McKinsey Finds Growing Number of Employers Likely to Drop Health Coverage

June 7, 2011 (PLANSPONSOR.com) – New research suggests that nearly a third of employers will be dropping their health care insurance programs after the provisions of the federal health care legislation come into full effect.

 

The McKinsey report notes that its early-2011 survey of more than 1,300 employers across industries, geographies, and employer sizes, as well as other proprietary research, found that overall, 30% of employers will definitely or probably stop offering employer-sponsored insurance (ESI) in the years after 2014, when many of the law’s relevant provisions take effect. 

Reform “Minded?”

Moreover, among employers with a high awareness of reform, this proportion increases to more than 50%, while upward of 60% will pursue some alternative to traditional ESI, according to the report, published in the June 2011 issue of McKinsey Quarterly.

“Our research suggests that when employers become more aware of the new economic and social incentives embedded in the law and of the option to restructure benefits beyond dropping or keeping them, many will make dramatic changes,” according to the report. 

McKinsey estimates that at least 30% of employers would gain economically from dropping coverage, even if they completely compensated employees for the change through other benefit offerings or higher salaries.

Moreover, and McKinsey notes, contrary to what many employers assume, more than 85% of employees would remain at their jobs even if their employer stopped offering ESI, although about 60% would expect increased compensation.

Economic Benefits

The McKinsey report notes that employers could benefit economically by paying sufficient additional compensation to help employees purchase coverage with no other out-of-pocket expense (less subsidies for employees with household incomes below 400% of the federal poverty level), the additional individual income and payroll taxes levied on the increased compensation, and the $2,000 government penalty.

“But we believe that employers will not have to provide 100 percent of the value of the lost insurance,” the researchers noted, cautioning that “if so, even more employers will benefit economically”.  The report cites the example of Liazon, a defined-contribution-benefit company, where executives interviewed found that found that when employees are shifted from coverage selected by their employer to a defined-contribution plan (under which the employer provides a fixed dollar amount and the employee can choose how to allocate it among a variety of benefit options), about 70 percent of employees choose a less expensive health plan.

Higher-income employees, who won’t receive subsidies and would have to pay the entire cost of individual coverage out of pocket, will have a greater need to be made whole, according to the report, which goes on to note that these higher-income employees are also more likely to be satisfied with partial compensation or with tax-advantaged forms of compensation, such as retirement benefits.

More information about the study is available at https://www.mckinseyquarterly.com/How_US_health_care_reform_will_affect_employee_benefits_2813

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