Tag: health care reform

The End Of Employer-Based Health Care?

The employer penalties in the health care law are low enough that many businesses will drop health coverage. This is a blessing in disguise, as it will lower costs in the long run.

The fiery rhetoric on both sides of the health care debate obscured the details of the actual reform bill. Now that it has become law, policy analysts and journalists have been combing through the bill and issuing predictions on whether it will raise or lower premiums, help or hurt businesses, and generally bring or not bring the Apocalypse. The bill will definitely change how health care is paid for in the United States, but perhaps not in the ways many expect. The following analysis shows that it’s possible that the new law will end the system of employer-based health care entirely!

The Kaiser Foundation has produced a nice summary of the law, including employer requirements:

  • Employers with less than 50 employees face no penalties.
  • Employers with more than 50 employees that provide no health care coverage must pay a tax of $2000 per employee (with the first 30 employees being exempt)
  • Employers with more than 50 employees that do provide care may have to pay a tax 0f up to $2000 per employee if  their employees use the new health care exchange subsidies.

Given these requirements, what are an employer’s options?

  1. Drop Employee Coverage: A company drops its health care plan, paying the $2k per head tax and leaving employees to buy their own plans. The company will save $10,000 per employee on average given the average cost of health insurance [1], and will also save by eliminating benefits administration expenses. The company could give each employee a $9000 raise and still increase profit by $500 or more per employee [2]. Employees will be mad about the loss of benefits, but not too mad as they can get coverage on the exchange using their new income and potentially subsidies.
  2. Keep Employee Coverage: The company will face the administrative burden of supplying vouchers to some employees who would like to opt out, of complying with minimum benefits requirements, and will potentially still have to pay $2000 in fines per employee if its health care plan is deemed insufficient. The company’s use of benefits as a recruiting tool will be diminished once benefits can be obtained on the health care exchange.

Looking at the alternatives, why wouldn’t a company drop its health care plan? Particularly for employers with middle-income employees (who may qualify for federal subsidies), it makes more sense to drop health care coverage and raise wages than it does to continue the status quo. While the employer-based health care tax deduction still exists, for many families its appeal will be neutralized by subsidies available in the new health care exchanges. And since all Americans will be guaranteed access to insurance starting in 2014, benefits will no longer be the employment draw that they are today.

The health care reform bill will thus reduce the share of employer-based healthcare in the US market. This is an excellent change for a couple of reasons: first, it breaks the link between employment and health care, providing more stability to all Americans; and second, it slowly weans Americans off the employer health care tax deduction, which contributes significantly to health care cost inflation. Ironically, the bill’s writers did not intend it to be the demise of employer-based health care. But if this trend does accelerate, the bill may be successful in controlling health care costs. [3]

[1] The average employer contribution for a family insurance plan was $9860 in 2009, according to Kaiser Foundation research. With health care inflation averaging above 4% in recent years, this will rise to roughly $12,000 by 2014. If an employer chooses to pay the $2000 penalty rather than buy insurance for an employee, it can thus save $10,000.

[2] An employer could cancel insurance, saving $10,000 per employee, and then give each employee a $9000 raise. Payroll taxes (7.65%) would add another $688 to this sum, leaving a net profit of $312 per employee if an employer took this approach. Benefits administration expenses would also be eliminated, however, and these savings could be significant. Eliminating a single $40,000 salary HR position at a 200 person company would save another $200 per employee, for instance. So a net profit of over $500 per employee is quite possible – the actual profitability of the move would depend on how much of the health care savings the company chose to pass on in the form of higher wages for its employees.

[3] Why will the shift from employer to direct purchased health care coverage lower costs? First, when you spend your own money, you are more likely to be judicious about it. Second, when tax deductions are replaced with tax credits, the cost inflation effect will drop, since a deduction rises with every additional dollar spent, while a credit does not.

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Medicare Bankrupt in 6-8 Years Without Rationing

Think rationing is impossible in the US? Medicare will soon be bankrupt, and the government will have to spend its healthcare funds in a limited, rationed way.

Medicare’s annual spending exceeded revenue brought in from taxes in 2008, forcing Medicare to begin spending its reserve funds. According to the Medicare Trustees, Medicare’s reserve will be empty by 2017, and Medicare will have to cut benefits or payment rates by 19% to balance its budget [1]. Since the projected date of Medicare’s bankruptcy has been brought forward many times [2], it’s likely that the actual date of bankruptcy may be as early as 2015.

This should come as no surprise to observers of US healthcare policy, since Medicare has limited funds, but nearly unlimited liabilities. Medicare will pay for almost any treatment that a licensed doctor provides, without regard to the effectiveness of that treatment, or its own ability to pay for that treatment.

In the past, politicians have paid for Medicare’s growth through borrowing. That route will be unavailable this time, as US government debt will exceed GDP by next year, and could be over 120% of GDP by 2017. Raising taxes will be difficult as well, since tax revenues will have to be increased just to pay for the existing debt! If Congress and the President fail to curb Medicare cost growth as part of health care reform, the cuts in 2017 will look a lot like California’s budget, where the state was forced to cut $16.1 Billion (18%) from its  in state services across the board.

The current health care reform plans have introduced a variety of cuts in Medicare, which may reduce costs in the short term. But none of the plans under consideration address Medicare’s root problem: Medicare is not allowed to say NO. Rationing health care is not part of the current health care discussion, but it happens covertly today, and it will become the norm. If Medicare is to avoid insolvency, the government will have to decide when some procedures just aren’t worth doing. Seniors should be allowed to pay extra for those procedures, but Medicare will have to limit its responsibility. If you don’t believe me, look at California, where they finally learned that when the money’s gone, it’s gone.

[1] The Medicare Trustees’ Report Summary can be found at: http://www.ssa.gov/OACT/TRSUM/index.html

The fiscal situation referred to in this post refers specifically to the solvency of the Medicare Part A, the Hospital Insurance (HI) fund. Other parts of Medicare are in slightly better shape, but not by much. In 2017 the HI fund will have revenue for 81% of benefits, but in 2035 it will have revenue for only 50% of benefits.

[2] The Medicare Trustees note that the 2008 Report projected a Medicare HI Fund insolvency date of 2019 – it was brought forward 2 years this year. The solvency calculations also assume that Medicare will cut payments to medical providers based on a Deficit Reduction Act formula – but every year from 2003-2009, these cuts have been rolled back. The likely date of insolvency may move forward by a few more years as a result.

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Limits on the Health Care Deduction?

The Obama administration is open to the idea of limiting the deduction on employer-based health care coverage. This would be a tremendous step in the right direction in limiting health care cost growth, as I’ve previously discussed (here as well).

While President Obama campaigned against this proposal initially, his advisers now indicate that he will not oppose a reduction in this subsidy if Congress passes it. Let’s hope that this particular initiative survives the Congressional melee and emerges as part of health care reform!

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