How to really predict employer offers of health insurance

The McKinsey “study” that loudly predicted a huge decline in employer-sponsored health insurance in response to the Affordable Care Act is back in the news today (e.g., NY Times, NPR, LA Times) because McKinsey finally released their methodology.  It turns out they did a market research survey of executives.  This approach has been widely criticized as inaccurate, so perhaps it’s a good time to ask how these kinds of predictions can be made more credibly.

Start by asking why employers sponsor health insurance for their employees at all.  The answer is that employer-sponsored health insurance is not taxed, so a dollar contributed to health insurance premiums buys a dollar of insurance while a dollar devoted to wages translates to less than a dollar of take-home pay.  As an employer, if I devote a portion of my compensation budget to health insurance and my competitor doesn’t, the dollar value of total compensation at my company will be greater than at my competitor’s.  I’ll attract the best workers.  So employers sponsor health insurance because the labor market is competitive.  They might wish they could cut these costs or drop health benefits entirely, just like they’d like to cut wages, but they have to consider the realities of the labor market or they won’t be able to hire.

So how does the ACA change the labor market?  It does several big things: 1) It expands Medicaid, making more low-income people eligible, 2) It creates insurance exchanges through which individuals can obtain (subsidized) insurance if they don’t have a qualifying employer offer, and 3) It gradually reduces the tax exclusion for employer-sponsored insurance, starting with the most expensive policies.  It does lots of other things too, but I think these will have the biggest effects on the labor market.

It turns out that there are well established empirical methods for predicting the effects of Medicaid expansion and changes in tax rates (see for example, Gruber and Simon (2008) and Bernard and Selden (2002)).  Predicting the effects of the exchanges is harder, but the fact that access will be limited to those without employer offers simplifies things somewhat.  Most workers will not be eligible for subsidies if they had access to exchanges and the tax benefit is a major factor, especially for higher income workers, so a firm that drops coverage will be cutting compensation significantly for most of its workers.  It’s not likely that many firms will be able to do this unilaterally.

All of these issues are discussed in more detail and accompanied by a forecast that shows very modest changes in employer behavior in “The Effect of Health Reform on Public and Private Insurance in the Long Run,” by Pizer, Frakt and Iezzoni , March 2011 (ungated working paper available).


Gruber J, Simon K. Crowd-out 10 years later: have recent public insurance expansions crowded out private health insurance? Journal of Health Economics 2008; 27 (2): 201-17.

Bernard D, Selden TM. Employer Offers, Private Coverage, and the Tax Subsidy for Health Insurance: 1987 and 1996. International Journal of Health Care Finance and Economics 2002; 2 (4): 297-318.


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