Post-Healthcare Reform: Companies Are Already Thinking About Dumping Worker Health Benefits

The Affordable Care Act contained one basic assumption that almost never got mentioned in the healthcare-reform debate -- namely, that employers, particularly big corporations, would continue providing coverage to their workers. Now it looks like that might not be true. Whoops.

New evidence reveals that four big companies -- Verizon (V), AT&T (A), John Deere (DE), and Caterpillar (CAT) -- recently considered dumping health benefits and giving employees a "raise" to buy coverage on the state insurance exchanges to be created by the reform law. All bets are off if that happens.

The evidence comes from internal company documents that Fortune magazine obtained from a congressional committee, which requested them while investigating big-corporation complaints that the Affordable Care Act would collectively cost them $1.35 billion. (Short summary: The law closes a tax loophole that let companies double-count tax benefits established by Medicare drug program.) The committee was going to hold hearings on the companies' write-downs of this money, writes Fortune's Shawn Tully, until it saw the documents.

What they revealed is that all four companies believed that the savings for dropping employee health coverage would far outweigh the penalties they'd owe under the reform law for doing so -- about $2,000 per employee. Even if the companies gave their workers raises with a post-tax value exceeding the cost of insurance premiums, after government subsidies, that amount plus the penalty would cost far less than the corporate health benefits did.

A slide from an internal AT&T presentation tells the story. Titled "Medical Cost vs. No Coverage Penalty," it shows that in 2009, AT&T spent $2.4 billion on health benefits for its nearly 300,000 active employees. The penalty for not covering those employees, by contrast, would be only $600 million, or 25 percent of its current spend.

Under the reform law, a policy for a family of four with an income of $66,000 a year would cost about $5,300 if the family bought it on an insurance exchange with a government subsidy. If a company like AT&T gave an employee the pretax equivalent of that amount as a raise, instead of insuring his or her family, it would save thousands of dollars. Even better, that approach could limit its defined contribution going forward.

Of course, lots of companies are already curbing their insurance costs by offering "consumer-directed health plans," which combine a tax-favored health savings account (HSA) with a high-deductible insurance policy. About 9 percent of U.S. employees were in such plans in 2009, triple the number in 2006. This year, 24 percent of large employers and 18 percent of small companies are expected to offer CDHPs. Some companies are simply giving employees a check from which they are supposed to buy an insurance plan and invest whatever remains in their HSAs.

So where are we heading? Is the employer-based insurance system that we've had since the 1940s about to unravel?

None of the companies mentioned above has actually dumped its health benefits, probably because the competition isn't doing so. (Also, the insurance exchanges won't be up and running until 2014.) But at some point, unless the government can figure out how to rein in health-cost growth, that could change. Already, a lot of small firms are ditching benefits. When and if large corporations join the rout, we'll be looking down the snout of an entirely different beast than the one that's now devouring corporate profits. And the cost of reform is likely to skyrocket.

Image supplied courtesy of Tambako the Jaguar at Flickr.