Employers better off keeping workers’ coverage under new health law

This post originally ran on our blog in November 2011 and is part of an ongoing series of posts examining the Affordable Care Act. For links to previous posts and additional resources, please visit the health care reform page on our website. 

Employer-based health insurance coverage is the single largest pillar of the American health insurance system. Unemployment and rising costs continue to erode employer-based coverage, but more than half of all Americans – 169 million –  are still insured through employers.  The federal tax code has long encouraged employers to provide coverage by making employer health care expenditures tax-deductible.

The new federal health care law, the Affordable Care Act (ACA), aims to expand health insurance coverage in the United States in part by strengthening employer-based coverage. The law provides sizable tax credits to small businesses (≤25 employees) that offer insurance. Beginning in 2014, large employers (≥50 employees) will have new responsibilities to provide coverage.  Known as the ‘play or pay’ provision, the law outlines that:

• If a large employer does not offer coverage and any of its employees receives a premium subsidy through a health insurance exchange, it will be subject to a fee of $2,000 per full-time employee (in excess of 30 employees);
• Large employers that offer only unaffordable coverage to workers will also be subject to a fee if employees receive subsidized coverage through an exchange;
• Large employers must automatically enroll employees into their lowest-cost plan if the employee does not sign-up for or opt-out of the employer’s coverage.

Critics of this provision claim that employers will drop employee coverage and simply pay the penalty instead. The Congressional Budget Office, the nonpartisan financial scorekeeper for the federal government, has determined such assertions to be inaccurate.  Opponents of the law disregard the CBO findings, instead frequently citing a survey of employers by McKinsey and Company, which reported that 30 percent of employers said they would definitely or probably stop offering coverage after 2014.  The McKinsey survey  is considered deeply flawed by health policy experts.  However, it formed the basis for a U.S. House Committee report claiming the ACA will lead to a large erosion of employer-sponsored coverage and for testimony before Oklahoma’s Task Force on the Federal Health Law asserting that “most employers WILL drop coverage.”

Yet, actuarial analysis released recently by a large Oklahoma employer contradicts the McKinsey survey’s findings.  Mike Rogers, Health Care Committee Chair of the Oklahoma State Chamber of Commerce, addressed a state legislative task force concerning the likelihood that his company BancFirst (1,425 employees) would maintain or drop employee coverage in 2014.  They concluded it would be significantly more expensive to their company to drop coverage:

BancFirst found that maintaining employee coverage would cost them an additional $410K. This reflects the costs of more employees signing up for coverage (+70 employees) and penalty costs ($3,000 per employee) for 54 employees for whom the company’s insurance would be unaffordable and who would instead receive premium subsidies through the exchange.  Conversely, dropping coverage would cost BancFirst an additional $1.2M.  These increased costs reflect: 1) losing the 35 percent corporate tax deduction and 7.65 percent FICA tax deduction they currently receive for employee health insurance expenses, and 2) paying the $2,000 per employee penalty for their entire payroll (exempting the first 30 employees).  According to their own analysis, it will cost BancFirst an additional $771K to drop employee coverage when the new ACA provision goes into effect in 2014 versus continuing coverage.

This analysis offers strong empirical evidence to support the claim that employers will play, not pay, in 2014.  As companies crunch the numbers and consider the full range of costs and savings, especially tax deductions for employer health care expense and penalties for not offering coverage, they will likely reach the same conclusion as BancFirst’s actuaries: providing coverage will be best for business’ bottom line.