What happens if my employer drops my health insurance coverage?

Could your employer-sponsored health insurance plan soon be extinct? For millions of Americans, it's a distinct possibility.

In 2014, one of the most important and controversial provisions of the federal Patient Protection and Affordable Care Act will go into effect: Businesses with more than 50 employees will be required to provide health insurance coverage to their employees or face penalties of $2,000 per employee.

what happens if my employer drops my health insurance coverage

The employer mandate is expected to boost the number of employers providing health insurance. However, according to several recent surveys, many employers actually plan to drop their health insurance coverage once the federal mandate takes effect.

A study of more than 1,300 businesses by consulting giant McKinsey & Co. found that 30 percent of employers that currently provide health coverage would definitely or probably stop offering health insurance in 2014. Although White House official Ann DeParle claimed that the study was “an outlier,” other groups have seen similar results. For instance, a study by the National Federation of Independent Business revealed that 12 percent of businesses surveyed planned to drop coverage within the next year, and nearly 87 percent of businesses that don’t offer coverage reported they were unlikely to begin offering coverage once the federal mandate goes into effect.

“The employer tax penalty is less than the cost of providing employer-sponsored health insurance,” says Kip Piper, a health care strategist who is president of Health Results Group LLC. “Do you want to pay $2,000 or $10,000? It’s probably a no-brainer.”

So what does that mean for the 61 percent of Americans who receive health benefits through their employers? Here’s a look at what may be in store.

Potential cost savings for both employer and employee

When making decisions about whether to maintain health coverage, employers are looking at the numbers. In many cases, it’s more cost-effective for both employers and employees to send employees to the new health insurance exchanges administered on a state-by-state basis by either governmental or nonprofit agencies, which will open for business in 2014. These exchanges will let individuals buy health insurance plans at group rates, and were intended to benefit the millions of Americans who are not currently eligible for an employer-sponsored plan.

John Graham, director of health care studies at the Pacific Research Institute, says employees who earn less than $70,000 will be better off buying through the exchanges because they’ll receive tax credits to help them pay for their insurance. The National Federation of Independent Business claims that low-wage employees who cover a high share of premiums are particularly likely to drop their employer-sponsored health plans; 43 percent of surveyed employers say that if the majority of their workers drop the company health plan, they’ll stop offering coverage.

Although it’s not yet clear how competitive the exchanges’ rates will be with commercial health plans, individuals could see significant savings.

Under a small business insurance plan, premiums are determined based on the health and age of the business’ employees. That means that companies with disproportionately older or sicker workers, or companies with more female employees (who cost more to insure primarily because of maternity and preventive care), will end up paying higher premiums. In contrast, premiums under the exchanges will be based on just a few factors: age, family size, ZIP code and whether a person smokes. Even if the policyholder has a history of illness, the individual won’t be subject to higher premiums.

Employers have more options

For employers that plan to drop private coverage, several options are available. Businesses that have between 50 and 100 employees can purchase an exchange plan for their company starting in 2014, while companies with more 100 employees can join the exchanges in 2017. In many cases, though, Piper believes companies will simply drop health coverage altogether and encourage their employees to purchase insurance through the exchanges individually. This is particularly true of companies with less than 50 staff, which are not eligible to purchase employee plans on the health exchanges.

As a result, some employers may bump up salaries or other benefits to compensate their employees for the loss of health care benefits, while others simply may absorb the savings.

Piper foresees growth in benefits such as free wellness clinics for employees. “It may be cheaper to move from providing insurance to using some of that savings to provide free wellness services or clinics, which can help companies stay competitive in the labor market,” he says.

A hazy future

Despite what the surveys say, it’s impossible to tell exactly what effect federal health care reform will have on employer-sponsored health insurance until 2014. Many aspects of the law remain up in the air.

For instance, some states "are actively hostile" toward the planned health insurance exchanges, Graham says. "I think there’s going to be a train wreck coming.”

Additionally, political pressure could jeopardize the exchanges’ future. “If either the Democrats solidify control or the Republicans take over the White House, you could have a completely different paradigm come 2013,” Piper says.

While employers may say they plan to drop their employee health plans, most aren’t likely to act as soon as the exchanges are implemented in 2014.

“They tend to wait for a few larger employers to take the hit before making a move,” Piper says. “Employers tend to be fairly cautious and circumspect about any discussions, but they are certainly assessing their options and they’ve been doing (computer) modeling, hiring consultants and thinking about what their options are.”

However, if federal health care form is carried out as currently written, Piper believes we’ll see the employer-sponsored health insurance market begin to dry up as more and more employees pour into the exchange system.

“Whenever the government goes into a marketplace and pays for something that was previously paid for with private money, it creates a strong incentive for those who’ve been paying for it with their own money to ask, ‘Why should I continue to do that?’” Piper says. “That’s one of the moral hazards of this kind of system.”

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