Employer responses to the changes in the health insurance market created by the Affordable Care Act (ACA) will shape the health care financing system. While most analysts project that the total number of Americans covered through an employment-based health plan will not change very much after ACA is implemented, some have argued that employers will drop coverage en masse. The final determination which of these two viewpoints is correct will depend upon how the law will be implemented: neither the Federal government, nor the vast majority of the states have progressed far enough in the planning process to fully assess the effects of the law. It is possible however to understand the implications of the ACA on employer decision making and the implications for individuals in the future health care delivery system.
A common sense approach to projecting the choices employers will make after ACA is implemented is to understand the choices employers make in the current environment. Employers offer a compensation package that includes employee benefits in general and health benefits in particular when it attracts the workforce the employer desires. Employers only offer benefits if it allows them to retain a workforce less expensively than a compensation package that consists of just cash. Workers must value the benefit more than the cash value of the benefit.
Currently almost all firms in Georgia with more than 500 employees offer health insurance coverage to at least some of their employees. Table 1 shows the percentage of firms offering employer sponsored coverage by firm size for firms with 500 or fewer employees.
Table 1: Offer rates for small business/employees by firm size
Firms Firms Offering ESI Workers at Firms Workers at Firms where ESI is Offered
Total: Georgia 115,166 47% 1,952,323 79%
Under 25 99,333 42% 647,393 56%
25 to 50 8,277 75% 277,017 76%
51 to 99 4,350 89% 307,730 90%
100-499 3,206 96% 720,182 95%
Source: Georgia Employer Survey, 2011, Georgia State University
Smaller employers may face higher costs for providing health benefits than larger firms for three reasons. First, their small size means that they are less able to spread risks. Second, their small size makes it harder for them to self-insure and avoid costly state mandates and taxes. Finally, they face higher administrative costs since they are less likely to have staff devoted to health benefits. For many of these sized employers the cost of the health benefit is greater than the value their employees place on health insurance, so they just don’t offer it.
The Affordable Care Act is intended to change the choices available to employers. The insurance market reforms are intended to pools risks for both individuals and small groups. The introduction of the American Health Benefit Exchange (ABHE) for individuals and the Small Business Health Option Programs (SHOP) are intended to lower the administrative costs and increase choice for individuals and small groups. Whether they actually do those things will depend on implementation decisions being made at both the Federal and state levels.
Employers face three broad possibilities. The first is that the ABHE functions to allow individuals to purchase coverage within the exchange at the same rate as they could if they worked for large employer (including the tax preference). In that case employers could compete for workers with cash because the worker could purchase as good or better health coverage in the exchange. Employers over 80 employees who opt to not offer coverage and have an employee eligible for a subsidy in ABHE will have to pay a fine so the difference in value between offering coverage and offering cash will have to greater than that assessment. In that case more employers above that size may opt to continue to offer (or start to offer) coverage.
The second possibility is that the SHOP exchange works as intended offering small employers more choice, administrative ease, and lower cost. Competition within the exchange and between the outside market gives employers more choice and stable premiums over time. Small employers would then opt to continue to offer (or start) coverage.
The third possibility is that the exchanges fail: they suffer from risk selection, fail to offer adequate choice, and fail to reduce the administrative costs of buy health insurance. In that scenario it is hard to see how the SHOP exchange could survive. The ABHE exchange would be sustained because that is the only place individuals could purchase health insurance with a subsidy.
Employers under this third possibility would face the same set of choices they face today. The vast majority of large employers (those over a 500 employees) offer coverage now and are likely to continue. Small employers (those under 50) face the same choices as they do today, with the exception that for firms employing low income workers the ABHE exchange provide an alternative for employer coverage. Mid-size firms (50 to 500) face the issue that if they do not provide coverage and one of their employees qualifies for a subsidy in the ABHE the firm would be pay an penalty of $2,000 for each employee after the first 30 employees. In Georgia there about 600 firms employing about 3 percent of the small firm workers who do not offer coverage and would face the choice of paying the penalty or begin to offer coverage.
All three scenario will have winners and losers. Pooling of risks means that premiums will fall for some and rise for others. The penalty for not offering coverage will raise the costs of hiring workers for some firms. However, health insurance coverage will increase without a large erosion in private coverage.
Employers will continue to make good business choices about their packages compensation to workers. Under any implementation of the Affordable Care Act employers will drop coverage only if their workforce can find comparable coverage less expensively through the exchanges or elsewhere.