Canaries in the Coal Mine for Employer Coverage

Kim Bellard, September 10, 2013

Many of you have probably heard about the old practice of putting canaries in coal mines as an early detection measure for lethal gases.  If the birds started dying, it was time to get the miners out.  We may be nearing that point with employer health coverage.

Within the past few weeks, several large companies have made some interesting announcements about their health plans.  IBM and Time Warner announced that they were moving their retiree coverage to private exchanges, and in the process essentially changing their plans from a defined benefit approach to defined contribution.  They join other major corporations like GE, Caterpillar, and Dupont in such an approach. 

Retiree health coverage is a dinosaur of employee benefits, a hold-over from a time when employers could afford to be more paternalistic – partly because health coverage was far cheaper and partly because people didn’t live as long.  Among the large employers most likely to offer such retiree coverage, its prevalence has dropped from 66% to 28% over the past 25 years, according to the latest Kaiser/HRET survey.  It’s only going to decline further, faster.

The recent rise in these private exchanges offer a new way out for employers, letting them more gracefully take a step back from their provision of health benefits, and not just for retirees.  That same Kaiser/HRET survey found that, among all large employers (200+ employees), only 9% were considering offering their employee health coverage through a private exchange.  However, the number was 29% among the largest employers, those with 5,000 or more, and they tend to be the first-movers. 

Clive Riddle recently reported on the Towers Watson/NBGH annual survey, and mentioned the interest in private exchanges.   Drilling down a little more into those results, only 28% of these large employers thought it likely that employers would move to a defined contribution approach over the next five years, and only 24% expected employers to put their coverage in a private exchange in that same time period – but the plurality were neutral in their responses.  Only 24% and 30%, respectively, thought it unlikely that they’d try these approaches.  Employers were significantly less likely to say they’d take these actions with their own health plans, which may just indicate they’re simply waiting to see what other employers do, but even so 15% were considering private exchanges for 2014.

Most chilling, only 26% are very confident they’ll be offering health benefits in ten years; in 2007 the comparable number was 72%.   

The TW/NBGH survey also reported that 42% had already increased contributions for dependents relative to single coverage (with another 19% planning to do so in 2014), and 20% had implemented spousal surcharges for spouses not taking coverage from their own employers.  Another 13% had this planned for 2014.  A recent survey from Mercer reported that 6% of firms with 500 or more employees imposed such surcharges on such spouses, while another 6% took more drastic measures, excluding spouses who could obtain coverage through their own employer.

U.P.S. is an example of this strategy.  Last month it announced that it was dropping spousal coverage for its white collar workers whose spouses have an option of coverage through their own employer.  U.P.S. isn’t the first company to take this action, nor will they be the last (The University of Virginia made a similar announcement; in fact, on the same day as U.P.S. did), but they are one of the largest to go public with this action. 

Large employers have complained for decades that they shouldn’t have to subsidize other employers by covering those employers’ employees who happen to be married to one of their own employees, and that is a valid complaint.  If more large employers follow U.P.S.’s approach, as I would expect, it would shift more of the burden on smaller employers, and on the public exchanges. 

Another vulnerable target is part-time employees.  Wegman’s grocery chain recently made news by cutting back its health coverage for part time employees.  Not many firms choose to coverage part-time employees (according to the Kaiser/HRET survey, only 25%, and that was when part-time meant less than 40 hours per week, not ACA’s 30 hours).  Ever since ACA passed there has been persistent suspicion that employers would cut back employees’ hours to get them below that 30 hour per week mandate requirement to offer coverage (see some pro versus con opinions), so we’ll have to see how quickly that 25% statistic drops.  

Health Affairs’ most recent issue focuses on the implementation of ACA, under the theme “Navigating the Thorns that Await the ACA.”  It had two articles on what will happen with employer coverage under ACA.  One study, by Thomas Buchmueller and colleagues, looked at whether employers would drop health coverage.   Their conclusion was probably not to any large degree, at least in the aggregate – their predictions ranged from a decline of 1.8% to an increase of 2.9%. 

Meanwhile, a second analysis, by Daniel Austin and colleagues, analyzed the impact of increases in employer premiums would have on employer coverage and on exchange participation, and concluded that even contribution increases of as little as $100 could cause 2.25 million to switch from employer coverage to the exchanges – and cost the federal government $6.7b in increased subsidies. 

No disrespect to Dr. Buchmueller, but I’d have to lean more towards Dr. Austin’s results, and suspect that they will be, if anything, understated.

The success of employment-based health insurance has been due, in large part, to its tax preference, which allowed employers to seemingly “pay” for most of the cost of the coverage and thus assure a risk pool with a cross-section of ages, genders, and health status.  Public subsidies that will be available through the public exchanges will lessen the tax preference advantage, and the guaranteed issue of health insurance will also chip away at the “job lock” that has kept some employees in their employer plan. 

Still, it all boils down to risk pool; if there are not enough healthy people enrolled – be it through public exchanges, private exchanges, or employer plans – costs will skyrocket and the coverage will face the prospect of a death spiral. 

Employer coverage isn’t going to disappear overnight, and there may be a lengthy transition period when employers use private exchanges to distance themselves, to lock in their contribution levels, and to avoid mandate penalties.   Dependent coverage is most at risk, between the desire to not subsidize working spouses and the lack of meaningful affordability requirements for such coverage. 

Of course, ACA could be repealed or drastically revamped due to many implementation issues, but, failing that, I think employers are going to be watching each other closely in order to make sure they’re not going to be the last one to leave the party.