Companies were supposed to drop employee health care. Here's why they didn't.

In May 2014, Michael Thompson and his colleagues at S&P CapitalIQ Global Markets Intelligence released two reports on possible impacts from the Affordable Care Act. One of the more far-reaching projections was the end to the traditional employer-sponsored health care plan, driven by incentives in the ACA that, whether planned or not, could save companies significant money by having employees driven to the various ACA exchanges.

With open enrollment now underway for 2016, Institute President John Kingston checked in with Mike Thompson to see how those projections had turned out.

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Kingston

Mike, you said in a report last year that, “By shifting insurance responsibility to the employee, the ACA presents an opportunity for U.S. companies to radically redefine the role they play in the health care system.” That doesn’t appear to have happened. What was the basis for that prediction and what happened instead?

Thompson

We talked about how people could migrate away from the traditional employee-sponsored approach. We looked at the incentive structure and how it rewarded corporations basically for letting go and ultimately getting out of their healthcare plans.

In the early days, we talked to people who had direct experience with setting the various incentives in the ACA. It was really apparently that companies would be better at a certain point just paying a fee for not offering the employee insurance and instead compelling them to go to an exchange.

So they would pay a penalty and it would be far less than what companies were paying to provide. So as an example of that, it would not be uncommon to see a company paying $15,000 for health care while an employee was paying $5,000 or $6,000. Now the way things work out, the company could pay $6,000 per employee, tell the employees “we don’t offer health care,” and then just pay a fine. That was the arbitrage right there. It could save almost $9,000 per employee.

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Kingston

Was that the plan of the architects? If so, they wouldn’t be the first group to think that health care coverage divorced from your employer was a good idea.

Thompson

The funny thing is that early on there was a lot of confusion. The policy people who were very much involved said it wasn’t designed that way, but one of the primary architects, Zeke Emanuel—coincidentally the brother of Chicago mayor and former Obama chief of staff Rahm Emanuel—went on the public record by saying that by 2021, corporations would not be providing health insurance. And that was consistent with what we saw, because of the way the incentives are structured, because companies are designed to maximize shareholder value. And the companies could say to the employees, you can go to an exchange, and it would be cheaper for the companies to do that. And further, there is a belief that there will be an alignment between what the companies are going to offer and what is on the exchanges. And at the end of the day, what you get from a company is probably going to be equivalent to what any company would be providing you. There is a merging.

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Kingston

But the reports of companies dropping health care for their employees are few and far between, and nobody has really discerned any sort of trend this year, the first full year the ACA has been in full force.

Thompson

That incentive has not induced as many people as we had expected. That has been so confounding. But the insurance companies reengineered what they had to offer. They have subtly changed polices. Yes, you see some increase in the headline cost of the plan, and so does the company.  But where they have been able, they’ve pushed a lot more costs on to the employee. For example, when you used to go for your annual physical, the bloodwork was included. You didn’t pay for the blood test. Now you get a separate bill.  So fees and expenses like this are much more weighted now toward the employees. It’s a subtle shift. The more you use, the more you pay.

What the ACA did was change all the conventions and norms for what had been a company plan. The day the ACA began, it became the vehicle by which employees start picking up more of the costs associated with the services they get. It became more market-driven that way. If you’re a heavier user, you’re going to pay more, and if you’re not a heavy user, you’re going to pay more, but not as much as the real heavy user.

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Kingston

Those seem relatively minor compared to the type of arbitrage you were talking about earlier.

Thompson

What we suspect is that it hasn’t been abandoned is because employees still see it as a perk, and the companies think that right now, the costs aren’t killing us.  And more importantly, the insurance companies have come up with a lot of new things in their plan to keep the companies from abandoning them.

So the headline is that the average cost goes up, and the basic plan has less in it. I don’t know if I would characterize it as a double whammy though, because health care plans were going up before the ACA, no matter what. Increases are moderating, so if I’m selecting a family plan, maybe it is going up a little less than before the ACA. But the actual costs to the employees have gone up because they are paying more for certain services. So companies really haven’t felt the need to abandon giving health care.

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Kingston

The fallout from total abandonment of the plans, at least now, would probably still be major.

Thompson

If the company stops totally, they could have issues with half the employees. But they are quietly, subtly making changes. The younger ones won’t see it because they are just going to pay the premiums, and probably not consume a lot of health care. The people who see it are the ones who get sick and every time they go for a service they have more responsibility then they would under the old plan.

So the new plans cover less and the employees have to pick up the difference. What we didn’t anticipate was the insurance companies repacking their products.

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Kingston

One possible drawback to this trend of migration not taking hold, at least in the short run, is that the number of people moving from  employer-sponsored health care coverage to an exchange is smaller than projected. And that keeps down the number of people ono the exchange. Those numbers are far, far below what had originally been projected. Has this been a factor?

Thompson

The architects of the ACA wanted everybody out and getting on the exchanges, because it is undisputed that the more participants you have in a marketplace, the more the prices will go down. In a more efficient market there is competition and a lot more opportunity. And when you have bigger markets, the number of providers into those markets tend to grow.

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Kingston

Do you think your projections of a large migration away from employee-sponsored health care plans and on to exchanges is something that ultimately will happen? Have the changes the insurance companies have made simply prolonged the date for that transition?

Thompson

Five years from now our prediction could be spot on. Five years from now I may be looking at a plan on an exchange I qualify for, and I may find that I can get the same darn thing basically off the exchange without going through my company. And then it’s a relationship between me and my insurance provider. Companies haven’t gotten rid of them, but they reduced their comprehensiveness and the heavy users are paying more than those who are not heavy users. So it’s more activity driven; some people think this is good. The insurance companies really came up with solutions.

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Kingston

One big change though in moving to an exchange is that if your employer now pays for a health care plan, it does so with tax-free dollars. If a company just drops the employer-sponsored plan and gives everyone a raise instead, those dollars are taxed. So this compensation doesn’t look quite as attractive as the old health care plan. Could that prove to be a major hindrance?

Thompson

There is going to be a point where you’re agnostic between some kind of subsidy and doing it with your own dollars. One vehicle could just be to take a health savings account. Can you take a HSA yourself—this is a question—and you deduct that contribution and use it to buy insurance? You could have the tax free status of an HSA to pay for your insurance. So I think that is one of the things that will be happening.

But it’s going to have the benefit of not having the dependency on somebody else for standard insurance. It’s taken on a form all of its own and the players seem to be adapting. It’s not going quite the way we expect it to or a lot of the architects saw it going.

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Kingston

The relationship between an employee and an employer over health care has long been second only to the relationship between the employer and that person’s job. It seems the changes you’re talking about have the possibility of really re-enginerring that relationship.

Thompson

The short of it is that employees or individuals are going to have a lot more control, but also more responsibility and expense of their health care needs. It is true what Zeke Emanuel said: ultimately, companies will not be in there.

People don’t like dependencies. You have the ability to control it yourself. It gives people greater labor mobility. Now, you may not like your job and it’s maybe not the best way to allocate what you’re doing with your life by saying, well, I need to stay at this company for health care.

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Kingston

Which is something Nancy Pelosi said when the ACA was first passed. Conservatives have been mostly critical of the ACA, but do you see anything in these changes that they could support in the long run?

Thompson

A very positive outcome is very possible if you believe in free market principles. You should have a marketplace where people can buy any kind of policy they want and whatever they want they will pay for. They can pay for a very lean policy or a very robust policy but let the market take care of that. And now you’re closer to that then before the ACA. So it’s still very much a work in progress.

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Kingston

Yet you can’t do that now. There is a significant amount of mandated coverage, and the anecdotes around it are the case of a woman in her 50’s paying up for a policy on an exchange—after losing her earlier policy—and being required to be covered for things she’ll never need, like birth control or prenatal care. That would seem to be something undercutting that free choice future you envision.

Thompson

There is a problem. In order to have that desired outcome, you need to stop requiring everybody to have everything in their policy that doesn’t apply to them. There needs to be more trust in the marketplace. The market will design itself. To say that somebody who is 70 needs to have prenatal care is silly. If there are people who need that, you might need to have government intervention. But still, you need to give the market a chance. At the end of the day there will always be places where you will need to find a subsidy. That’s possibly a place where there’s a good use for Medicaid.

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Kingston

So that’s the case of an older woman. How do you think younger people will react to the changes you foresee?

Thompson

I do think that one thing the administration got right is that ultimately it will not be employer-driven. And I think there will be access to health care one way or the other.

Millennials will probably prefer this. They think, “I don’t want companies involved in my health care. That’s my business.” They are different generations and different mindsets. It’s a generational shift. I think witih some pretty dramatic changes, the door now is open to hammering the ACA into a far better product.