If Employers Walked Away From Health Coverage

Brian Klepper, PhD, and David C. Kibbe, MD, MBA

Nov 24, 2010 - Kaiser Health News

What would happen if the rank and file of America's employers, financially overwhelmed by the burden associated with sponsoring health coverage, suddenly opted out?

It isn't so far-fetched. Enrollment by working age families in private health coverage dropped more than 10 percent over the last decade, as individuals and business were priced out of the coverage market. Others, victims of the downturned economy, have lost their jobs and access to subsidized coverage. Those who still have coverage have narrower benefits with higher out-of-pocket costs than before.

In 2010, employers transferred ALL health plan premium cost increases to employees. Employee health costs rose 14 percent. Over the last five years, their costs have risen 47 percent, while wages have increased only 18 percent.

It may be reasonable to interpret this action as a line in the sand. Employers, who typically provide about a $10,000 subsidy for family coverage, are saying, "Enough. This is the limit of our financial commitment. More cost will have to be passed on to someone else."

That someone else, of course, would be employees and his/her families, who, on average, will make about $50,000 gross this year, and who are paying about $4,000, or 8% of that income, for health coverage.

Employer frustration with being held hostage by America's health system has been percolating for a long time. Various arguments -- both for and against -- recur in the debate over whether employers should sponsor health coverage. On one hand, healthier employees are more productive, and comprehensive health coverage is critical to recruiting and retaining better employers. But on the other, health care's relentless cost inflation renders American businesses that offer coverage less competitive than their domestic counterparts that don't. Similarly, they are less competitive than international firms whose employees' coverage costs significantly less.

With such a large financial stake in the process, most employers are carefully watching the health reform battle and its potential implications. Those could be very different, depending on which side prevails. Now that the Republican Party has resurged in Congress, in large measure galvanized by a "Repeal Reform" platform, let's imagine two scenarios.

In the first, Republicans, backed by a health care industry daunted by the prospect of lower revenues if the health law's cost control provisions remain intact, nullify those provisions. Freed from constraints once again, excessive practice patterns continue unabated and costs continue to soar.

With the economy still weak, employers withdraw even faster to escape the higher costs. With government programs only capable of absorbing some new participants, the number of uninsured people mushrooms. Safety net programs are overwhelmed, and pressure on government to devise a new solution rapidly intensifies.

In the second scenario, the Democrats hold fast. But in 2014, the health insurance exchange provision kicks in, allowing businesses to drop coverage sponsorship by paying a $2,000 per employee penalty, plus costs related to current benefits expenditures. In a recent Wall Street Journal op-ed, Tennessee Governor Philip Bredesen detailed an analysis showing an immediate $146 million dollar yearly savings by transferring coverage of core state employees to the exchanges. It seems an attractive solution.

How many businesses would likely maintain coverage at $10,000 per employee if they had, say, a $6,000 alternative? Many might, according to a recent survey by Mercer, the benefits consulting firm. But some wouldn't. Those that make tremendous per employee profits, like financial services, technology and pharmaceutical firms, may not drop coverage. Those with occupational health exposures that give them reason to aggressively and directly manage employee health might not. But for small businesses, which are less likely to offer coverage anyway and typically struggle more with these costs, the health exchanges may be an appealing option. With so many variables, it's hard to know. But in the face of a weak economy and continued explosive health care cost growth, a mass employer exodus is not outside the realm of possibility.

In round numbers, America now spends about $2.6 trillion annually on health care. Commercial coverage comprises half ($1.3 trillion), with $300 billion paid by individuals or families and $1 trillion by businesses. The question, then, is how the reduction in business' health coverage subsidy -- $400 billion a year in the example here -- would be replaced, and what might happen if it isn't.

In the current anti-tax political environment, it is difficult to imagine Congress could compensate for the lost employer subsidy by raising taxes. Business is unlikely to acquiesce to paying higher taxes commensurate with whatever health care costs accrue.

And consider that a new dedicated tax of $400 billion per year would be an astounding five times the bailout and economic stimulus that, earlier this year, rightly or wrongly, raised the fury of the American people. Will we also be willing to bail out the health care industry, because it is "too big to fail?" Finding the dollars to keep the current health system and the industry afloat would require a new national commitment of historic proportion, far greater than the recent Wall Street bailout.

Either of these scenarios could result in massive public conflict and, equally importantly, significantly diminished resources for the health care sector. An inability to continue funding the industry's excesses would surely burst the health care cost bubble, unleashing a cascade of harshly chaotic consequences. Only then might we see a reform process that more rank and file Americans might appreciate and embrace.

Brian Klepper and David Kibbe write together about health care market dynamics, economics and technology.