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The recent enactment of comprehensive health care reform has many implications for American employers and their workers. But how they are affected by the Patient Protection and Affordable Care Act and the companion Health Care and Education Reconciliation Act, or, together, the Affordable Care Act, will depend on factors such as the size of the employer, family incomes, and health conditions of the workers.
More than 160 million (61 percent) of non-elderly Americans have an employment-related health insurance policy in 2008. 2 In general, employers are expected to continue providing health insurance for a large fraction of the non-elderly following health care reform. Some small employers will qualify for temporary subsidies, and large employers face fines designed to encourage employers to stay in the game. If individuals are not insured, then they face fines that add to the incentives aimed at employers. Other provisions, notably expanded Medicaid eligibility and the availability of low-income premium and cost-sharing subsidies for those not offered employer coverage, may lead some employers with low-skilled workers to drop health insurance provision, but for the large majority of employers, the reforms are likely to maintain their key role.
More specifically, key features of the enacted final health care reform legislation include:
- The creation of state health insurance exchanges with family income-based premium subsidies (not available if offered employer insurance)
- A requirement that large employers who do not provide health insurance (or those providing health insurance whose workers receive subsidies in the exchange coverage) pay a penalty on behalf of their workers; small employers who offer coverage receive a temporary subsidy
- A requirement that individuals hold insurance coverage—either through a public program, through an employer, or purchased through the exchange—or pay a penalty
- Insurance market reforms, including near-community rating, guaranteed issue, and minimum standards for health insurance plans
- Expanded eligibility of public coverage for all Americans with incomes under 133 percent of the poverty level, or somewhat less than $30,000 a year for adults in a family of four
- Cost-containment strategies that include Medicare payment reforms that aim to improve delivery system efficiency and quality, a new tax on high-cost health insurance plans, and new investments in delivery system infrastructure, such as comparative effectiveness research
- Financing provisions that include (in addition to the high-cost-plan tax) reduced growth of Medicare provider payments, reductions in Medicare’s payments to private health plans, taxes on medical manufacturers, new payroll taxes for high-income workers, and new taxes on unearned income
Employers’ coverage decisions will be determined by these changes to the health care system, as well as the aspects of today’s system that remain unchanged. For instance, employer-provided health insurance continues to receive a large tax subsidy, being exempt from payroll and income taxes unlike cash compensation and unlike the purchase of health insurance on one’s own. Large employer policies are also likely to continue having lower administrative costs relative to individual policies sold through exchanges; small employers have the option of buying into the exchange.3
Among other provisions, the new health reform law also includes demonstration programs, innovation initiatives, independent commissions, and other mechanisms to improve health care management, and redesigned financial incentives for health care providers to reduce the growth rate of health care and health insurance costs.4 Cost containment is unambiguously beneficial for businesses; the growth of health insurance premiums has outpaced inflation and productivity growth for many years. To the extent that the legislation is able to lower health care cost growth it will benefit business because workers would have to give up less of their wages for health insurance. How businesses are affected by insurance expansion provisions will vary according to their characteristics.
The smaller the employer, the lower the incomes and worse the pre-existing health status of the workers, then the larger the assistance provided by the new law relative to the current situation. Employers with fewer than 25 full-time equivalent employees and annual average wages below $50,000 will receive temporary subsidies for providing health insurance, starting in 2010. Employers with 50 or fewer full-time equivalent employees face no fines for not providing health insurance.
All individuals, regardless of whether they have an offer of coverage or not, face fines if they are not insured. For the very few (less than 3.5 percent) employers with more than 50 full time equivalent, or FTE employees who do not currently offer health insurance, the law requires them to provide coverage to all FTEs or pay a fine. A more binding restriction for large employers, however, is that even if they offer coverage, they are liable for a fine on FTEs who do not take up coverage, or who were excluded from the offer of coverage, and receive subsidized coverage from the exchange. Among employers with 50 or more workers that offer health insurance, on average only 54.6 percent of FTEs are currently enrolled in coverage at predominantly low-wage establishments.
The fine-based mandate for large employers, and the temporary subsidies for small employers combined with the existing tax subsidy and other existing advantages of bulkpurchasing policies, act as incentives for employers to provide health insurance. These forces act against the income-based health insurance subsidies available for low-income workers which are available (with some exceptions) only if they are not provided health insurance by their employer.
How the different forces balance out will depend on the employer’s size and workforce characteristics. Smaller employers with a relatively homogeneous low-wage workforce may rationally decide to drop coverage and offer higher wages instead, benefiting from the subsidies in the exchange. Larger firms with a substantial fraction of low-wage workers who do not currently offer health insurance may find ways to creatively restructure to the extent allowed by the law if the subsidies available to their workers in the exchange exceed the advantages of employer-provided coverage.
Large firms that offer coverage but not to all workers may extend coverage and reduce wages. At the margin, low-skilled employment growth may be spurred in small firms and dampened in large firms because of the relative advantages from the new law to being in a small firm. Small employers with higher-income workers with high health care costs may find themselves able to provide coverage because of the near-community rating rules in states that did not already have such insurance reforms.
On the flip side, small employers with workers who have low health care costs may see a rise in premiums. Employers in the health care sector itself stand to gain from having greater demand for their services when more Americans are insured. And firms of all sizes and types stand to benefit from reductions in health care cost growth, to the extent they materialize from cost control provisions of the law.
So what will this all mean for employers? In the pages that follow, this paper will unpack each of these provisions contained in the new health care reforms. I do not provide a detailed account of the legislation for the sake of brevity; summaries are available elsewhere. The complexity of the legislation means that this analysis will not capture all aspects of importance to employers. Nor is it meant to be an endorsement or criticism of the law. Rather, I demonstrate in this paper and the detailed appendices that employers are expected to be affected by the reform provisions in different ways depending on their circumstances, but that they are nevertheless expected to continue playing a central role in providing health insurance to workers. It will be important for policymakers to monitor the intended and unintended consequences of reforms, and to understand the full incidence of costs and benefits brought about by the new laws.
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