Will health care reform support or undermine the employer-based system that provides health care coverage for the majority of working age adults?

Employer sponsored health care

According to a report by Fortune, several Fortune 500 employers have considered dumping the health care coverage they now offer to their employees.

Caterpillar, Deere, Verizon, AT&T, Bayer, and some other Fortune 500 companies have weighed the fines levied by the Patient Protection and Affordable Care Act (PPACA)against the cost of offering health insurance.

The fines win.  It’s cheaper to pay than to play.  Billions of dollars cheaper.

It’s not just the fines.

Fortune uncovered this story by combing through documents the companies submitted to Congress when Congress questioned the big tax write offs the companies took after after passage of PPACA.

The write offs, Congress learned, were legitimate.   Accounting rules require companies to account as a liability the future costs of retiree health care.  Those accounting rules are a big reason why the number of retirees covered by employer sponsored health insurance has dropped from over 40% to near 20% in the last twenty years.

That liability is reduced by any anticipated income for retiree health care including the Medicare Part D Retiree Drug subsidy.  When that Retiree Drug Subsidy is reduced because Congress changes the tax law, the liability is increased and the companies take a write off.

Then there is cost shifting

But the papers also reveal that the companies analyzied the full cost impact of the new law on their health plans.  That incuded cost shifting and increased taxes.

The PPACA continues Congress’ clumsy habit of shifting costs to employers.  It requires employers to cover young adults to age 26.  This is wonderful for young adults and for the parents and grandparents of young adults like me.  It is not so good for employer health care costs.

This unfunded mandate is expected to cost one of those Fortune 500 companies, Caterpillar, about $20 million a year.

Still more taxes

The companies are also concerned about the impact of two new taxes in the new bill.  The much-debated tax on “Cadillac Plans” is a big concern.  I have criticized this idea often here.  During the debates, the only ones raising their voices against the idea was the AFL-CIO.

Now it seems that these Fortune 500 companies are suddenly concerned that taxing health care will mean higher wages to offset the increased taxes.

Verizon’s document predicts the tax will cost its employees $255 million a year when it starts in 2018, and rise sharply from there. Hewitt also isn’t sure that Verizon can pass on the full tax to its employees; so it could impose a heavy weight on the company as well. “Many [have] characterized this tax as a pass-through to the consumer,” says the Verizon document. “However, there will be significant legal and bargaining risks to overcome for this to be the case for Verizon.”

Tax pass-throughs

The PPACA imposes an assortment of fees, taxes, and deduction limits on insurers, medical device providers, and drug manufactures that will surely be shifted to the cost of health coverage to employers and their employees.

Companies will be watching their cost of health care closely.  Historically the cost of health care to employers has increased faster than the overall cost of health care which itself has increased faster than inflation.  If their own cost curve does not bend downward, they may make it bend by abandoning their commitment to offer health insurance for their employees.

During the health care debate, employer groups refused to endorse a sensible employer mandate.  They also refused to endorse a single payer system that would have relieved them of their obligation to offer health insurance.

Instead they are inviting the same sort of race to the bottom that brought about the collapse of the defined benefit pension system.  As I have predicted, employer sponsored health insurance will quickly become like the game of Old Maid – who will be the last one holding the poison card.

What will that government bail out cost?