“The shift away from employer-provided health insurance will be vastly greater than expected and will make sense for many companies and lower-income workers alike.”
~McKinsey Quarterly, June 2011
Skip Knauff of Knauff Insurance was kind enough to send me a copy of the McKinsey & Company Quarterly dated June 2011. On its cover was the quotation shown above. Its portent is rather sobering to those who sell employer-provided coverage, but it should also be sobering to employers and employees alike.
Passage of the Affordable Care Act of 2010 sets in motion the most significant reform of our health care system since the provisions allowing employer-provided coverage without taxation were enacted during World War II. Wages had been frozen, so employers were allowed to attract workers with health care coverage without the cost of that coverage being taxed as income.
Indeed, what has passed is not just bits and pieces of reform, but systemic reform that fundamentally changes the way health care is delivered and paid for in the United States.
Most of the act’s provisions take effect in 2014. As employers discover the new economic and social incentives in the law as well as the option to restructure benefits beyond dropping them or keeping them, many will choose to make substantial changes. In an early 2011 survey of more than 1,300 employers across a scientific sample of businesses, it was found that reform will provoke a number of responses, including:
· 30 percent of employers will definitely or probably stop offering employer-sponsored insurance (ESI) in the years after 2014.
· Among employers with a high awareness of reform, this proportion increases to more than 50 percent and upward of 60 percent will pursue some alternative to traditional ESI.
· At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.
· Contrary to what many employers assume, more than 85 percent of employees would remain at their jobs even if their employer stopped offering ESI, although about 60 percent would expect increased compensation.
The end result is not clear except that ESI will be radically different from today. With the new law’s guarantee that individuals will have the right to health insurance regardless of medical status, the social contract between the employer and employee is radically altered. The “moral obligation” of the employer is minimized. At the same time, the mandate on individuals to obtain coverage turns the responsibility on to the employee and away from the employer. Corporate tax advantages will be retained except for high-premium insurance plans.
Income-indexed premiums and out-of-pocket subsidies will be offered to people to make it affordable to all. Higher subsidies will go to lowest-income workers. Decisions about providing ESI will become strictly business decisions. Many other provisions of the law will affect benefit plans and will be guided by incentives and/or penalties.
To continue to attract and retain their better employees, employers will have to be increasingly sharper about meeting the needs of their employees through the plans that they offer. Desirable products and services will likely win out over individual coverage that may be more cumbersome and unattractive.
What is most important for this new health care system to succeed is for employers and employees to be more engaged as consumers of health care. It is important that this new system be consumer-centric. As individuals become more involved in selecting coverage and choosing health care services, costs will be contained and in some cases reduced. The direct interaction between payers and providers will encourage healthier living and lifestyles.
Systemic reform requires substantial change and that is about to occur in the next three years. It will not be painless; it will not be easy; and we will not know if it is better until we have operated under the new system of health care and had a chance to evaluate its impact.
Stay tuned. More to come.