Employer opt-out as a result of reform: survey vs. model

Yesterday, McKinsey released a report suggesting that 30% of employers will definitely or probably stop sponsoring health insurance after the Federal reform “big bang” in 2014. Although disputed by the White House per press reports and the methodology details are limited in the published article, there are four good reasons to think the McKinsey survey could be correct:

1. Contradictory studies (Urban Institute in January 2011 and RAND in April 2011) use simulation methodologies while McKinsey did a survey. With a change as transformative as Federal health care reform, simulation parameters estimated based on historical behavior are probably going to be less accurate than surveys if the questions are phrased correctly.
2. Massachusetts reform experience (cited by the White House to suggest minimal opt-out) is a flawed basis for extrapolation: the degree of change Federal reform will impose on many states is far greater than the degree of change Massachusetts state reform imposed on its health insurance market: after all; before state reform, Massachusetts already had very high state benefit mandates, pricing based on community rating (no medical underwriting) and a low starting level of uninsured. These conditions do not hold for many states.
3. Other employer surveys point in a similar direction: last year, Mercer surveyed employers on their intentions to provide coverage in 2014 and beyond. They found that 6% of employers with more than 500 employees and 20% of employers with less than 500 employees were likely to drop coverage (weighted average: implied effect on 13% of all employees). Although these numbers are a lot smaller than the 30% of employers cited in the McKinsey study, employers have had a lot more time to study the law since the first survey.
4. The underlying economics of benefits may well push employers away from offering benefits per McKinsey: they found that for many employers, it can be less costly to drop coverage, make their employees whole for cost of buying individual coverage (post subsidy), pay the incremental taxes and the penalty vs. continuing to pay for benefits (though of course, this analysis is highly sensitive to the pricing on the individual market which itself is dependent on opt-out and adverse selection patterns – again, one wishes for more methodological detail).

There is also a broader interdependency across employer decisions. To the extent competing buyers of labor do not offer health benefits, an employer won’t either (and instead try to meet regualtory requirements at minimal cost — including opting out and paying the penalty if appropriate). No surprise then that a survey which suggests employers covering 13% of employees would opt-out published in November 2010 would be followed by another survey undertaken several months later resulting in 30% of employers saying they would opt-out. Indeed, the McKinsey study also suggests that many recession-scarred employees would want to keep thier jobs even if their employer drops coverage and did not make them financially whole. Employers will quickly learn from each other what is possible within their labor markets and compensation pricing will reset.
Opt-out on the scale implied by the McKinsey study has major implications for health insurers: the employer sponsorship question is firmly “on the table” and insurers looking to hold on to group business (as opposed to trying to pick up the employees on the individual market) will need to create a compelling case why employers should be involved in health care at all. A marginal cost differentation may not be enough in many cases; the differentiated productivity value proposition will become increasingly important. One added complication: employers offering the lowest salaries will be more likely to drop coverage (as these employees will be eligible for the subsidies and therefore less costly for an employer to “make whole” with higher salaries). They will also be less responsive to a marginal improvement in productivity – after all, by definition, it costs less to hire additional labor to fill in the gaps.