the Trump Administration planned to enforce the Employer Mandate by collecting penalties from companies for the first time but had already delayed that enforcement once.
If the Employer Mandate were removed as a requirement or simply not enforced, then the large employer market dynamics, save for the matter of competition-driven proxy behavior, becomes more akin to the small employer market, where there is no penalty and an available alternative for employees in the individual marketplace. Competition alone may provide enough of a status-quo mentality to make the removal of the Employer Mandate have minimal impact.
But the White House may break right through that minimal impact.
In its ACA-related Executive Order in October, the Trump Administration explicitly outlined the desire to expand the availability of health reimbursement arrangements among large employers, something done at the end of 2016 for small employers as part of the 21st Century Cures Act. opening the possibility of them being provided to employees for individual coverage while ensuring employers maintain a tax preference on HRA funds. If the order is instituted as written, it could mean that employers of all sizes could save themselves millions in both actual dollars and resource allocations toward their benefits plans. As with the shift from defined-benefit pensions to defined-contribution 401(k)’s, health insurance would become money provided to employees to spend on individual health plans as they see fit. The employer maintains their tax preference, and employees stay covered. Likewise, employers will then look more readily to third parties to help with health insurance, in the same way they currently look to companies with consumer-oriented profiles (Vanguard, Fidelity) to manage retirement accounts on behalf of employees.
Just as it makes sense that large employers would not drop coverage with the combination of how the ACA was written and how competition impacts their benefits decisions, it makes sense that if these two major factors were to change — no more Employer Mandate and HRA expansion to individual coverage — then employers would change their health benefits strategies in significant numbers.
In fact, it already almost happened without these two factors. Back in 2012, several companies with large hourly workforces for which the majority of those workers were not benefits-eligible but large numbers were on the cusp of becoming eligible due to the ACA’s shift to 30-hours per week average as the threshold for benefits eligibility, decided to test the waters of dropping coverage and/or changing employees’ hours to keep them under the threshold. It was a PR disaster; one company was forced to backtrack because it was impacting them as a consumer brand, not just as an employer. Another large nationwide employer is trying to settle for multiple millions after reducing workers’ hours and citing not being able to afford covering additional employees as the reason.
Other retail and hospitality companies, seeing this cautionary tale play out, went with other options. Some went to private exchanges that promised to offer employees choice, control costs and remove the administrative burden from the companies. Other companies with large hourly workforces took a different approach by preemptively giving all part-time workers a small stipend (with no HRA advantage to the employer) to spend on individual health benefits. They were treated much more positively in the press and social media for the action, while their reasoning was virtually the same.
It’s the latter action that becomes a much more valuable option to employers and, ultimately, may become more valuable to employees as well.
Of course, for that to happen and to get to a post-Employer Mandate world that is positive for employees and employers, then the individual market needs to become more stable than it has been the past several years, with its huge premium increases, many health plan exits, and narrowing networks and plan choices — not to mention Trump’s executive order on association health plans, which could normalize offering short-term coverage, derided as bad for consumers, to options offered by small employers.
There is a clear, if not smooth, path to more stability in the individual market: sheer numbers. If the relatively small individual market gets an infusion of millions of new customers via HRA-driven shifting of employees, then the pool of covered lives quickly grows large enough to spread the risk much more widely, thereby lending more stability to the market. It will take substantial shifts by health insurance payers to become more consumer-centric and focused on the individual market. But over the course of the past decade, health insurers have shown themselves to be surprisingly able to adapt to new market dynamics. They don’t like it but they’ll follow customers wherever they go to stay relevant — as seen by the rise in both high-deductible health plans (HDHP’s) and Medicare Advantage.
Such a monumental transition may sound counterintuitive, to put it mildly. And certainly the healthcare sector doesn’t always operate as you would expect a free market to operate. But where economics are most purely shown to align with supply and demand — the small group market of (mostly) fully insured companies — the decline in coverage (16% in less than a decade) has been substantial and undeniable. With significant changes to the Employer Mandate and HRA’s, the large group space starts looking more like the small group space, not vice-versa.
Even if you don’t need convincing that the large employer market is going to shift substantially, you may not think that employers will or should feel responsible for helping their employees obtain coverage if and when a shift to a defined-contribution approach happens. Our experience, as noted above, is that employers care a great deal about the health and well-being of their employees and that it’s cost and administrative burden, not the act of providing health insurance itself, that will ultimately drive them out of the health coverage business, the same way it drove them out of pensions. Moreover, it’s the industries with lower-wage workforces — retail, hospitality, customer service — that are most inclined to think seriously about the impact of the Employer Mandate. But, generally, they still want to see their employees healthy, happy and covered, both for what it does for those employees and for what it does for the company’s bottom line.
Indeed, a 2007 study by the U.S. Chamber of Commerce noted the importance of helping your employees find and obtain public assistance available to them. Programs like Medicaid (low-income health coverage), S-CHIP (low-income children’s health coverage), Head-Start (pre-school and daycare) and SNAP/TANFF (food assistance) can relieve the financial burden on the low-income, hourly workers while also making them more effective employees who experience less absenteeism due to poor health or personal needs. You can add Obamacare to that list.
It’s valuable to remind ourselves that the U.S. system of health insurance is truly unique in the world. It is less centralized than virtually any other system. As such, sweeping prognostications tend to fall flat precisely because they try to apply the same rules across the board. The employer-based model is responsible for the coverage of cumulative hundreds of millions of people. But it is not immune to market forces. If it becomes too costly for employers to cover their employees and stay in business, then no amount of competitive pressure will force them to stay in the game. It’s possible that reining in costs will change the economics of offering coverage to a position that’s favorable enough to save it. But if it doesn’t, if it goes the way of pensions, then it’s paramount that we are ready to offer solutions that will keep Americans covered while also ensuring a healthcare system that is not just healthy in the short run but sustainable in the long run.
This article was originally published on LinkedIn with co-author George Kalogeropoulos, CEO of HealthSherpa.
George Kalogeropoulos is CEO and co-founder of HealthSherpa, a certified web-based entity that has helped more than a million people nationwide find and enroll in health insurance since 2013.
Shandon Fowler is the founder and principal of Four8 Insights, a healthcare and benefits technology strategy group based on Charleston, S.C.
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