To drop or not to drop - that is NOT the question

by Torsten Bernewitz

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As most people in the industry are aware, there are diverging opinions about how the Patient Protection and Affordable Care Act (PPACA) may affect the market for employer sponsored insurance (ESI), which currently represents over 70% of the non-elderly uninsured, or close to 150 million people in the US.

In particular, the discussion has focused on the question if - and how many - employers may stop offering ESI. Answers to this question seem highly explosive from a political perspective, going at the heart of what the law wants to achieve and its chance to achieve it.

However, from the perspective of health insurers and payers (as well as other stakeholders in healthcare), this may be the wrong question to ask, may in fact be a red herring that could lead to serious strategic mistakes.

In this post, I want first to summarize the different positions, and then discuss why the black and white perspective is limiting and what might be better questions to ask.

When the PPACA was signed into law in 2010, the Congressional Budget Office regarded its effect on ESI as minimal, estimating that about 7 percent of employees who currently enjoy health insurance through their employer would have to move to the exchanges in 2014.

In June 2011, management consulting firm McKinsey made waves with the bold claim that this estimate was far too conservative. Based on an employer survey they had conducted earlier in the year, the firm concluded that the law would trigger a radical restructuring of employer-sponsored health benefits. 30 percent of employers – potentially even more once everybody fully grasped the implications of employer mandate, the new insurance exchanges, and the law’s system of penalties and subsidies - would “probably” or “definitely” stop offering health coverage to employees after 2014, pushing them to the individual market instead.

However, two further studies published around the same time challenged this view again. Both the Urban Institute and the Robert Wood Johnson Foundation identified health care cost savings to firms with fewer than 50 workers, as well as a small increase in the number of people covered by their employer-sponsored plans, indicating a stabilizing influence of the Affordable Care Act on small firm coverage, which has been eroding over the last decade.

A similar view was shared in another survey, this time conducted by consulting firm Mercer in July 2011. Although employers voiced concerns about rising costs, most said they remained committed to offering ESI. Only 8% of survey respondents were “very likely” or “likely” to stop offering medical plans after the insurance exchanges become available.

Finally, while the above surveys and studies are speculative and based on modeling assumptions and stated stakeholder intentions, there is one real data point: Massachusetts introduced an individual mandate and penalty structures similar to those of the PPACA in mid-2007, and experienced a subsequent increase in ESI coverage. Of course, there is also a debate whether the Massachusetts case is a representative indicator for the national level.

However the black and white perspective on ESI – whether “to drop or not to drop” – is perhaps missing the point. It may also lead to strategic mistakes. Those who conclude that ESI will not change dramatically may be tempted to call off the alarm and continue business as usual. Those who conclude that ESI will be dropped left, right and center, may shift too much of their attention away from one of their core (and very profitable) customer groups, the employers. Both groups will miss opportunities.

The fact remains that offering employer sponsoring insurance is very expensive, and that employers need to tackle this problem to maintain ESI as a meaningful and valuable benefit for employees. According to consulting firm Hewitt Associates, healthcare premiums have more than doubled over the last ten years, growing more than five times as fast as the median household income in the US during the same time.

The 2011 Milliman Medical Index shows that the cost of PPO coverage for a typical family of four has now reached $19,393, of which the employer pays almost 60%, or $11,385, and the employee covers $8,000+ in contributions and out-of-pocket costs. This is significant if we consider that the average household income in the US in 2010 was just about $50,000.

If the underlying costs continue to grow - and it is not clear how they will be stopped - employers will need to rethink their health benefits strategies. Employers offer health benefits primarily to recruit and retain employees. How much can they ask employees to share in the increasing burden through higher co-payments, co-insurance or deductibles without seriously damaging the value recruits and employees put on the offering? Especially, if potentially more competitive coverage options become available on the exchanges?

Employers, in particular large ones, may still feel “morally obligated” to offer health insurance coverage, or see health benefits as a way to signal prestige and industry leadership. So they will likely offer something. The question is thus not whether, but what to offer.

Very likely these benefit offering will not be the same as today. Instead, they will include wellness programs, employee incentives, rewards and perhaps also penalties based on biometric outcomes. There will be more choice. And more options will create more diversified employer as well as employee segments.

It is also probable that, as the exchanges evolve, the relative value of coverage that can be obtained on the individual market - compared to ESI - will change through the effects of economies of scale and stronger competition. Employers will watch this evolution closely, and continue to adapt their ESI strategies.

The key question for health insurers and payers is therefore: how can we get as close as possible to employers to help them navigate their health benefit strategies and leverage opportunities to cross-sell new insurance products, new services like health IT and data solutions, or medical and wellness management?
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Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com