Catalyst for Payment Reform

MYTHBUSTER: Employers are getting out of the business of buying health insurance

MYTHBUSTER: Employers are getting out of the business of buying health insurance

As the nation prepared for the rollout of “public exchanges,” many experts opined that employers would stop directly offering health insurance benefits to their employees and instead give them a fixed amount to shop for coverage on either a public or private exchange. In either case, the idea was that exchanges would provide both employers and employees with more choices in coverage, greater cost control, and a way to make the cost of premiums more transparent.

So, now that public exchanges have been up and running for a few years, it’s worth revisiting this hypothesis. Have employers moved their employees to public or private exchanges?

Let’s start with public exchanges. In 2014, the IRS created a major disincentive for employers to “dump” employees on public exchanges by declaring that employer financial contributions for health insurance premiums do not count as taxable income to workers.  This move helped clarify what role the public exchanges would play for employers under the Affordable Care Act.  Employers can still give employees contributions to cover some or all of their health care costs in the form of higher wages, but wages are taxable. It shouldn’t surprise anyone that employers did not find public exchanges particularly appealing.  Combining this with questions surrounding the viability of public exchanges and an ideological opposition by some businesses to government-run programs, it’s easy to see why only 2% of employers have expressed interest in public exchanges.

What about private exchanges? Data on adoption is not easy to come by, but we know early projections overestimated their growth too. The Employee Benefits Research Institute (EBRI) predicts that private exchanges will have approximately 10-13 million enrollees by 2020 – a small percentage of the total group health insurance market. What happened?

The decision to join an exchange is heavily intertwined with whether an employer is fully or self-insured because exchanges typically offer fully “insured” products and the ability for limited customization.  This dynamic hasn’t worked in favor of the exchanges, as employers of all sizes are increasingly pursuing self-insured models due to reduced administrative fees and an increase control over their health care strategy.  Large employers seem to be taking a “wait and see” approach to determine if private exchanges really offer more than those advantages.  Mid-to-small employers may find private exchanges more attractive as they are less likely to pursue a self-insured model, but they don’t seem to be flocking to them in droves either.

There are other economic dynamics at play. Those in a position to recommend exchanges to employers – benefit managers and brokers — have a disincentive to pursue the model, unless they want to design their way out of their jobs.  And the cost trend has been better in recent years than in earlier memories — it’s desperation that makes employers willing to rock the boat with their benefits offerings.  Given that the labor market is currently quite competitive, employers are reluctant to make big changes to their benefits structures that might encourage workers to look elsewhere for employment.

With these factors for employers to consider, it seems that employers’ role as health care purchasers is here to stay, at least for now.

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