Will employers scrap their health plans and send employees to exchanges? Do we want them to?

One of the things policy wonks are keeping an eye on as the Affordable Care Act is fully implemented is the proportion of employers who stop offering employees insurance and instead give their workers money they can use to pay premiums of plans sold on health insurance exchanges (or marketplaces). As Robert Pear reports in the New York Times, though, a new IRS ruling will discourage employers from doing that. The IRS will not consider employer arrangements that give workers premium funds (for purchasing insurance through exchanges) to satisfy the ACA requirements, which means employers could be subject to fines of up to $36,500 per employee per year.

This reminds us of an important question: Do we want to encourage employers to continue to be the major source of health-insurance coverage for the US's non-elderly population? In 2012, 56% of US residents ages 0-64 had insurance coverage through an employer.

On the whole, I'd like to see our country move away from our reliance on employer-sponsored insurance, because it leaves some kinds of workers at a disadvantage and while creating difficulties for those who contemplate job changes. Some workers can't get coverage through their employers (e.g., low-wage workers in small firms are less likely to have employer-sponsored insurance than higher-paid workers and those employed by large firms), and those those who want to freelance, start their own businesses, or work for small organizations often face less-attractive options, with higher premiums, more cost-sharing, less-generous benefits, or all of the above. Employees who have good employer coverage may be reluctant to strike out on their own or change jobs if they like their current health insurance, and that can make it harder for new graduates or others seeking new or different jobs to find employment. Even workers who change from one employer's plan to another that's equally generous can face headaches when switching to another insurer's network and practices.

Offering health insurance can be a headache for employers, too. I worked for several years at a medium-sized nonprofit, and a great deal of staff time was devoted to insurance issues. Many organizations would probably rather focus on their core missions or businesses rather than developing expertise in local health-insurance options. And there's also the fact that, especially for smaller employers, having one or two employees with cancer diagnoses, severe trauma, or other costly diagnoses in a single year can lead to huge premium hikes. Employers who make difficult tradeoffs between benefit generosity and affordability to workers can face criticism on either side.

From the employer perspective, though, there are also reasons why it makes sense to offer health insurance. Such benefits can help attract and retain employees, and they also come with tax savings. Employer-sponsored health benefits aren't taxed the way ordinary income is, so employers who pay a portion of workers' premiums as part of an overall compensation package and workers who get such coverage get payroll- and income-tax savings not available to most individuals puchasing plans on the private market (premiums for privately purchased insurance are tax-deductible only for those who itemize deductions and have medical expenses exceeding 10% of their income).

Shifting away from a reliance on employer-sponsored insurance would level the playing field between different kinds of workers and employers, and reduce some of the job lock and headaches that can occur for workers who have good employer coverage. One down side of having more people buy their plans from exchanges, though, is that it will mean higher costs for some individuals.

The Affordable Care Act prohibits plans from excluding or charging higher premiums to applicants who are women or who have pre-existing health conditions (things that made individual plans unavailable or unaffordable to many in the pre-ACA days). Plans sold on health-insurance exchanges are allowed to charge higher premiums to older adults and to smokers, though -- up to three times more to older applicants and up to 50% more to smokers. So, middle-aged and older employees and those who smoke would likely be facing higher premiums than they do under employer-sponsored plans. Even if they received higher wages from employers no longer providing insurance, these individuals still might struggle to afford premiums for individual policies. Sliding-scale subsidies are designed to make plans affordable for those with incomes between 100% and 400% of the federal poverty limit, but there can be a gap between what the government defines as affordable and what a family considers affordable.

Some people with incomes above 400% FPL ($62,920 for a two-person household, $95,400 for four) might find it difficult to switch from employer-sponsored to individual-market plans, too. For instance, a household of two 60-year-olds making $65,000 per year would need to pay more than $1,100 a month (over $13,200 a year) to get a silver-level plan that covers both of them in Fairfax County, Virginia. (You can try results for different ages and locations here.)

It makes sense that the Obama administration would want to adopt policies that discourage employers from dropping their insurance plans and sending their workers to the exchanges to buy health insurance. Older employees suddenly faced with the need to buy individual policies would likely find their premiums to be significantly higher, and in some cases would consider them unaffordable. (Conversely, younger workers might find them lower.) We might want a system that doesn't rely on employer-sponsored insurance, but the transition will be challenging.

Back in 2009, Atul Gawande wrote a great New Yorker piece about how different countries' healthcare systems have evolved. He noted that the US reliance on employer-sponsored insurance sprang from employers' use of insurance benefits as a way to get around post-war wage controls set by the Roosevelt Administration, and warned that it would not be easy to shift from this path to one with little or no role for employers. Gawande also offered some optimism, though. He pointed to Massachusetts' health insurance reform, upon which the ACA was modeled, as something that is far from perfect but that the vast majority of people still consider to be an improvement.

We won't be able to fix everything in our system at once. Some people will still stay in jobs that aren't right for them because they feel they need the health benefits, but at least they know that they'll have an option to buy insurance on the individual market if they're laid off or decide to freelance. Before the ACA, a 60-year-old with a chronic health condition or two would struggle to find any insurer to sell her an individual plan, let alone a plan with a premium of under $600 a month. As we grapple with ongoing issues of affordability, quality, and access, we need to keep in mind what we want our healthcare system to look like a generation from now.

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It should be noted that the real reason for the rule is to avoid paying subsidies from the taxpayers to those applying for insurance. As I understand it a private exchange is quite ok, where the employer provides a defined contribution for HI.

Yes, that's another reason for the federal government to not want people to shift from ESI to exchanges - some of them will qualify for subsidies.