The cost of dropping health insurance

July 17, 2012

In the health reform debate, we do a lot of crystal ball gazing over whether employees will keep offering health insurance in 2014, or send employees to the new health insurance marketplaces where some could purchase subsidized coverage. The companies would face a $2,000 per employee fine for not providing coverage, but that's a whole lot less than the cost of providing health insurance.

Truven Health Analytics recently took a deep dive into the financial decision employers face. It looked at health plan data for 33 large companies, including universities, retailers, those in financial and manufacturing industries. It found that moving employees into the exchanges would save employers a little - but also cost workers a lot.

"In no case could there be a win-win for the employer and the employee," says Ray Fabius, Truven's chief medical officer. "Someone ends up paying more."

This is true in all four of the scenarios that Truven modeled. It started by looking at a a company that moves its employees into an exchange, but gives them enough money to buy comparable benefits. That's the part in the key below referred to as "grossing up" the employee's compensation:

The cost of health benefits jumps for two key reasons. First, when large companies purchase insurance, they buy in bulk and tend to get a better deal. "Big employers can lower the cost of an individual premium by spreading risks across a bigger pool," says Fabius. Economies of scales, in other words, disappear in the individual market.

Then, there's the tax advantage: Employer-sponsored benefits do not get taxed. Any policy purchased on the health insurance exchange, however, would have to be purchased with post-tax earnings.

That gets layered on top of some other fees, like the $2,000 penalty for not providing health insurance. The company's other benefits, such as life and disability insurance, would likely become more expensive as companies that usually buy them as a bundle with health care would be shopping for stand-alone products.

That's if employers keep paying for insurance. Truven also models an alternative situation, where an employer decides to drop insurance coverage altogether and let the worker handle it herself.

That saves the company about $5,000 per employee. The worker, meanwhile, ends up spending an average of $12,888 more on health care costs than they did when they had an employer plan. That figure, it's worth noting, includes any tax subsidies that the law would provide to the employees in this study:

Truven's research aligns well with other work, from consulting firms, that have modeled the impact of employers dropping insurance. Benefits firm Lockton has research estimating that an employee who loses employer-sponsored insurance would spend 79 to 125 percent more buying benefits on the exchange.

This doesn't mean companies won't drop coverage: There are, after all, some savings at stake here. It does, however, add a bit more complexity to companies' financial calculations. Employers would see some savings - and also difficult conversations about why health care costs were spiking.

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Brad Plumer | July 17, 2012