The Death of Employer-Based Health Care Doesn’t Have to Be a Disaster

The Death of Employer-Based Health Care Doesn’t Have to Be a Disaster

iStockphoto/The Fiscal Times

The road to comprehensive health care reform will be littered with casualties. One of them might be employer-provided health coverage, although that may not be as ominous as it sounds. 

A recent report by S&P Capital IQ, the financial research firm, found that the Affordable Care Act (ACA) is providing employers incentives to shift employees into federal and state-offered insurance exchanges. The potential savings to corporate America could be up to $3.25 trillion

Although no analyst is predicting a mass dumping of employees from corporate health plans this year, the transition could start over the next few years and extend to 2025. The largest savings would be realized by the largest companies in the S&P 500 industrial index, according to the report.

Related: The Chart That Kills Employer-Sponsored Health Care

The shift from a fringe benefit to more of a public utility model will likely accelerate if the Obamacare health exchanges prove successful in providing greater access at a reasonable cost. Some 8 million have signed up, including, apparently, millions who've never had coverage or lost it through unemployment.

Employers have myriad incentives for pushing their employees into the exchanges. With current employee premiums around $12,000 a year, the annual costs could grow to around $25,000 by 2025, S&P estimates. Over the past decade, premiums have more than doubled from $6,000 in 2000 to around $16,000 for family coverage, reports the Kaiser Family Foundation (KFF).

What's most worrisome for employers is that although they control plan options and are passing along costs, they can't curb the rate of health care inflation, which has averaged 7.5 percent annually since 1999, according to KFF. At that rate, costs double in roughly 10 years. The current broad-based Consumer Price Index inflation gauge is running at under 2 percent.

Related: Employers’ Health Care Push: Play by Our Rules, or Pay

Many critics of the employer-based system say that employees have little incentive to pare their health care spending because they rarely see the actual costs. And employers don't feel the brunt of the economic pain since they receive a tax break for providing care.

Changing the Carrots
What S&P neglected to detail is that the disincentive for employers to rein in costs is partially due to the huge tax break they receive from the U.S. Treasury for providing it. The cost of that write-off was more than $300 billion in 2013 — the largest-single tax break or "expenditure" deduction in the U.S. tax code. 

The health-insurance write-off came about as an indirect way to incentivize employers to keep wages stable after World War II. Fringe benefits such as pensions and health plans took on a life of their own as employers increasingly upped the ante to attract and retain desirable employees.

In an era of deficit reduction and fiscal restraint, the deduction is seen by critics as a huge giveaway to corporate America.

Related: Obamacare Spells the End of Employer-Based Coverage

But subsidies like health care write-offs will not go gently into the night. Cutting the break is not politically popular, although it’s been proposed in various tax reform plans, including those championed by Republicans. And in an election year, it's a non-starter, particularly when you consider that those suddenly uninsured would be shunted to the politically volatile ACA exchanges.

A gradual transition — as advocated in the S&P report — might ease the short-term disruptions, even if the tax break remains in place. And a seldom-discussed part of Obamacare under which the most-generous health plans will be taxed in 2018 might hasten the phasedown of the general fringe-benefit write-off. 

In the interim, the idea of giving employees fixed payments and directing them to private insurance exchanges is gaining traction in the corporate arena. 

Last year, IBM announced that it would move 110,000 employees from its corporate health plan into a private exchange, where they would purchase a private policy with a company payment. The drugstore chain Walgreen's is doing the same with 120,000 of its employees.

While large-scale tax reform appears unlikely this year — and perhaps won't be attempted until after the next presidential election in 2016 — the presence of the ACA exchanges will continue to nibble around the edges of the employer-based health system.

Obamacare has set some new ground rules for a utility health care model. Those who obtain policies through the exchanges are no longer tied to employers and their benefits are completely portable. They will be able to start new businesses, become independent contractors and even hire employees, who could obtain their own coverage through the exchanges.

If Obamacare ultimately proves successful in covering nearly 30 million uninsured, its low- and middle-income subsidies may be expanded, luring even more corporations to shift employees into exchanges. 

If this movement reaches a tipping point, it may trigger a tailspin for the employer-based system. The economic savings would then be too appealing for companies to ignore en masse. They might even lobby Congress to end corporate subsidies — and bolster Obamacare.

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