Despite dire predictions most employers currently offer health insurance coverage to their employees are going to “dump” their coverage as a result of the Affordable Care Act (ACA) in 2014. Those who do drop coverage will do so because their employees get better or lower cost coverage in the public health insurance exchanges than the employer can offer. However, the ACA will have profound impacts on the health insurance as an employee benefit by removing many of the barriers to the creation of private health insurance exchanges.
With apologies to Will Rogers the employment-based system of financing health care has been called the worst possible way for gaining access to health care: except for all the others. The employment-based system mitigates the problem fo adverse risk selection that would make a wholly individual insurance market unsustainable.
Many employers over the last two decades have expressed a wish to discontinue health insurance as part of employee compensation given the steady increase in the costs of health insurance and as important, the uncertainty of those costs increases year to year. The labor market has prevented larger employers from dropping coverage regardless of the intensity of their desire to do so. The problem facing employers who desired to drop coverage is that employees who value health insurance simply had limited or no options for purchasing coverage outside of their employer’s plan. Employer plans have the ability to pool risk, exploit economies of scale in purchasing, and provide a tax advantage to purchasing coverage as part of compensation. Dropping coverage would make an employer much less competitive in attracting and retaining employees. In fact, during the tight labor market of the late 1990s employment-based health insurance coverage broke a two decade long trend and actually increased.
The Affordable Care Act fundamentally changes how people will purchase health insurance in the individual market and small group markets. Some of the advantages of employment-based group health insurance relative to individually purchased coverage are reduced in the public health insurance exchanges. Large employer premiums are based on the entire group: premiums in the exchanges will be based on the entire group. Marketing and administration costs in the individual exchange will come closer to the costs of large employer plans. For lower income individuals subsidies for the purchase of health insurance in the exchange will replace the income tax preference and for most, some, but not all of the employer’s share of the premium.
For most large employers there are considerable risks to dropping coverage. The actual costs of coverage, the choices of plans, and the ease enrollment in the public exchange are all unknown at this point. Moreover, the tax preference given to employees in purchasing employment based coverage is lost if the employee purchases coverage in the public exchange. Employers, particularly large employers, may lose what ever competitive advantage they have in the labor market if drop health benefits.
A number of firms have promoted private health insurance exchanges as a way of retaining that competitive advantage for employers. Private health insurance exchanges have been around for some time, but they had limited success in large part because they could not pool risk. Any attempt to pool risk was defeated by the ability of good risks to find better premiums outside the exchange. Their departure threatened the exchange with an adverse selection death spiral.
The Affordable Care Act removes the threat of adverse selection in two ways. The private exchange could be designed as individual coverage regulated under the ACA. Insurers selling coverage in this type of private exchange would be required to bundle the private exchange premiums with their entire book of business for risk adjustment purposes. The employer’s share of the premium could be provided through a Health Reimbursement Account (HRA) preserving the employee’s tax preference. This type of exchange is similar the Small Business Health Options Program (SHOP) exchanges under ACA but available for large employers.
Alternatively the private exchange could remain a large group plan. In this arrangement insurers selling coverage in the exchange would agree to a risk adjustment mechanism administered by the private exchange. Again the employer’s share of the premium could be administered through an HRA.
Private exchanges may be attractive to employers by allowing them retain the advantages of offering health benefits while giving their employees greater choice. It also allows them to structure the benefit as a defined contribution.
There remains a great deal of uncertainty about the operation of individual insurance market in 2014 and beyond. However, the Affordable Care Act’s restructuring of the individual health insurance market creates possibilities for significant changes in the employment-based health care financing system.