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Huge Number of Businesses to Drop Health Insurance, Thanks to Obamacare

Posted By Kathryn Nix On June 8, 2011 @ 11:33 am In Obamacare | Comments Disabled

Experts have warned that Obamacare’s new subsidy program could cause a mass exodus of businesses out of employer-sponsored insurance. New research from McKinsey and Company [1] based on a survey of employers reinforces this concern.

According to their findings, 30 percent of employers said they would definitely or probably stop offering insurance once the law’s main provisions go into effect in 2014. The inclination to dump coverage exceeded 50 percent once employers’ understanding of the law’s effects increased.

Obamacare encourages employers to dump coverage on two fronts. First, several provisions will increase the cost of employer-sponsored insurance (ESI), including new insurance requirements and mandates, and a tax on high-cost health plans. Employers who don’t offer a minimum level of coverage deemed essential by the federal government will face a penalty of $2,000 per worker, but as the authors point out [2], Obamacare’s other “requirements will increase medical costs for many companies. It’s important to note that the penalty for not offering coverage is set significantly below these costs.”

In addition, Obamacare creates alternatives to employer health plans, reducing the need for firms to continue offering health benefits. McKinsey’s researchers write [2]:

That reduces the social-equity advantage of employer-sponsored insurance, by enabling these workers to obtain coverage they could not afford on today’s individual market. It also significantly increases the availability of substitutes for employer coverage. As a result, whether to offer ESI after 2014 becomes mostly a business decision. Employers will have to balance the need to remain attractive to talented workers with the net economics of providing benefits—taking into consideration all the penalties and tax advantages of offering or not offering any given level of coverage.”

For several employers, McKinsey estimates, “at least 30 percent of employers would benefit economically by dropping health coverage even if they make employees 100 percent whole.” And the benefits of dumping coverage would increase over time. Since the subsidies are structured to keep individuals from spending more than a fixed percentage of their income on health care—as long as medical costs continue to rise faster than income—the authors explain, “even employees who initially have to pay more out of pocket toward an exchange policy than they would toward ESI will have less of a difference to make up each year, and the employer will have to provide less to make employees whole.”

If it sounds too good to be true, that’s because it is. The big losers in this game are American taxpayers. Initially, the Congressional Budget Office (CBO) estimated that only 7 percent of employers would drop their current health benefits, and the new law already raids Medicare to pay for the new entitlement. Former CBO Director Douglas Holtz-Eakin found that [3] the program’s price tag could increase by close to $1 trillion over the first decade if more employees are dumped into the program. This will mean either higher taxes for American workers or bigger debt, which the country cannot afford [4].

Heritage experts have predicted this problem. As Heritage’s Brian Blase and Paul Winfree write [5], “The cost of the subsidies harms the nation’s long-term fiscal health. Furthermore, the subsidies will encourage employers to drop coverage, perpetuate an already inequitable tax code, and discourage work and upward mobility.”


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/06/08/huge-number-of-businesses-to-drop-health-insurance-thanks-to-obamacare/

URLs in this post:

[1] New research from McKinsey and Company: https://www.mckinseyquarterly.com/article_page.aspx?ar=2813&l2=12&l3=63&srid=526

[2] but as the authors point out: https://www.mckinseyquarterly.com/Health_Care/Strategy_Analysis/How_US_health_care_reform_will_affect_employee_benefits_2813

[3] Former CBO Director Douglas Holtz-Eakin found that: http://americanactionforum.org/files/LaborMktsHCRAAF5-27-10.pdf

[4] which the country cannot afford: http://savingthedream.org/

[5] As Heritage’s Brian Blase and Paul Winfree write: http://www.heritage.org/Research/Reports/2011/01/Obamacare-and-Health-Subsidies-Expanding-Perverse-Incentives-for-Employers-and-Employees

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