Health+Benefits the July/August 2011 issue

The Big Lie

The new state health insurance exchanges will raise government costs, but federal officials refuse to acknowledge it.
By Joel Wood Posted on July 1, 2011

There’s one thing that former Rep. Anthony Weiner, D-N.Y., and I can agree on: We both wish the media focused on more important issues back in June, such as how healthcare reform will be put into practice. You wouldn’t know it from watching the nightly news, but there was a barnburner of a debate that month about the impact of the Affordable Care Act on employers that drop health coverage. Depending on who’s right and who’s wrong, the consequences for the nation could be enormous.

The barbs started flying when the consulting firm McKinsey released a report pointing to a radical restructuring of employer-sponsored health benefits following the 2010 passage of the act. McKinsey estimated that 30% of employers will “definitely or probably” stop offering health coverage after 2014. Among those with a “high awareness of reform,” the number rose to more than 50%.

Democrats on the Hill and in the White House were stung, and they pounced. White House Deputy Chief of Staff Nancy-Ann DeParle blogged that the study misses key points and doesn’t provide a complete picture of how the Affordable Care Act will strengthen the system and make it “easier for employers to offer high-quality coverage to their employees” by tackling healthcare costs.

Senate Finance Committee Chairman Max Baucus, D-Mont., fired off a letter to the consulting firm, demanding to know its methodology. It was Baucus who launched an investigation into Humana two years ago, when the firm sent a letter to customers suggesting that cuts were coming to Medicare Advantage plans (which is exactly what is happening).

A central Democratic selling point on healthcare reform is that it will reduce the federal deficit. But if McKinsey is right and the administration wrong, the act will instead send federal health costs soaring—as employers drop their coverage and send millions of workers to state exchanges, where subsidies are available to families making up to 400% of the federal poverty line.

The Congressional Budget Office estimated that only a fraction of the 161 million Americans insured through employer-sponsored plans would migrate to the exchanges. Democratic leaders have repeatedly cited the CBO study as proof that McKinsey has it wrong. But the CBO is constrained in its estimates, unable to “dynamically score” the full implications of the law. Its estimate of worker migration, for example, doesn’t take into account medical cost inflation that is sure to continue to rise.

I’ve visited scores of Council member firms and hundreds of their clients in the past two years, and the clear consensus is that the retail and hospitality sectors will be the first to go. Employers are already calculating the ways in which they can escape the act’s mandates by switching to more part-time workers and dumping employees into state exchanges (despite the $2,000-per-employee penalty). But the anxiety extends beyond those sectors, even all the way up to professional services firms.

The White House, meanwhile, insists that employers “have no incentive to drop coverage.” I hope they’re right and I’m wrong, but I don’t buy it. The notion that the Affordable Care Act makes providing healthcare easier for employers is undermined not so much by the McKinsey study but, rather, by a June study released by the Health Reform Advisory Practice of the Lockton Benefits Group (a Council member firm).

“Far from making the provision of group health insurance less expensive and less burdensome, (our) survey demonstrates last year’s health reform law has instead had the opposite effect,” says the Lockton report. “A significant majority of employers responding to the survey…say the health reform law has increased their costs and administrative burdens, and nearly 20% say they’ll consider terminating group coverage in 2014.”

Indeed, nobody really knows where the numbers will wind up. For the most part, states have made little progress establishing their exchanges. The administration correctly notes that employer-sponsored coverage has actually increased in Massachusetts, but perhaps that’s more a reflection of how poorly the Massachusetts Connector has performed. The Lockton study cataloged the many ways in which health plan administration, already a costly and burdensome endeavor, will be made more difficult.

“The survey confirmed what we had been hearing anecdotally from our clients for months—that many of them are very, very apprehensive about the reform law’s mandates,” says Ed Fensholt, director of Lockton’s compliance services division. “They know there is a lot of extra work and additional expense ahead.”
The Lockton study did not uniformly criticize the new law. Some employers like the law, and most of them were enthusiastic about the increases in maximum permissible wellness incentives.

But the bigger picture, Fensholt says, looks frightening. “What we have learned is that, while most clients are taking a ‘wait-and-see’ approach to the issue of terminating group coverage, about one in five say they will consider dropping coverage,” he says. “If we see that a significantly larger number of employees migrate to the insurance exchanges for coverage, then Congress’s estimate of the dollars needed to supply subsidies in the insurance exchanges will have been significantly understated.”

Joel Wood Senior Vice President, Government Affairs, The Council Read More

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