The Survey Kerfuffle Asks the Wrong Question

Paul Krugman called it McKinsey Gate.  The New America Foundation called it a kerfuffle.

Three congressional committees threatened to investigate.

What provoked this outrage?  A survey?!

The survey by the normally respected McKinsey & Co revealed that 30% of employers were likely to drop their employer sponsored health insurance (ESI) after the insurance exchange provisions of the Affordable Care Act (ACA) kicked into place in 2014.  This contrasted sharply with a study by the Congressional Budget Office that predicted that only 7% of employers would likely drop coverage.

The kerfuffle

The McKinsey survey has been described as an “outlier”, inconsistent with the results of other studies, in addition to the CBO study, including Rand, the Urban Institute, and the International Foundation of Employee Benefit Plans.

McKinsey defends its work by stating that it has not produced an economic model but rather has surveyed actual decision makers.  But this response too is not enough.  Some have gone so far as to impugn the professionalism of the survey firm that conducted the research, Ipsos, a French marketing firm.  Many criticized McKinsey’s initial unwillingness to provide specific methodological details about its study.  Later the firm relented and released specific details but that barely quieted the critics.

As McKinsey admits in its own study, the future is difficult to predict.  Critics argue that when employers are fully informed they will see the advantages of continuing to offer ESI.

The kerfuffle obfuscation

But arguing over the specifics of one study versus another misses the larger point.  To the extent that McKinsey has challenged previous predictions, perhaps their work has positive value.

It is useful to put the McKinsey study and health care reform into more recent trends in employer sponsored health insurance.

• Fewer employers are offering health insurance to their employees.  That decline is especially acute in smaller firms that tend to function in a more competitive compensation market.
• Those that do, offer it to fewer employees by
  • moving certain job functions to part time employees or contract employees
  • offering incentives to employees to use other coverage
• Making employees pay more through higher premium, deductibles and co-payments
• Limiting their own risk exposure by attempting to make employee health care benefits into a defined contribution voucher program.

Reversing trends?

What does the ACA do to reverse these trends?

There are things it clearly does not do.  It does not abolish the model of employer sponsored health insurance. It does not require that all employers offer health insurance.  It does not require employers to offer health insurance to all employees.

In short, it does not choose any action that would be clear and simple.

It does offer a mixed bag of incentives and disincentives, couched in a complicated array of regulatory requirements.

The new exchanges

First there is the health insurance exchanges.  While the exchanges will differ from state to state, they will share some commonality.

• No medical underwriting – coverage will be available regardless of previous medical history.
• Limits on plan design and cost sharing.
• Ability to compare plans on a uniform basis
• Subsidies are available to individuals whose family income is less than 400% of the federal poverty level.

This is good for individuals and small groups who have traditionally found it difficult, sometimes impossible, to purchase health insurance.  The small group market has seen the greatest erosion of employer-sponsored health insurance over the last twenty years.  Will these exchanges stop the bleeding?  Most practitioners that I talk to are skeptical, but hopeful.

It seems that the practitioners that McKinsey has surveyed are equally skeptical and McKinsey is hopeful that they will present consulting opportunities.  But that is another blog post.

What does ACA say to larger employers?

Again there is a complicated array of regulations that can impose additional costs on employer-sponsored plans.  They include:

• Removal of certain plan limits
• Expanded eligibility rules for dependents
• Expanded benefits
• non-discrimination rules
• more stringent claims and appeals regualtions

In addition, employers must consider:

• Whether their firm meets the regulatory definition of a “large” employer
• The family income of their employees
• The cost sharing as a percentage of that family income
• Whether or not their coverage is “affordable” according to the regulations
• Whether or not any full time employees receive a subsidy from the Exchange.

And then the hard part

And that is the easy part.  Employers will have to balance the following factors in making the decision to continue to offer or not offer health insurance.

• How much is the penalty for not offering health insurance?
• What are the tax consequences of crossing the threshold into a “Cadillac Plan” territory?
• Will changes to benefit offerings violate new anti-discrimination rules?
• What are the short and long term consequences of “grossing up” employee income so that employees can buy coverage from the Exchanges?
• What will be the employee disruption factor?

The wild cards

There are two big wild card questions that could trump all of the number crunching efforts to quantify the preceding list of factors.

First, what does the boss want?  After all, the boss likes his insurance and new anti-discrimination rules will make it difficult to separate his plan from the rest of the employees.

Second, and the biggest wild card of all – what are the bosses competitors doing?  If just one large player in a major industry decides to pull the plug on its employer-sponsored health plan, the whole system could collapse quicker than the stock market in 2008.

And that is the silliness of  the McKinsey Gate kerfuffle.  No amount of sophisticated modeling or stringent survey protocols can predict the outcome of a system that ultimately depends on the willingness of players to continue to play without clear moral, legal, or financial penalties for doing otherwise.

Saving employer sponsored health insurance may be a bit like the debate over “saving” Medicare.  It may exist in name, but will provide very little protection.