Steve Pizer speaks with great confidence:
The McKinsey “study” that loudly predicted a huge decline in employer-sponsored health insurance in response to the Affordable Care Act is back in the news today (e.g., NY Times, NPR, LA Times) because McKinsey finally released their methodology. It turns out they did a market research survey of executives. This approach has been widely criticizedas inaccurate, so perhaps it’s a good time to ask how these kinds of predictions can be made more credibly.
Start by asking why employers sponsor health insurance for their employees at all. The answer is that employer-sponsored health insurance is not taxed, so a dollar contributed to health insurance premiums buys a dollar of insurance while a dollar devoted to wages translates to less than a dollar of take-home pay. As an employer, if I devote a portion of my compensation budget to health insurance and my competitor doesn’t, the dollar value of total compensation at my company will be greater than at my competitor’s. I’ll attract the best workers. So employers sponsor health insurance because the labor market is competitive. They might wish they could cut these costs or drop health benefits entirely, just like they’d like to cut wages, but they have to consider the realities of the labor market or they won’t be able to hire.
So far, so reasonable. Pizer continues:
It turns out that there are well established empirical methods for predicting the effects of Medicaid expansion and changes in tax rates (see for example, Gruber and Simon (2008) and Bernard and Selden (2002)). Predicting the effects of the exchanges is harder, but the fact that access will be limited to those without employer offers simplifies things somewhat. Most workers will not be eligible for subsidies if they had access to exchanges and the tax benefit is a major factor, especially for higher income workers, so a firm that drops coverage will be cutting compensation significantly for most of its workers. It’s not likely that many firms will be able to do this unilaterally.
All of these issues are discussed in more detail and accompanied by a forecast that shows very modest changes in employer behavior in “The Effect of Health Reform on Public and Private Insurance in the Long Run,” by Pizer, Frakt and Iezzoni , March 2011 (ungated working paper available). [Emphasis added]
Are workers indifferent between cash compensation and compensation in the form of health benefits? We’ve been debating this question for a while now. As Pizer, Frakt and Iezzoni, we don’t have much in the way of precedents for the subsidized exchanges outside of Massachusetts, which is one reason why it doesn’t strike me as unreasonable to survey employers.
In 2010, Eugene Steuerle wrote the following:
How will the new law work? A worker whose household cash income is $60,000 in 2016 and who gets no health benefits from her employer would receive a subsidy equal to approximately $9,000. Because the firm provides no health insurance, it must pay a $2,200 penalty, leaving a net gain of about $6,800. By contrast, a worker earning equal compensation who receives employer-provided insurance would receive a subsidy around $3,500 from the exclusion of health benefits from his taxable wages, leaving him more than $3,000 worse off than his counterpart whose employer offers no insurance. This pattern holds until compensation reaches about $84,000, at which point the two subsidies are about the same. Workers earning more than $84,000 do better under the current employer-provided system than they will under the new system.
Might firms with large numbers of employees making more than $84,000 behave differently from firms with large numbers of employees making less than $84,000? The goalposts will shift as the excise tax becomes more pressing, per the study.
Except for the employer penalty for larger firms mentioned above, there are only limited mechanisms to stop employers from dropping coverage and allowing their employees to enter the exchange. Of course, some firms may be reluctant to switch because they are uncertain about changes to the health law or because some workers will insist on keeping their existing plans, at least until they see how the new exchanges work. But new firms, which over time grow and absorb larger shares of the labor force, will not face the demands posed by longtime employees. And the exchange doesn’t fully go into effect until 2014.
Congress could have avoided many of the problems that will result from this shift from employer-sponsored insurance to the exchanges by providing the same subsidy to all households with equal incomes. Perhaps it will move in this direction as the law is refined over time.
Perhaps it is irrational to value cash compensation more than compensation in the form of generous benefits, but it seems plausible to me that this would be true of many workers. Given that young firms account for a large share of employment growth, it will be interesting to see the kind of choices they make over the next decade.