McKinsey Report Says Employers Will Abandon Health Insurance

Today’s Managing Health Care Costs Indicator is 30%

A report from the consulting firm McKinsey has been getting a lot of attention this week; it suggests that almost 1/3 of employers will exit health insurance following the implementation of the major elements of the Affordable Care Act in 2014.

The report provides conclusions, but shares little detail of the underlying assumptions and data.  McKinsey has evaluated the economic “best interest” for firms, and combined this with its own polling data.   Interestingly, the McKinsey survey concludes that employer sponsored insurance is not that highly valued by employees.  Most surveys show employees value health insurance second only to wages.

The McKinsey conclusion starkly differs from the Congressional Budget Office evaluation, which suggests that only a million   will be dropped from employer health insurance due to the Affordable Care Act.  RAND  and the Urban Institute  have also evaluated this question and concluded that the ACA will not lead to wholesale employer exit from the insurance market.

The McKinsey study is consistent with the Towers Watson NBGH 2011 survey , which shows that the percentage of responding employers who believe that they will continue to offer employees health insurance ten years from now has dropped by almost half since 2007.
McKinsey also suggests that employers will continue to sponsor wellness programs even if they exist employer-based health insurance.   The economic rationale for many wellness programs is that they will lower medical costs; if the employer is no longer responsible for those costs, wellness programs will be more difficult to justify in corporate budgets.

It’s hard to make predictions – especially about the future, as Mark Twain (and perhaps Yogi Bera) said.  Here are some circumstances that could make the McKinsey predictions more likely:

  1. All or virtually all states have functional exchanges where employees could individually purchase good health insurance without fuss and without big bills for those with preexisting conditions.   The Washington Post recently reported that exchange creation has been slow going in many states.
  2. The federal government continues to fund generous subsidies for low and moderate income Americans, and these subsidies rise at the rate of medical inflation.   Paul Ryan’s plan to cap Medicare expenditures through a privatization program suggests that there will be limits to the willingness to provide funding for continued rises in health care costs.
  3. Health care costs continue to rise at rates substantially above inflation, making more employers subject to the “Cadillac” tax, which increases the effective cost of providing employer sponsored insurance. However, I believe that if too many employers are subject to this tax, the rules themselves will be revised.
  4. The penalty for not offering insurance remains low.   Most employers offering credible employee health insurance pay more than $2000 per employee for this coverage,  so many CFOs will see the benefit of exiting employer-sponsored insurance.  However, the Massachusetts experience is that even with a substantially lower state penalty there have been few employers who exited the market.
  5.  Employers are allowed to segment their populations, offering health insurance to some employees who are expensive to recruit, train and retain, and not offer insurance to low-skilled workers.  The ACA specifically prohibits companies from doing this, but companies might change their corporate structures to allow this.

Employers far prefer to know their future costs, and so prefer a defined contribution to a defined benefit plan.   The defined benefit plan carries an unknown future cost, which is hard to budget for, hard to account for, and in many cases, hard to pay for.  Employers rushed to the door to get out of defined benefit pension plans when an Accounting Board rule made them divulge future liabilities, and most Americans no longer have a fixed pension for retirement.  Employers have largely exited retiree health insurance at this point as well. So there is some reason to believe that they could do the same for active employee health insurance.

Employers pay about a third of the cost of health insurance in the US – over $700 billion.  Widespread employer abandonment of health insurance will require funding from alternate sources – and neither out-of-pocket payment nor increased taxes are getting high poll numbers right now.  I suspect that if employers do discontinue offering health insurance in large numbers there will be “tweaks” to the Affordable Care Act to encourage them to continue to offer or at least fund health insurance.