In Summary1. Analysis by the Urban Institute challenges the claim that ACA

creates a “win-win” opportunity where many employers will drop coverage and make their workers and their firms better off.

2. Over time, no such “win-win” situation exists. The key to the ACA’s impact on employer sponsored insurance (ESI) will be whether most workers prefer ESI to coverage newly available through state insurance exchanges.

3. The Urban Institute’s (along with Rand’s and CBO’s) microsimulation model shows that ESI will likely remain most workers’ preferred and therefore primary source of coverage, even as the ACA is implemented.

BackgroundWith or without the ACA, employers provide benefits to employees to the extent that the labor market demands, and to the extent that costs—when combined with wages—do not exceed employees’ worth to the firm. Traditionally, the insurance market, labor market and tax incentives work together to make workplace-based health insurance cheaper and better for employees as compared with insurance they could obtain on their own. There’s always a tradeoff, however, between wages and benefits. Rising health costs make it harder for employers to keep wages low enough to hold total compensation equal to the workers’ value to the firm, so coverage has declined, especially for low-wage workers. Decreases in ESI—driven by rising per capita health care costs—will likely continue, but implementation of the ACA will not unravel ESI coverage.

Does the ACA change employers’ incentives? For some (especially lower-wage) workers, the ACA’s subsidies and its soon to be created insurance exchanges will make acquiring health insurance outside of the workplace a better deal. But the law, with some very limited exceptions, prevents workers with employer coverage from taking this deal. For these workers to access subsidies, employers must drop coverage (and pay penalties) for all employees.

But an employer who drops coverage won’t save money overall, as some incorrectly speculate. Employers who drop workers’ coverage, but fail to increase employees’ wages in order to maintain their overall compensation, will inevitably lose these employees to competitors. Thus, employers who drop coverage must in turn, increase wages. Employers who try to fully compensate employees for lost benefits on top of paying the necessary penalties would have to increase total compensation costs.

Raising employee premium contributions in an effort to encourage only low-wage workers to drop coverage voluntarily (to take advantage of subsidies) raises additional challenges. Doing so could leave the firm providing insurance only for its higher-wage, older workers, who cost more per person to insure. Requiring these workers to pay higher premiums or reducing wages as necessary to maintain overall

compensation would likely antagonize the very workers that employers most want to keep—more experienced, more senior employees.

Although some employers may still choose to seek short-term gains by dropping insurance without increasing wages, market competition will ultimately eliminate underpayment, force employers to adjust, and bring total compensation into line with workers’ value. There is, therefore, no widespread incentive for employers to either drop employee coverage, or to encourage low-wage workers to drop their coverage voluntarily.

How do the “winners” and “losers” of dropping stack up? Whereas tax subsidies for employer benefits increase with income, the opposite is true for subsidies under the exchange. Analysts agree that only at or below an income of 250 percent of the federal poverty level do the ACA’s subsidies make exchange coverage as good as or better than employer-sponsored coverage. Firms dominated by workers within this income range are likely to drop coverage, substitute extra wages (less penalties) for benefits and make their low-wage workers better off.

But 80 percent of U.S. workers overall—and the group most likely to dominate most workers’ firms—would lose out if employers drop coverage. Since compensating them for the loss of benefits would increase costs to employers, and thus create a disincentive to drop, most employers will continue to provide coverage.

Making dropping even less likely is the difficulty of identifying “winners” and “losers” in advance. Employee preferences are complicated, and factors like age and family status may reduce the attractiveness of exchange-based coverage in unanticipated ways. Even workers who benefit financially from exchange subsidies may prefer the security of employer-subsidized benefits to the risk of having to repay an exchange-based subsidy deemed “overpaid” based on income at year’s end. Employers who drop coverage, therefore, also risk undermining worker loyalty, increasing worker turnover and disrupting employees’ benefit expectations.

What then, are the long-term prospects for employer-sponsored insurance? The best microsimulation models approximate employees’ complex preferences and allow the simulation of employer decisions in a dynamic marketplace. Analyses using these models find that employer-sponsored coverage under the ACA would not be significantly different than without it. In fact, employer-sponsored coverage actually grew in Massachusetts following the state’s enactment of health reform similar to the ACA.

Although predictions are inherently uncertain, the most thorough analyses support the conclusion that the ACA will leave employer-coverage largely intact, even as it creates a viable insurance market for those people employer-sponsored insurance fails to reach.

For more information, read the full report funded by the Robert Wood Johnson Foundation and prepared by researchers at the Urban Institute.

Why Employers Will Continue to Provide Health Insurance: The Impact of the Affordable Care Act

Timely Analysis of Immediate Health Policy Issues October 2011

Linda Blumberg, Matthew Buettgens, Judy Feder and John Holahan