Healthcare Reform: A Disaster Scenario Looms If Employers Dump Coverage

Last Updated Oct 25, 2010 5:45 PM EDT

In a provocative Wall Street Journal op-ed, Tennessee Gov. Phil Bredesen, a Democrat, raises the possibility of a mass employer exodus from health coverage, starting in 2014. If he's right -- and the signs are increasingly pointing in that direction -- the White House needs to start planning now, since that scenario has the potential to drive up healthcare-reform costs significantly.

Here's the thesis: As a result of government subsidies for workers who buy insurance through the future state insurance exchanges, employers have every incentive to drop coverage and pay a $2,000-per-worker penalty, since they'll still come out way ahead. Of course, since the employers now pay 75-80 percent of the premium, and the federal subsidies aren't that high, they'll have to give their employees a salary increase to make up the difference. But even if they do, Bredesen says, they'll save a bundle.

Bredesen sketches a hypothetical scenario involving the employees of Tennessee state government. Today, 40,000 people participate in the state's health plan. After factoring in the difference between the employees' current insurance cost and their cost of buying it through the exchange, as well as new taxes and an inefficiency factor, Bredesen figures that if the state dropped its coverage today, its total cost for making sure that employees had equivalent insurance would be about $200 million. If Tennessee continued to cover its workers, by contrast, it would have to pay $346 million. So by transferring partial responsibility for coverage to the federal government, the state could save $146 million a year.

Local governments would find this scenario even more attractive, he adds. Many offer health plans that don't meet the minimum federal standard, which means they'll face a rapid increase in their insurance costs if they don't move their employees into the insurance exchanges.

In the private sector, there have already been rumors about large corporations that plan to drop coverage. Last May, with the ink on the Affordable Care Act barely dry, Fortune magazine unveiled internal company documents showing that Verizon (V), AT&T (A), John Deere (DE), and Caterpillar (CAT) were all considering dumping coverage, giving their employees a raise, and paying the government fine. More recently, McDonald's and 30 other big companies with low-wage workers got government waivers to keep offering their inexpensive "mini-med" plans, which offer benefits far below the minimum that will be required, starting next year. It's pretty clear that they'll tell employees to take a hike for insurance, come 2014.

In perhaps the most telling sign of things to come, Paul Keckley, the sage of Deloitte, tells the Associated Press that many of his consulting company's clients would love to get out of providing insurance:

I don't think you are going to hear anybody publicly say "We've made a decision to drop insurance." What we are hearing in our meetings is, "We don't want to be the first one to drop benefits, but we would be the fast second." We are hearing that a lot.

What would happen if a large portion of currently insured employees came crashing into the insurance exchanges? For one thing, Bredesen points out, it would greatly increase the cost of healthcare reform. The Congressional Budget Office (CBO) has forecast that only about 3 million people will lose their employer-provided coverage as a result of the reform law. If it were 10 or 20 times that number, and the government had to subsidize them all, there would be fiscal and political hell to pay.

Officially, the administration claims there's no problem. Obama economic advisor Jason Furman says that the ACA increases incentives for employers to offer coverage -- which makes sense in terms of helping employees meet the federal mandate. A spokeswoman for the Senate Finance Committee, which helped shape the legislation, said that the fine for not providing coverage and the adverse tax consequences would more than outweigh the savings. But with family coverage now weighing in at almost $14,000 a year, that's nonsense.

The uncomfortable truth is that while the White House had to compromise a lot to get the reform legislation through, it's now facing the consequences of not slapping a much heavier penalty on large employers that don't cover their workers. But the political prospects of doing so now appear dimmer than ever.

Image supplied courtesy of Wikimedia Commons.

  • Ken Terry

    Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.