30 Percent of Employers to Drop Health Coverage Because of Obamacare

June 7, 2011 - 1:00 PM

(CNSNews.com) A survey of 1,300 employers finds that 30 percent will “definitely or probably” stop offering health insurance to their employees due to new requirements imposed by the Obamacare health reform law.

The survey, conducted by business journal McKinsey Quarterly, found that contrary to government estimates a large percentage of employers will drop their employee health plans, forcing employees to buy coverage on the government-mandated insurance exchanges.

“Overall, 30 percent of employers will definitely or probably stop offering ESI [Employer Sponsored Insurance] in the years after 2014,” the study found.

In fact, among companies who are most familiar with the laws mandates and regulations, 60 percent would drop employee health plans because of the law.

“Among employers with a high awareness of reform, this proportion increases to more than 50 percent, and upward of 60 percent will pursue some alternative to traditional ESI.”

The McKinsey study finds that the reason companies will drop their ESI coverage is because the Obamacare law makes it too expensive for them to offer the plans, meaning that dropping the coverage and compensating employees in other ways will soon become better for business.

“At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.”

The study finds that the primary driver behind companies’ dropping coverage is the Obamacare mandate that any employer with 50 or more employees must provide a minimum level of government-defined coverage or pay a $2,000-per worker penalty to the government.

“Other requirements are game changing and could prompt employers to completely reconsider what benefits they offer to employees. Reform requires all employers with more than 50 employees to offer health benefits to every full-timer or to pay a penalty of $2,000 per worker (less the first 30),” the study says.

“These requirements will increase medical costs for many companies. It’s important to note that the penalty for not offering coverage is set significantly below these costs.”

In other words, the 50-employee standard and its accompanying penalty seem designed to have precisely the effect the McKinsey study found – to force employers to drop their private health coverage and drive employees into the government-run exchanges.

Further, the study finds that 45 to 50 percent of employers will be changing the ESI plans that they do offer when the Obamacare mandates kick in, in 2014 – a finding that further undermines the Obama administration’s promise that Americans could keep the plans they have in the wake of the new law.

“Our survey found, however, 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.”

Other studies have found only slight interest among employers for dropping or changing ESI. A CBO study, for instance, found that only seven percent of employers would drop health coverage because of Obamacare.

However, the McKinsey study points out that the other studies were done before many of the law’s rules and regulations were written or well understood. The more employers learn about Obamacare, the more they want to escape its costly regulations by canceling their private-sector health plans.  

“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 study said.

“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,” it added.

The study’s authors warned employers that Obamacare would severely impact their business, advising them to study the law and its mandates and to be on alert for how the government might react when they begin dropping health coverage.

“If many companies drop health insurance coverage, the government could increase the employer penalty or raise taxes. Employers will need to be aware of actions by participants at any point along the health care value chain and prepare to adapt quickly,” the study said.

“Whether your company is poised to shift from employer-sponsored insurance or will continue to offer the same benefit package it does now, health care reform will change the economics of your workforce and benefits, as well as how your employees value coverage.