Why Employers Will Continue to Provide Health Insurance: The Impact of the Affordable Care Act Timely Analysis of Immediate Health Policy Issues October 2011 Linda Blumberg, Matthew Buettgens, Judy Feder and John Holahan In Summary 1. Analysis by the Urban Institute challenges the claim that ACA compensation would likely antagonize the very workers that employers creates a “win-win” opportunity where many employers will drop most want to keep—more experienced, more senior employees. coverage and make their workers and their firms better off. Although some employers may still choose to seek short-term gains by 2. Over time, no such “win-win” situation exists.The key to the ACA’s dropping insurance without increasing wages, market competition will impact on employer sponsored insurance (ESI) will be whether ultimately eliminate underpayment, force employers to adjust, and bring most workers prefer ESI to coverage newly available through state total compensation into line with workers’ value.There is, therefore, no insurance exchanges. widespread incentive for employers to either drop employee coverage, or to encourage low-wage workers to drop their coverage voluntarily. 3. The Urban Institute’s (along with Rand’s and CBO’s) microsimulation model shows that ESI will likely remain most workers’ preferred and therefore primary source of coverage, even as the ACA is How do the “winners” and “losers” of dropping implemented. stack up? Whereas tax subsidies for employer benefits increase with income, the Background opposite is true for subsidies under the exchange. Analysts agree that With or without the ACA, employers provide benefits to employees only at or below an income of 250 percent of the federal poverty level to the extent that the labor market demands, and to the extent that do the ACA’s subsidies make exchange coverage as good as or better than costs—when combined with wages—do not exceed employees’ worth employer-sponsored coverage. Firms dominated by workers within this to the firm.Traditionally, the insurance market, labor market and tax income range are likely to drop coverage, substitute extra wages (less incentives work together to make workplace-based health insurance penalties) for benefits and make their low-wage workers better off. cheaper and better for employees as compared with insurance they But 80 percent of U.S. workers overall—and the group most likely could obtain on their own.There’s always a tradeoff, however, between to dominate most workers’ firms—would lose out if employers drop wages and benefits. Rising health costs make it harder for employers coverage. Since compensating them for the loss of benefits would to keep wages low enough to hold total compensation equal to the increase costs to employers, and thus create a disincentive to drop, most workers’ value to the firm, so coverage has declined, especially for employers will continue to provide coverage. low-wage workers. Decreases in ESI—driven by rising per capita health Making dropping even less likely is the difficulty of identifying “winners” care costs—will likely continue, but implementation of the ACA will not and “losers” in advance. Employee preferences are complicated, and unravel ESI coverage. factors like age and family status may reduce the attractiveness of exchange-based coverage in unanticipated ways. Even workers who Does the ACA change employers’ incentives? benefit financially from exchange subsidies may prefer the security of For some (especially lower-wage) workers, the ACA’s subsidies and its employer-subsidized benefits to the risk of having to repay an exchange- soon to be created insurance exchanges will make acquiring health based subsidy deemed “overpaid” based on income at year’s end. insurance outside of the workplace a better deal. But the law, with some Employers who drop coverage, therefore, also risk undermining worker very limited exceptions, prevents workers with employer coverage from loyalty, increasing worker turnover and disrupting employees’ benefit taking this deal. For these workers to access subsidies, employers must expectations. drop coverage (and pay penalties) for all employees. What then, are the long-term prospects for But an employer who drops coverage won’t save money overall, as some incorrectly speculate. Employers who drop workers’ coverage, employer-sponsored insurance? but fail to increase employees’ wages in order to maintain their overall The best microsimulation models approximate employees’ complex compensation, will inevitably lose these employees to competitors.Thus, preferences and allow the simulation of employer decisions in a employers who drop coverage must in turn, increase wages. Employers dynamic marketplace. Analyses using these models find that employer- who try to fully compensate employees for lost benefits on top of paying sponsored coverage under the ACA would not be significantly different the necessary penalties would have to increase total compensation costs. than without it. In fact, employer-sponsored coverage actually grew in Raising employee premium contributions in an effort to encourage Massachusetts following the state’s enactment of health reform similar only low-wage workers to drop coverage voluntarily (to take advantage to the ACA. of subsidies) raises additional challenges. Doing so could leave the Although predictions are inherently uncertain, the most thorough firm providing insurance only for its higher-wage, older workers, analyses support the conclusion that the ACA will leave employer- who cost more per person to insure. Requiring these workers to pay coverage largely intact, even as it creates a viable insurance market for higher premiums or reducing wages as necessary to maintain overall those people employer-sponsored insurance fails to reach.For more information, read the full report funded by the RobertWood Johnson Foundation and prepared by researchers at theUrban Institute.