Will Employers Drop Health Insurance? McKinsey Part 1

McKinsey & Company has raised a lot of questions about decisions concerning employer sponsored health insurance post implementation of the ACA in 2014. The article appearing in the June 2010 issue of the McKinsey Quarterly was written by Shubham Singhai, Jeris Stueland, and Drew Ungerman and predicts that up to 30% of employers could drop employer sponsored health insurance when the full effects of the ACA start to kick in.

As the results of the survey became available, there was plenty of controversy about the results and questions about the methodology. Today (6/20) McKinsey released the survey questionnaire and results to quell the inevitable complaints of survey bias from ACA supporters. You can read the McKinsey post to understand how the panel selection was done by a third party and were not necessarily McKinsey clients as had been suggested by many people unhappy with the results of the survey. The key point as McKinsey points out was that they were surveying employer attitudes, not predicting behavior.

As most people are aware, the US style of employer sponsored health insurance grew an unintended consequence of WWII wage controls. There is nothing that requires an employer to buy and offer health insurance to employees other than employee expectations, the need for employers to compete for employees, and the tax advantage that employers have over individuals in paying for health insurance. The implementation of the ACA will begin to erode these bases.

Similar to the growth of defined contribution (401k) over defined benefit pensions, the change in employers offering health insurance will probably take effect in newer, smaller employers and gradually work its way through the system to larger employers. As McKinsey points out, 85% of employees indicated that they would remain at their current employer if the employer stopped sponsoring health insurance, with the caveat that 60% would expect increased compensation. Gradually the expectation that the employer needs to offer health insurance as a benefit to attract a quality workforce, when it is available without problems in obtaining coverage through the exchanges, will lessen the need for employers to offer it in the first place.

The other fact that the McKinsey report calls out, is that for employers with a workforce of mostly low wage employees, that both the employer and the employee may be better off by the employer dropping health insurance. This is a function of the amount of the subsidy promised through the exchanges for low wage workers and the amount of the fine on the employer.

In short, there are plenty of reasons to believe that many employers will begin to drop their sponsorship of health insurance plans beginning in 2014.