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New Study: 30 Percent of Employers Would Dump Employees into Obamacare Exchanges at Taxpayer Expense

9:01 AM, Jun 8, 2011 • By JEFFREY H. ANDERSON
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A new study by McKinsey & Company finds that, under Obamacare, the exodus of employers from the employer provided insurance market would be “vastly greater than expected.” The report on the study states:

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“Our research suggests that when employers become more aware of the new economic and social incentives embedded in the law…many will make dramatic changes. The Congressional Budget Office has estimated that only about 7 percent of employees currently covered by employer-sponsored insurance (ESI) will have to switch to subsidized-exchange policies in 2014. However, our early-2011 survey of more than 1,300 employers across industries, geographies, and employer sizes, as well as other proprietary research, found that [the overhaul] will provoke a much greater response.” 

The study finds that, “Overall, 30 percent of employers will definitely or probably stop offering ESI in the years after 2014….Among employers with a high awareness of reform, this proportion increases to more than 50 percent.” 

The report explains,

“[Obamacare] fundamentally alters the social contract inherent in employer-sponsored medical benefits and how employees value health insurance as a form of compensation. The new law guarantees the right to health insurance regardless of an individual’s medical status. In doing so, it minimizes the moral obligation employers may feel to cover the sickest employees, who would otherwise be denied coverage in today’s individual health insurance market….

“Our survey found…that 45 to 50 percent of employers say they will definitely or probably pursue alternatives to ESI in the years after 2014. Those alternatives include dropping coverage, offering it through a defined-contribution model, or in effect offering it only to certain employees. More than 30 percent of employers overall, and 28 percent of large ones, say they will definitely or probably drop coverage after 2014.”

Why are this study’s findings so different from the CBO’s estimates?  McKinsey & Company write,

“Our survey shows significantly more interest in alternatives to ESI than other sources do, for several reasons. Interest in these alternatives rises with increasing awareness of reform, and our survey educated respondents about its implications for their companies and employees before they were asked about post-2014 strategies. The propensity of employers to make big changes to ESI increases with awareness largely because shifting away will be economically rational not only for many of them but also for their lower-income employees, given the law’s incentives.”

Lower-income employees’ incentives would often line up with those of employers because of the availability of generous taxpayer-funded Obamacare exchange subsidies. When the CBO scored Obamacare, it assumed that such subsidies would be provided only to the limited number of workers that it projected would lose their employer-provided insurance. Under McKinsey & Company’s projections, the tab for taxpayers would be far, far higher.

Under Obamacare’s mandates, the report says that “employers will no longer be able to offer better benefits to their highly compensated executives than to their hourly employees.” 

These mandates would result in perverse hiring incentives. The report writes, 

 

“Instead of completely dropping employer-sponsored insurance (ESI), employers could also choose, in effect, to cover only part of their workforce, without violating the provisions of reform that prohibit employers from discriminating against lower-income employees in a health benefits offering.  One way of doing so would be to increase the proportion of part-time workers, for whom employers are not required to provide coverage.”

Is this really what Americans wanted out of health care reform — to decrease the proportion of full-time workers?

The report adds, “In industries with a high proportion of low-wage employees not covered by ESI today such as retailing and food service, this approach allows the employer to avoid significant additional medical costs while still providing coverage to higher-income management and corporate employees.”

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