On Oct. 25, 2013, the Baker Institute Health Policy Forum hosted its fourth biennial conference on health care reform. This series of blogs discusses the implications of the 2010 Affordable Care Act for the U.S. health care system and the well-being of the population.
Read other posts in this series:
- Dual roles of individual and benefits mandates
- Vertical agreements in health care can be pro- or anti-competitive
The extent to which employers will stop offering health insurance in and after 2014 is an important issue that has been a common topic of debate among academics and pundits. The Affordable Care Act’s individual mandate and exchange-coverage premium tax credits (subsidies) will go into effect in 2014. The employer mandate has been delayed until 2015. Meanwhile, it’s true now and it will remain true that employer-sponsored insurance (ESI) is exempt from taxation (“the tax subsidy”).
In considering how the Affordable Care Act (ACA) will impact ESI offers, it is important to recognize two things: 1) ESI offers, generally, have been falling for years, and 2) ESI offers increased in Massachusetts when the state implemented a health care reform law very similar to the ACA.
Both these facts are illustrated in the following chart from a 2011 report by Massachusetts’ Division of Health Care Finance and Policy.*
In 2012, using Medical Expenditure Panel Survey data, Jean Abraham, Peter Graven and Roger Feldman examined employer offers in a paper published by the National Institute for Health Care Reform. Instead of looking back, as the chart above does, the paper looked ahead and considered the economic incentives to offer ESI before and after the 2014 ACA-mandated changes. Their analysis is from the perspective of employers who act as employees’ agents, considering what is in their workers’ best economic interest.
The economic incentive or disincentive is calculated by adding the dollar value of the ESI tax subsidy and the value of avoiding the penalty for not offering insurance, and then subtracting the value of the premium tax credits that eligible workers could use in an exchange if their employer does not offer coverage.
The results of this calculation are presented in a series of tables that stratify establishments by various criteria.** I encourage you to examine them in full. Here is one example:
Most (81 percent) of establishments that currently offer ESI will continue to have an economic incentive to do so, even after health care reform is implemented. About two-thirds of establishments that do not currently offer ESI will not have an incentive to do so after reform. Other results include:
- Because some are exempt from the employer mandate, smaller firms will have a weaker incentive than larger firms to offer ESI after reform. However, on average, firms with fewer than 50 employees still have a positive incentive to do so.
- Post-reform and on average, establishments in the agriculture, forestry, fishing, accommodation, food service and entertainment/recreation industries (but no others) have an incentive not to offer ESI because workers in these industries are more eligible for exchange subsidies.
- For the same reason, establishments with more than half their workers earning under $11 per hour will not have an incentive to offer ESI post-reform.
The authors point out, as does my own analysis with Steve Pizer and Lisa Iezzoni, that the excise (Cadillac) tax, which will begin to tax high-premium plans in 2018, will further decrease the incentive for employers to offer ESI. There are, however, other reasons why employers offer coverage, as the authors note:
[A]n employer may choose to offer ESI to attract and retain workers in labor markets with low rates of unemployment, or it might place more weight on the preferences of key, higher-wage workers relative to the average worker considered in this analysis. Alternatively, an employer’s decision to not offer ESI may reflect that its workers simply prefer more taxable income over tax-free health insurance irrespective of any economic advantages. …
After 2014, … employers may be much less certain about the potential eligibility of their workers for exchange subsidies, because they lack information about whether workers’ spouses have access to ESI or whether the family incomes of their workers would make them eligible for premium tax credits.
All in all, one should expect ESI offers to decline over time, as they have in the past. However, as in Massachusetts, they might first increase if the individual mandate increases employee demand for coverage through work.
* The report hypothesizes that the upward jump in 2010 in the U.S.-wide offer rate results from a higher fail rate among non-offering firms due to the poor economic climate. A longer time series for employer offers can be found on page 6 of this Kaiser Family Foundation survey.
** The employer mandate penalty has been delayed one year. Therefore, interpret the post-reform results either as presuming employers are anticipating the penalty or as applying to 2015 and beyond.
Austin Frakt is a health economist with an educational background in physics and engineering. He has appointments with Health Care Financing and Economics at the VA Boston Healthcare System, U.S. Department of Veterans Affairs and with the Department of Psychiatry and the Department of Health Policy and Management at Boston University. Since 1999, he has studied economic issues pertaining to U.S. health care policy with a recent but not exclusive focus on Medicare and the uninsured. Frakt has authored numerous peer-reviewed, scholarly publications relevant to health care financing, economics and policy, and he is the creator, co-manager and a primary author of The Incidental Economist.