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Will the ACA cause employers to drop coverage?

Over at the Tax Policy Center, Gene Steuerle writes that the Affordable Care Act "will make it beneficial for many employers to drop their insurance coverage." This, Reihan Salam says, substantially complicates the political case for the reform, even as it may strengthen the intellectual case for it. "Where were the legions of scrupulous fact-checkers from the center and the left when the president claimed that those who liked their coverage would keep their coverage under the reform?" he asks.

Well I, for one, was attacking the administration for not going far enough in this direction. The exchanges are closed to large employers until at least 2017, at which point states get to choose whether to let larger employers participate.

What Steuerle and Reihan are talking about, however, is something very different: It's employers dropping coverage entirely. And I think this unlikely. Consider this: It's beneficial for many employers to drop insurance coverage now. There's no law saying they have to offer it. And it's wildly expensive. But they keep offering it.

I've often asked employers why they offer it and the answer is a mixture of competition and responsibility. They feel like they have to, because if they don't, the best employees will go with their competitors. And they feel like they should because, well, that's what you do for your employees.

But in a world with exchanges and subsidies, it's possible that both employees and employers would be better off if employers dropped insurance coverage, raised wages and let their lower-income employees get subsidized on the exchange. The upside to that world is that the employees are getting better insurance at a lower cost. The downside is that increased use of subsidies makes things more expensive for the taxpayers.

My judgment is that a large move in this direction isn't very likely. Benefits are sticky. Workers don't like disruption. And new businesses that are hiring the sort of workers who would ordinarily get health benefits will be competing against businesses offering health benefits, and workers will likely prefer that arrangement. But if you do see a move in this direction, the policy responses aren't too complicated: A mixture of a stronger employer mandate and more tax credits for businesses is likely, though I'd certainly prefer that we embrace the end of the employer-based health-care system and put into place policies that accelerate its decline.

But like a lot of things in this -- or any -- bill, whether we need to strengthen this part of the legislation will depend on how businesses and individuals respond to the legislation. For now, we just don't know. The employer-based market exists despite all sorts of rational economic incentives that should cause it to stop existing. My guess is it will continue to exist, in much the same way it exists now, at least into the second decade of the legislation, and that the transformative change will be large employers entering the exchange rather than midsize employers dropping coverage entirely.

So to answer Reihan's question: I think the argument that most people who like their current coverage will get to keep it is basically correct. The bigger problem for the bill, actually, is that people who don't like their coverage will not be able to choose something different. So long as your employer is offering you a minimally affordable plan, you're barred from entering the exchanges.

By Ezra Klein  |  April 7, 2010; 4:03 PM ET
Categories:  Health Reform  
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oh, you were 'attacking' the administration, eh? Come on Ezra. You couldn't have been more of a cheerleader for this bill if you had a skirt and some pom poms. Not that your position or arguments were ever wrong, necessarily. We'll have to wait and see. But whatever disagreements you had certainly never amounted to an attack.

Posted by: andrewbaron78 | April 7, 2010 4:25 PM | Report abuse

Here's my question for you, Ezra.

A family of four earning 85K/yr. has a 40% margainal tax rate. That means this family receives an $8K tax subsidy for a $20K plan (40% of $20K). [It's not that hard to get a $20K family plan here in MA -- just have an older workforce with a disproportionate share of women and smokers.] Suppose their employer decides to drop coverage, and raise wages by $13,000 (65 percent of $20K). Well, this family is inelligible for subsides, so this family is basically slapped with an $8K tax increase -- not to mention subject to the 3:1 age rating and 1.5:1 smoker rating. What do you think will happen to such a family (besides being exempt from the individual mandate since surely any family plan with 0.60 AV will exceed 8% of their income)?

Posted by: moronjim | April 7, 2010 4:32 PM | Report abuse

I follow the logic and am one of those who continues to believe that many employers will drop insurance coverage. I continue to be skeptical about the "raise wages" part, though.

Qualified employees are easy to find, particularly in today's market where an unemployed job seeker immediately looses benefits when he declines employment paying more than the value of his federal subsidy. If a few large employers take the President's advice and turn in fraudsters who decline employment but cash benefit checks, making the PPACA/HCERA-related wage and benefit cuts will be even easier.

By late October and the first week of November, it should be easy to see the paycheck effects of the PPACA/HCERA.

Posted by: rmgregory | April 7, 2010 4:33 PM | Report abuse

The upside to that world is that the employees are getting better insurance at a lower cost. The downside is that increased use of subsidies makes things more expensive for the taxpayers.

Wait a minute, who says they'd get better coverage?

I'm in NJ. We already require insurers to cover to an unlimited lifetime maximum with no caps. We have everything in reform except the end to pre-ex and the individual mandate.

We cover autism treatment (at a very large expense stuffed into premium). Will the exchange cover it? Can poorer states afford to cover it on their exchanges? If NJ has an exchange with neighboring states to the south would they cover it?

Posted by: visionbrkr | April 7, 2010 4:36 PM | Report abuse


you also don't get that large employers won't go onto the exchange with 'requirements' in coverage. Large employers for the most part self-insure. that means ERISA exempts them from these requirements which are costs to them. There's no reason they'd participate in the exchange.

There needs to be MORE incentive for them to participate.

Think of how MSA's failed miserably and HSA's are thriving.

Think of the Medicare Part D extra subsidy that's now being taken away.

You need to bribe large businesses more and raising their costs through what is perceived as better benefits on an exchange will not happen.

Posted by: visionbrkr | April 7, 2010 4:41 PM | Report abuse

Another question, Ezra: if employers drop coverage, does the CBO account for the increase in revenue from not having to subsidize the person's employer-based policy?

Also, when determining the level of subsidy from the employer tax exclusion, how does the CBO account for payroll taxes -- does it include both the employer and the employee contribution when determing the tax subsidy for employer-based health insurance? Does it include the earned income tax credit and other tax subsidies the low-wage employee would no longer be eligible for (or be eligible for substantially less) if their employer dropped coverage and raised wages by the contribution to the employees' health insurance?

Posted by: moronjim | April 7, 2010 4:43 PM | Report abuse

The Center for Economic and Policy Research identified in these "employer responsibility" provisions a free rider problem that would make it easy for many large and profitable employers, particularly the ones paying poor wages, to shirk their responsibilities. See

Posted by: nwoo | April 7, 2010 4:47 PM | Report abuse

"The employer-based market exists despite all sorts of rational economic incentives that should cause it to stop existing."

Ezra, I don't think I agree that large employers have an economic incentive against providing health insurance.

1. There's the tax exclusion, obviously. It's cheaper to provide $X in health benefits than $X in salary.

2. Even putting aside the tax-advantaged status of employer health benefits: by bundling all of its employees into a single risk pool, a large employer can cover them more cheaply than they could cover themselves in the pre-ACA individual market.

3. Expanding on the pre-ACA individual market... it's terrible, and a lot of potentially great employees would find themselves unable to get good individual coverage, or unable to get coverage at an affordable rate. If you don't offer health benefits, you will lose essentially 100% of these people to employers that do.

Posted by: guided | April 7, 2010 5:02 PM | Report abuse

I am not going to be dropping coverage. Everyone on my team makes too much to benefit from the subsidies, and it's still a way to increase their pay without increasing their taxes. It's going to be a bigger deal for companies with low paid workers, because they may actually have access to better care with the subsidies than their employer is providing.

I think letting them know how much they are getting might make a difference though, from a compensation perspective. A single guy right now is getting about $400/month, whereas a covered family is getting $1300/month, and an older person is getting even more on our Anthem BC/BS PPO. When that differential starts showing up on people's will be interesting.

Posted by: staticvars | April 7, 2010 5:36 PM | Report abuse

I think there is a third reason besides competition and responsibility that employers offer insurance. It limits the mobility of their employees.

If I know that I or my spouse or one of my kids has a pre-existing condition or are in some other way uninsurable, then leaving my job (and giving up my current employer coverage) isn't an option even if I get a better offer. Employers like this.

This reason goes away to some extent with the ACA since you cannot be denied insurance now on the basis of pre-existing conditions.

Posted by: stand | April 7, 2010 5:37 PM | Report abuse

Over the next 6 years, the subsidies for small business are really good so I don't think you'll see many drop coverage during that time. However, I also don't think many small business will start providing coverage because there are too many uncertainties involved.

We do know that businesses will try to dodge an employer mandate. We know this because of the Hawaii experience. Having expanded Medicaid and a subsidized exchange as the safety net will allow employers to rationalize their behavior.

I don't see large employers moving to the exchange. First of all about half of employers with >1000 employees are self-insured. Second they don't want to deal with the additional uncertainties and regulation.

Posted by: bmull | April 7, 2010 5:59 PM | Report abuse

We live and work in a region where there is a lot of job mobility (San Diego). In such an area, I think that there is an advantage to "owning" your health insurance, as opposed to having to take whatever crappy policy your employer buys (Yes, I'm a fan of Wyden-Bennett). In this environment, I can see advantages to both the employer and the employee for the employer to offer higher compensation rather than health insurance.Of course, I'm not naive enough to think that salaries will actually go up as much as the savings from offering health insurance. Most likely the employers will just stop offering health insurance as a benefit.This is already the case with the majority of small businesses here.

Posted by: Beagle1 | April 7, 2010 6:16 PM | Report abuse

I would really like to see you comment about what's happening in Massachusetts right now, where all the insurers, miffed at not being allowed to institute massive rate hikes, just closed their policies to new subscribers.

Posted by: dday212 | April 7, 2010 6:18 PM | Report abuse

My small non-profit had already (pre-ACA) contemplated dropping coverage for employees just to get out of the burden and cost of managing the whole benefit system. I suspect you will see small employers look at this as a way to save on the expense of managing the programs, and just to get rid of the hassle. I doubt that wages will increase enough to actually cover the costs for the workers--too many unemployed right now for that to happen. What you might see is a one-time wage increase up to the current level of health costs for the employer, but then it will be up to the employee to renegotiate their salaries each year and they won't keep pace with ever-inflating health costs.

Posted by: AuthorEditor | April 7, 2010 8:30 PM | Report abuse

I would really like to see you comment about what's happening in Massachusetts right now, where all the insurers, miffed at not being allowed to institute massive rate hikes, just closed their policies to new subscribers.
the insurance companies will sue Deval for blocking the rate increases. They'll win because Deval is only blocking the rate increases because he's running for reelection. DUMP DEVAL-TOGETHER WE CAN!

Posted by: obrier2 | April 8, 2010 9:16 AM | Report abuse

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