Obama's Gift to the Heritage Foundation

For the past 30 years, the Heritage Foundation and many conservatives have advocated the virtues of a reformed health care market in which individuals take ownership of selecting their health benefits. The Obama health care reforms may deliver just that result to millions of Americans. At least that’s the outlook described in a study released by McKinsey & Company early last week.

McKinsey suggests that employers will stop providing employer-sponsored health insurance (ESI) under health care reform at a much greater rate than previously assumed. Earlier government studies estimated that, beginning in 2014, up to 9 million Americans would shift from employer-sponsored insurance to insurance purchased through Health Insurance Exchanges. McKinsey estimates that as many as 30% of employers will definitely or probably stop offering ESI in the years after 2014.

A core finding of the McKinsey analysis is the recognition that employers have a built-in incentive to capture the government subsidies made available to individuals earning less than 400% of the federal poverty rate and for whom their health insurance premiums exceed 9.5% of their income. By facilitating a scenario in which premiums for low-income employees exceed 9.5%, employers can reduce their health care costs, even after paying a government-imposed penalty.

The McKinsey study identifies a number of ways employers can facilitate this strategy, but the net effect of each approach is an outcome in which highly-paid employees retain employer-sponsored insurance and lower-compensated employees migrate toward purchasing health insurance through the Exchanges. In the process, employers can effectively cap their health insurance liabilities at a fixed amount.’

If McKinsey is correct in its analysis, the implications for the health benefits industry are significant.

1. The health benefit marketplace will be more “retail” than ever before. Health Insurance Exchange purchasers will perhaps represent the “lions share” of the commercial health insurance market. Health insurers will need to effectively segment their customers on a basis other than medical costs to be successful.
2. The purchasing considerations of employers will likewise evolve. Employer-sponsored insurance may become a more pronounced tool for attracting and retaining highly-skilled employees. If this is the case, employers may become less fixated on the total cost of the product and more interested in the value-added product features that in the past have been left on the “cutting room floor.”
3. The health improvement and wellness sector can also be expected to undergo change. Employers have never been completely sold on the ROI of health improvement and wellness programs. As significant portions of employees move into the Health Insurance Exchange market where employer costs are fixed, it is unclear whether employer-sponsored health improvement and wellness programs will be as highly valued as a cost containment tool. Health improvement and wellness program providers will have to sell employers on a different value proposition, one that emphasizes the ability of these programs to improve workforce satisfaction, engagement and productivity.
4. Finally, it would be shortsighted to think that the government would see such an influx of subsidy-eligible employees without reacting. If McKinsey is right in its analysis, the government’s cost estimates are woefully low. It will not take long for the government to react, most likely by increasing the penalty employers pay when their employees opt out of employer sponsored coverage.

Ironically, it may be the Obama health care reforms that move the country further than it ever imagined toward an individually-driven consumer market.