Experts of all stripes have been predicting the end of employer-sponsored health insurance for some time. As an employee benefit, it peaked in the 1980s after decades of growth. It has been declining gradually ever since.
The American health insurance system is the only one in the world designed around employment. It is curious how we came to this situation. As Princeton economist Uwe Reinhardt said, “if we had to do it over again, no policy analyst would recommend this model.”
Employer-sponsored health insurance began during World War II and is essentially a product of the tax code. Fears of inflation led the government to institute wage controls, and employers looked for ways to compensate employees without having to tax additional rewards. Employer-sponsored health insurance became one of these rewards. A subsequent presidential administration tried to rescind what was supposed to be a temporary tax exemption, but by then such programs had already become entrenched. Further tax breaks followed and employer-sponsored health insurance gained a strong foothold in the 1950s and 1960s. Seventy percent of Americans were covered by employer plans in the 1960s, with virtually everyone else covered by Medicaid or Medicare.
Excise Tax and Exchanges
There are many influences that will drive employer-sponsored health insurance out of its present position, but among them is the so-called “Cadillac tax” that will go into effect in 2018 as part of implementation of the Affordable Care Act. This could be a turning point, as it will dramatically affect the insurance plans employers will be able to offer employees. A 40 percent excise tax for employers will kick in on the total value of combined premiums, HSA and FSA contributions after they exceed $10,200 a year for single coverage and $27,500 for families. If current plan designs were to remain just as they are now, approximately 60 percent of those plans (mostly offered by larger companies) would be affected. Employer-sponsored coverage would not be able to compete favorably with the cost and variety of plans employees would have access to on private Exchanges. Employers would have an incentive to shed the administrative burden of offering health plans. Employees in private Exchanges would gain insurance that’s more portable and affordable than the COBRA option that currently becomes available when a qualifying life event or job ending takes place.
A Role for Third-Party Organizations
Health insurers are responding to the probable death of employer-sponsored health insurance by taking a hard look at joining the private Exchange market, if nothing else, as a defensive strategy for preserving and growing an enrollment base. Third-party organizations like Aon and Towers Watson are offering private Exchanges that could attract members. “Obviously, our goal is to keep group, group,” said insurance executive Bill Brown in the media recently. But, he acknowledges, enrollment in commercial plans is not expected to grow for a variety of reasons. When it comes to this landmark movement away from employer-sponsored health insurance, many insurance plans and employers are taking a wait-and-see attitude.
Of the 149 million Americans now receiving health insurance through their employers, most have never known any other system. The cultural shift that would come with such a change would be significant. We should expect cries from many quarters for the repeal of the “Cadillac tax,” and for American attitudes about their health insurance to become a major issue for whomever becomes the next president. There are sure to be interesting times ahead.
Shan Padda is chief executive officer for Health Integrated.