McKinsey & Co., a well known and respected consulting firm with offices around the world, recently published its findings on a study that it conducted to determine how the new health care legislation, the Affordable Care Act, will affect employee benefits.
The findings have raised eyebrows and also the ire of White House officials who have responded that the study is an “outlier” from other studies.
McKinsey found that 30 percent of employers will definitely or probably stop offering employer-sponsored insurance in the years after 2014.
The report states that before each employer was surveyed, McKinsey explained the complicated law so that they understood the new economic and social incentives imbedded in it. McKinsey also outlined various options on how to restructure health benefit packages rather than dumping them altogether.
This level of attrition is a contrast to the Congressional Budget Office’s estimate that 7 percent of employers will have to switch to subsidized exchange policies after 2014, when many of the law’s provisions take effect and individuals without employer-provided health insurance will receive government subsidies for health insurance.
This will give low-income workers access to quality health coverage they wouldn’t otherwise have in today’s individual market. McKinsey suggests that the law reduces the social equity advantage of employer plans, and that it makes more sense for businesses to let the federal government pay for their employees’ health care.
penalties are cheaper
Health care reform requires all employers with more than 50 employees to pay a penalty of $2,000 per worker if they don’t offer benefits to every full-timer. The benefits must be considered reasonable and must be the same for all employees regardless of compensation.
In addition, plans with premiums above $10,200 per individual and $27,500 per family will be subject to the so-called Cadillac tax, which is a rate of 40 percent. McKinsey states that these requirements will increase costs for many companies, making the option of dropping health insurance and paying the penalty of $2,000 per employee compelling.
Individuals who work for employers that do not provide health insurance can apply for government subsidies toward purchasing their individual policies. To be eligible for subsidies, the maximum income for a family of four is about $89,000. Considering the 2009 median household income in the United States was $50,221, likely most families will qualify for health care subsidies.
benefit to fade away
The report goes on to state that 45 percent to 50 percent of employers will definitely or probably pursue alternatives to employer-sponsored plans in the years following 2014.
Alternatives include offering benefits through a defined contribution model or just paying workers higher wages to offset the cut in benefits. Under a defined contribution model, the employer provides a fixed dollar amount and the employees choose how to allocate it among a variety of options.
Incidentally, citing separate research, the report said that 70 percent of employees participating in this model opt for a less expensive health plan.
The report concluded that employers will not have to provide 100 percent of the value of lost insurance. The study states that overall, employees value cash compensation several times more than health coverage.
McKinsey consumer research found that more than 85 percent of employees — and almost 90 percent of higher income ones — say they would remain with an employer that dropped insurance. Younger employees tend to value career-development opportunities and work-life balance more than health benefits.
Employers are not just thinking of the bottom line. The report states emphatically that employers are considering shifting away from their own health insurance plans, not because they don't care about their employees, but because the new law gives better health care to their workers, thanks to government subsidies, than they could otherwise provide.
The study demonstrates that the health care reform law complicates business activity.
To understand what is best for a company and for employees, managers will need to understand the law and the composition of their work force. They will have to balance part-time and full-time labor and the cost of making employees whole (i.e. how much extra compensation will it take to keep them happy without employer-sponsored insurance).
Travis Flenniken, a certified financial analyst, is vice president of investments at DeMoss Capital.