• McKinsey Issues

    UPDATE: I was wrong that Q41b did not mention the penalty. I fixed the post.

    Stop emailing me, please! I know that McKinsey released their survey.

    It’s a long document, and I have many things going on. So this is a preliminary read, and the top of my head thoughts. My biggest concern is question 41a and 41b, which is the same question given to small or large employers. Here it is:

    41a/b. Individual health insurance exchanges. Starting in 2014, there will be state-run exchanges forindividuals to more readily purchase medical insurance on their own. Here are some additional facts:

    ■         Insurance products will be “guaranteed-issue” (i.e., a person cannot be turned down because of a pre-existing condition)

    ■         Insurance companies cannot charge exorbitant rates because of a person’s health. The onlyfactors they can use to “rate” an individual are age and smoking status.

    ■         Individuals whose employers do not offer health coverage, and who have household incomesbelow 400% (around $43K for a single person and $88K for a family of 4) of the federal poverty level, will receive government subsidies to offset their healthcare cost. Individuals with incomes above 400% ofthe FPL will receive no subsidies.

    Assume exchanges become an easy, affordable  way for individuals to obtain health insurance.

    If your employees were to obtain insurance on an exchange instead of through your company, here are examples what they would likely pay for basic coverage (based on their annual household incomes):

    Single personFamily of Four
    Household IncomeMaximum Annual PremiumHousehold IncomeMaximum Annual Premium

    [For question 41b, a line is added: “You would also pay a penalty of $2,000 per employee after the first 30 employees.”]

    Given this information, how likely do you think your company would be to discontinue employee healthcoverage?
    Definitely would

    Probably would

    May or may not

    Probably would not

    Definitely would not

    Here’s the problem with that question. Nowhere in there is the mention that employers who dump employees onto the exchanges will face a penalty if they get subsidies from the government! If I read this, why wouldn’t I send employees to the exchanges?  They sound great! My employees get a subsidy, so we all win!

    I still have a problem with this question. The whole thing reads like exchanges are awesome, with so many benefits and subsidies, then finally tacks on a line about the penalty. I even missed it the first time I read it. I don’t think they are lying (and never have), but I still believe the question may be biased towards making respondents think harder about dropping coverage. There’s a lot of stress on the benefits to employees.

    Think I’m wrong? Here’s question 41c:

    41c. Have you previously calculated how many of your employees would benefit economically if yourcompany were to discontinue offering health insurance?



    I don’t know

    It’s hinting to respondents that employees will benefit if the company discontinues health insurance. Employees benefit, no penalty to me – what’s the downside?

    I’d need to hear a pretty strong argument how this isn’t biased towards pushing employers to think harder about discontinuing coverage. Note, I’m not dismissing the fact that some employers will drop coverage. I just think this question is written in such a way as to make it seem like a better idea than it might be.

    Update: Edited for clarity.


    • Given the size of the subsidies in the exchange, some employees will benefit by being pushed onto the exchange. The subsidies are extremely large, especially for the 50+ family householders. If someone is below 400% FPL, then those employees could be better off on the exchange given the subsidy magnitude.

      I’m quite sure that companies will attempt to estimate the range of their employees within the various subsidies and figure out whether or not the employee will be better off on the exchange. And of course companies can be better off on exchanges as well.

      I’d look to the employee/employer response to EITC for a similar experiment. On the individual side, employees worked less along the phaseout margin of the EITC. On the employer side, there is some evidence (Jesse Rothstein as I recall), that employees lowered some wages to EITC beneficiaries b/c they knew employees were still better off b/c of the government subsidy. If the government subsidy is large enough in the exchange, companies will look to extract a share of the gain from the subsidy along with the individual.

    • Employees do benefit going to the exchange. They have more portable coverage, more options to choose from, they’re getting a subsidy to help pay for it, and they don’t have to worry about the employer shifting more of the cost to them if premiums go up (they’re effectively paying the entire premium already, but most people don’t understand this conceptually). Most employers end up better off as well, as the penalties are both predictable and typically lower than the cost of insurance. It remains to be seen if employers will actually drop coverage, but it will be beneficial for many of them to do so. It is not inaccurate or misleading to point this out. I’ve been saying it since the bill was passed, and when I was still in the insurance industry I joked with my employer that I was going to moonlight as an employee benefit consultant helping employers optimize their expenses, and said optimization means the worst case scenario for the government spending-wise.

      • Comparing penalties to cost of insurance is an error, unless you can come up with an argument that employers will collude in not increasing cash compensation as they discontinue health insurance benefits. I think most economists would consider that an extraordinary claim, hence requiring extraordinary evidence.

        Assuming that the labor market functions as a market (at least in the long run), the proper comparison is the penalty vs. the current tax deduction for employer-paid health insurance premiums.

    • I agree the employer penalty should have been more prominent in this question. Although, if it’s too prominent, one could argue that they were over-emphasizing the penalty.

      In my mind, the employer penalty and the individual penalty are the two big weak points in Obamacare. They’re both too small. Employers have an incentive to pay the fine rather than providing insurance. And healthy individuals have an incentive to pay the individual fine rather than purchase insurance.

      They’re too low – and as a consequence I think it’s very likely that (1) Obamacare will result in tens of millions of people losing their employer health insurance, and (2) Obamacare will increase the number of people without insurance by tens of millions.

      The political will simply wasn’t there to make these two penalties big enough to work. But it’s understandable. Congress wasn’t going to impose an 8k a year penalty on all new jobs created. And they’re not going to force middle class people to pay 8k a year for not having health insurance. As it is, the individual penalty is going to be a nightmare for the federal government to enforce.

      Centralized planning doesn’t work; centralized planning by a committee of 300+ people who have to worry about getting reelected REALLY doesn’t work. Obamacare might possibly have had a chance if it had been designed by an absolute dictator, not a legislature.

    • The way the question is worded missed several essential elements of the cost-benefit analysis for employers in the decision on whether or not to continue offering health benefits. Given the individual mandate, employees will have a greater demand for coverage.Employer sponsored health insurance is pre-tax. Buying coverage as an individual through the exchange is not. For most employees who currently have coverage on the job the tax benefit for job-based coverage is greater than the subsidy they would receive in the exchange.

      Employers offer coverage today in order to attract and retain qualified workers. That is why the CBO and other modelers project that after the Affordable Care Act goes into effect little will change in that equation for most employees.. We should expect a modest decline in offer among small and low-wage firms, combined with an increase in offer and take-up rates in higher wage firms of all sizes and a small overall drop in the share of workers covered through an employer.

      A survey of employer views can be very beneficial, as long as it doesn’t steer them in the wrong direction. Your point on Question 41c is dead on. To be neutral they should have laid out the costs as well as the benefits, and framed the question in terms of both.

      • Gosh, I guess that great economist Max Baucus knew exactly what he was doing when he picked $3,800 as the max fine for a family and $950 as the max fine for an individual. He knew he was creating just the right incentive structure! (Personally, I think most single people will pay the $750 – $950 annual fine rather than spend thousands of dollars on insurance – esp. now that they will be able to buy insurance after they get sick.)

        Similarly, the $2k annual fine on employers was not put together by a bunch of economists. It was political sausage making that produced a $2k fine (as opposed to, say, a $6k or $8k fine).

        You act like the people who created this knew what they were doing; you seem to be assigning intentionality to random acts of Congress. You’re twisting your brain into pretzel shapes in order to make the argument that there’s a coherent incentive structure.

        If this “incentive structure” actually works, then it was purely random, and we will all be very very lucky.

    • We own a small business, with twenty employees, including ourselves. We provide health and dental benefits (a top of the line PPO plan) and cover the entire premium for all employees, including family coverage. Our bill for health insurance is our second highest expense, behind only salaries.

      We fully intend to discontinue health coverage once the ACA goes fully into effect in 2014, because it makes perfect economic sense to do so. We’re small enough that we won’t incur any penalties and we can increase salaries to cover employee’s initial out of pocket costs for premiums on the exchanges. Given what we pay for insurance now, we’ll come out ahead and employees should not lose anything, at least initially. While we have had no control over premium increases in the past, we can control salary increases in the future.

      • Question for Small Business Owner: Do you plan on upping your employee’s salaries by the same amount that you were paying for their health insurance? For instance, if you were paying 10k a year for insurance for an employee whose salary is 50k, and you going to start paying them 60k?

        It looks like the cost to you would be the same because, essentially, you’re already paying 60k. However, if we assume your employee has a family and will receive, say, 5k in federal subsidies, then you could merely raise his compensation by 5k, and he would be in the exact same position as he was, but you would have saved 5k. Or you could keep it at 60k and essentially he’d gain 5k a year. He’s probably not going to walk away, as long as he’s in the same position that he was previously, so I think you could easily pay him 55k instead of 60k.

        Your situation is actually ideal for predicting what employers will do, since your business is small enough that you won’t incur the employer penalty. If an employer in your position is going to drop insurance, then the issue is not whether larger employers will drop insurance but rather this is whether the 2k annual fine is sufficient to offset their incentive to drop insurance. Presumably, a $1 annual penalty would not be sufficient. Nor would a $100 annual penalty be sufficient. What makes $2k the magic number?

        • No, if Small Business Owner increases his employees’ salaries by $10k, it will cost him more, and it will not necessarily make his employees whole.

          It will cost SBO $765 (the employer part of FICA taxes) plus possibly an increase in other employment taxes (UI, WC), depending on how they are levied in his state.

          But his employees will only be able to buy, at most, $7,735 worth of health insurance with the extra cash – they will have to pay $1,500 in income tax (assuming they are in the 15% bracket, as most of them probably are) and $765 in FICA taxes. And, unless they live in a state with no state income tax, they’ll be able to buy even less. Let’s say their state income tax rate is 4%; then they’ll only be able to buy $7,335 worth of health insurance.

          Thus, SBO and his employees are better off only if the employees can buy in exchanges for $6,560 (after subsidies) what they buy for $10,000 now. Some of them probably will – the lower-paid ones, and especially if SBO’s group has had a sick worker and has been charged higher premiums because of it – but it seems likely that some of them will still lose.

    • Of the twenty employees, six have family coverage, costing us approximately $1,500 per month per employee. Three have Medicare as their primary insurance, with our plan being gap insurance for them. The cost of those individual policies I admit I’m not quite sure of, since I don’t have the bills in front of me right now. The remaining eleven employees are single coverage, which runs approximately $450 per month per employee. This is for the health insurance only, as the dental is with another provider.

      Until we know what the initial costs on the exchanges will be, we can’t be certain exactly how we will change compensation. We know that, barring any unforseen consequences, we will probably cover the full exchange premium amount and add a percentage to cover the additional tax exposure to the employee as a result of the salary increase. We will do our best to keep everyone whole to the extent possible in the first year. After that, increases in premiums on the exchanges, over and above what raises we provide depending on company profits, will be the employees responsibility to deal with.

      There are two reasons we plan on making these changes. First, it is an effort to control costs. We just cannot continue to absorb double digit premium increases, as we have done in the past. We’ve held off having employees contribute, but can no longer do so. If we kept insuring them on a company plan, they would have to start contributing. Making this change should buy them another year with us fronting the entire cost, one way or another, but either way they will start having to contribute in 2015. Second, even though we are a very small employer, our accountant has told us that since our average wage exceeds the amount allowable under the ACA, we would not qualify for any of the subsidies provided for in the act. Combine no subsidies with no penalty, due to our size, and we would be idiots to continue to shoulder this expense.

      • Thanks for the details – it is much better to discuss an actual situation than an assumed one. For simplicity, I will ignore the Medicare primary employees; the average premium for the other 17 is $9,847 per year, which rounds to 10,000. So, at least some of the discussion above was right on. (Dental, BTW, is not covered by ACA, so that cost is unrelated.)

        If you wouldn’t qualify for small employer subsidy based on wages, it means the average wage of your workers is over $50k. If all of them had the same wage (probably not true), then the single employees would not qualify for subsidy in the exchanges, but the ones with families might (if they are the only earners in their families). CBO estimated the unsubsidized Bronze Plan premium in 2016 to be $4,750 for single and $12,250 for family. I’ll use those amounts although we are probably discussing 2014, because the Bronze Plan is very stingy and the Silver Plan (which ought to cost about 7/6 of Bronze) is the basis for most subsidies. So your single employees would need to be paid $6,141 more to account for extra taxes (=$4,750/.7735; more if there is state income tax) and it would cost you another $470 in FICA taxes (more if you pay other proportional employment taxes). So, you’d spend at least $6,611 per single employee instead of the current $5,400. OK, your premiums may actually increase by 22% by then, in which case you’d break even. But hardly an opportunity to save on singles.

        You may be better off if some singles qualify for subsidies. But keep in mind that it is the wage after the increase that counts. If you are operating in a competitive labor market (let’s say the unemployment rate in 2014 looks a bit more normal), you shouldn’t be able to save much on total compensation cost, so your employees’ average wage after you drop insurance should be more than $60k.

        You can save on your employers with family coverage if they are the sole earners in their families; but if they have spouses earning about equal wages, then they won’t qualify for subsidies, either, and if you go through the steps above, you’ll find that making them whole may be more expensive to you than keeping coverage.

        So it all depends on how the earnings are distributed among individual workers and what the earnings of workers’ spouses are. You seem well-intended to not make your workers worse off. But some of the information you may need may not be available to you. Can you know what your workers’ spouses earn? Can you base wage adjustments on that? Raise Joe’s salary more than Bob’s because Joe’s wife earns more? This raises some thorny ethical and possibly legal (IANAL) issues.