Could Employer Dumping of Health Coverage Reduce the Deficit?

March 20, 2012

One of the biggest concerns with the Affordable Care Act (ACA) has been that the law will drive employers to stop sponsoring health insurance for their workers, instead dumping those workers on to the new law's subsidized insurance exchanges.  The Congressional Budget Office (CBO), in a provocative new report, believes that such behavior could, in some circumstances, actually reduce the deficit, says Avik Roy, a senior fellow in health care policy at the Manhattan Institute.

The CBO evaluated a number of different scenarios in which employer dumping was more widespread than initially projected.

  • In Scenario 1, employers dump 7 million more people onto the exchanges and other public programs (Medicaid and the Children's Health Insurance Program).
  • In Scenario 2, employers actually increase coverage by 8 million people, due to the law's employer mandate: effectively the inverse of Scenario 1.
  • In Scenario 3, employers dump 14 million more people onto the exchanges.
  • In Scenario 4, companies use restructuring strategies to dump their lower-paid employees onto the exchanges, while continuing to pay for insurance for their higher-income workers.

The scenario with the most widespread dumping, Scenario 3, actually reduced the deficit by $13 billion from 2012 to 2022.  The two other scenarios with dumping, Scenarios 1 and 4, increased the deficit by a relatively small amount: $45 billion and $36 billion, respectively.  Scenario 2 reduced the deficit by $82 billion.

How could dumping more people onto the subsidized exchanges, in the case of Scenario 3, actually reduce the deficit?  Because people who get insurance through the exchanges, rather than their employers, would no longer be able to take advantage of the tax deduction for employer-sponsored health insurance.

If the CBO's analysis is correct, it would be encouraging news for the fiscal soundness of our new health law.  But is it correct?

It appears that the CBO has made a critical assumption in its calculations: that employers who dump health coverage will replace that coverage, on a dollar-for-dollar basis, with increased cash wages.  However, it's far from clear that it would work out this way in reality.

Another important assumption that the CBO makes is that insurance premiums will grow at a slower rate -- 5.7 percent per year -- than their previous estimates projected, because premiums grew at a relatively slower rate between 2005 and 2010.  It's far from clear, however, that future rates of premium growth will be as low as they were in the recent past.  Indeed, the ACA has many provisions that will drive up the cost of health insurance.

Source: Avik Roy, "Could Employer Dumping of Health Coverage Reduce the Deficit?" Forbes, March 15, 2012.  "The Effects of the Affordable Care Act on Employment-Based Health Insurance," Congressional Budget Office, March 15, 2012.

For text:

http://www.forbes.com/sites/aroy/2012/03/15/if-employers-stop-paying-for-health-care-who-wins-maybe-everyone/

For study:

http://www.cbo.gov/publication/43090

 

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