Too Bad About Your Coverage

By Kim Bellard, July 30 2012

There’s more data that shows health coverage is good for people.  Too bad fewer people than expected will have it. 

The New England Journal of Medicine recently reported on a study by Sommers et. alia which showed that Medicaid expansions can be linked to lower mortality rates in the impacted populations, along with better access to care and improved self-reported health status.  Not surprising, really, especially on top of last year’s study from the Oregon Medicaid program, that also showed that those lucky enough to win their coverage “lottery” did fare better. 

ACA was supposed to greatly increase the population covered by Medicaid, but with the Supreme Court ruling’s loophole on states adapting the expansion, that picture no longer looks quite as rosy.  The Congressional Budget now estimates that 6 million fewer people will get coverage through Medicaid and CHIP, although they obviously do not yet know which states will elect not to expand their programs.  CBO believes that half of those 6 million people will get coverage via the insurance exchanges – although I’m not clear why someone who would have gotten coverage in the Medicaid expansion would have income above the magic 133% of poverty level – leaving a net increase of 3 million more uninsured than under the original ACA estimates. 

CBO also believes those 3 million additional enrollees in the insurance exchanges will cost more than average, and as a result add about 2% to the cost of individual insurance in the exchanges.  That is another hidden “tax” on the private sector.

Whenever I think about the injustice of millions of poor people not having access to coverage while middle class people get subsidies, I remind myself that this is nothing new.  We’ve been doing that with the tax preference for employer health coverage for decades, so this latest indignity merely makes things quantitatively worse, but is not qualitatively new. 

Speaking of employer health benefits, Deloitte’s recent survey of employers forecasts 9% of employers will drop their health coverage, with another 10% uncertain what they will do.  This compares to the GfK study estimate from last winter of 12% drop/32% uncertain, and the now infamous McKinsey estimate from last summer that 30% of employers would drop coverage.  Deloitte’s survey, though, was only of employers with more than 50 employees; if smaller employers were included, the number would no doubt be higher than the 9%.

Reasonable experts can probably agree that the estimate of employers initially dropping coverage is somewhere in that 10-20% range, recognizing that many employers have not yet made up their minds.  The trouble I see is that once this ball starts rolling downhill, it won’t stop; it’s only going to pick up speed.  No one is going to want to be the last one in the benefits pool.

A little history lesson might be helpful.  Health insurance used to be virtually all fully insured and community rated.  That worked for a while, until some employers and insurers figured out that both could benefit by offering lower rates to employers with lower cost populations.  That gradually led to the demise of community rating – HMOs were the last to give up the ghost – in the group market, as fewer and fewer employers were willing to subsidize their higher cost fellow employers.  Use of employer-specific claims experience became the norm, especially for larger employers.  In the early 1970s, spurred by the passage of ERISA, employers also realized even with experience rating, being part of the insurance pool at all still had limitations they wanted to avoid, and they began to adopt various forms of self-funding.  It initially was only for very large employers, but, again, gradually became adopted by employers or more and more sizes – some of whom were/are really too small from an actuarial point of view to justify it.  Again, once some employers escaped being insured, other employers became more uneasy about still being part of the insurance pool.

Self-funding had the specific advantage of escaping state benefit mandates, although recent federal mandates, including ACA’s, are rapidly eroding this advantage of self-insurance.  The ACA requirements have added costs to most employer plans – e.g., coverage dependents, unlimited maximums, no coinsurance on preventive services – and the government’s involvement in their benefit design is probably not sitting well with many employers who thought they had escaped it.

At this point in time, most group business is self-funded.  Kaiser Family Foundations’ 2011 Employer Health Benefits survey found 60% of employees were in self-funded plans, up from 49% in 2000.  Over 80% of employees in firms with 200 or more employees are in self-funded plans.   I.e., to the extent they can, employers have made rational business decisions not to subsidize anyone they don’t have to.

Why anyone would believe employers would not act the same way once some employers start dropping their health plans is beyond me. 

Employers have invested a lot in their current health plans.  They have shown much thought leadership in driving changes to both insurers and providers, but the auto and steel industries, to pick two, have shown us how legacy health costs can hamper domestic and local competitiveness.  Right now, not offering health plans is a huge disadvantage in attracting and retaining employees; Deloitte’s survey shows over 80% of employers cite attracting/retaining employees as a key reason for offering health benefits.  However, it would only take a few bellwether employers to start dropping coverage to start a rush by other employers for a similar exit.

Employer coverage still has the advantage of the tax preference, plus the fact is that the health insurance exchanges are not up and running and the individual market is not yet reformed or robust.  Come 2014 or 2015, though, the exchanges may be a more appealing option, especially for smaller employers, and if anyone believes the tax preference will survive as is in the coming deficit reduction wars, well, good luck with that.

People aren’t going to keep their current health plan.  Many poor people will still not be protected by Medicaid.  We will still have some 30 million uninsured.  And we’re still not getting good value for our exorbitant health care spending.  Until that problem is solved, everyone’s coverage is in danger.