Employer Coverage Could Be in Jeopardy

A recent article in Fortune Magazine backs what we’ve been saying all along. The new health care reform law is just not sustainable.

The new law is dependent upon expanding and sustaining the current employer-based system that insures many Americans through their jobs. According to documents released, companies such as AT&T, Verizon, Deere and Caterpillar are exploring their options when it comes to health insurance coverage, including dumping health care coverage and instead, paying the penalty fee to the government.

This came to light after a number of companies announced big write-downs due to elimination of federal retiree drug-benefit subsidies, which reduced projected revenue. Angered over this, Representative Henry Waxman demanded these companies hand over all of their health care-related documents and summoned top executives for hearings.

After reading through the document provided, hearings were abruptly canceled and a memo issued stating that the write downs were “proper and in accordance with SEC rules.” They also mentioned that the reports gave an optimistic view but neglected to mention anywhere that these companies were weighing the costs of dropping coverage.

The cost of dropping coverage, paying the penalty and allowing employees to receive their coverage through the exchange is much less than maintaining health coverage for employees. Covering dependents up until age 26 under their parents’ coverage is further hurting companies financially. 

In November, when the government proposed an 8% payroll tax on companies that didn’t offer coverage, Caterpillar estimated it could shave $25 million a year, or almost 10% from its bill. Now, because the $2,000, in the final bill is far lower than 8%, it could reduce its bill by over 70% (yes, 70%!) by dropping coverage and paying the penalty instead. AT&T spends $2.4 billion a year on coverage for its almost 300,000 active employees. Their costs would fall to $600 million if they drop coverage.

What it comes down to is it’s a lot cheaper to “pay” than “play.”

This contradicts President Obama’s statements about Americans getting to keep their current coverage if they like it. Even worse, it puts the cost balance of the system in jeopardy. The CBO counts on a majority of Americans attaining their coverage through their employer, with less than 25 million Americans receiving subsidies by 2020.

Fortune estimates that each person who's dropped would cost the government an average of around $2,100 after deducting the extra taxes collected on their additional pay. As an example, if 50% of people receiving employer-coverage get dumped, federal health care costs will rise by $160 billion a year in 2016, in addition to the $93 billion in subsidies already forecast by the CBO.

Admittedly, it is unlikely that large, labor-dependant companies like Caterpillar and AT&T would altogether abandon their company-sponsored benefit plans. The impact on employer recruitment and retention would be disastrous, compounded by the shift in public sentiment against the company. However, the fact that these large, stable organizations are “doing the math” is a sign that many smaller businesses who are struggling financially may find that the “math” makes sense to “pay” rather than “play”.