What Happens If My Employer Drops My Health Insurance Coverage

What happens if my employer drops my health insurance coverage?

Could your company's health insurance plan go extinct soon? It's a real possibility for millions of Americans.

One of the most critical and contentious sections of the federal Patient Protection and Affordable Care Act will go into effect in 2014: businesses with more than 50 employees will be obliged to provide health insurance coverage to their employees or risk $2,000 per employee penalty.

The employer requirement is likely to increase the number of businesses that offer health insurance. However, according to recent studies, many firms intend to discontinue health insurance coverage once the federal mandate goes into effect.

According to a McKinsey & Co. survey of more than 1,300 organizations, 30 percent of employers that currently provide health insurance would definitely or probably discontinue providing health insurance in 2014. Although White House official Ann DeParle claimed that the study was "an outlier," identical findings have been reported by other studies. According to a National Federation of Independent Business survey, 12 percent of businesses surveyed planned to drop coverage within the next year, and nearly 87 percent of businesses that don't offer coverage said they were unlikely to start offering coverage once the federal mandate takes effect.

"The employer tax penalty is less than the cost of providing employer-sponsored health insurance," says Kip Piper, president of Health Results Group LLC and a health care expert. "Would you like to pay $2,000 or $10,000?" It's most likely a no-brainer."

So, what does this mean for the 61 percent of Americans who get health insurance via their jobs? Here's a preview of what's to come.

Potential cost savings for both employer and employee

Employers consider the numbers while deciding whether or not to continue health care. In many circumstances, it is more cost-effective for both employers and employees to send employees to the new health insurance exchanges, which will open for business in 2014 and will be administered on a state-by-state basis by either governmental or nonprofit organizations. Individuals will be able to purchase health insurance plans at group rates through these exchanges, which are meant to help the millions of Americans who are not now qualified for an employer-sponsored plan.

Employees earning less than $70,000, according to John Graham, director of health care studies at the Pacific Research Institute, will be better off purchasing insurance through the exchanges since they will receive tax credits to help them pay for it. According to the National Federation of Independent Business, low-wage employees who pay a high share of premiums are especially likely to drop their employer-sponsored health plans; 43 percent of surveyed employers say they will stop offering coverage if the majority of their employees drop the company health plan.

Although it's unclear how competitive the exchanges' rates will be with commercial health insurance, people could save a lot of money.

Premiums for a small business insurance plan are decided by the health and age of the employees. That means that businesses with a disproportionately older or sicker workforce, or businesses with a higher number of female employees (who cost more to insure due to maternity and preventive care), will wind up paying higher premiums. Premiums under the exchanges, on the other hand, will be determined by only a few factors: age, family size, ZIP code, and whether or not a person smokes. Even if the policyholder has a history of illness, the rates will not be raised.

Employers have more options

There are various choices accessible to employers who intend to discontinue private coverage. Businesses with 50 to 100 employees can purchase an exchange plan beginning in 2014, while organizations with more than 100 employees can join the exchanges beginning in 2017. Piper believes that in many situations, businesses may simply discontinue health coverage and encourage their employees to obtain insurance through the exchanges on their own. This is especially true for businesses with less than 50 employees, which are not eligible to purchase employee plans through the health exchanges.

As a result, some firms may increase wages or other benefits to compensate employees for the loss of health care benefits, while others may simply absorb the savings.

Piper anticipates an increase in employee benefits such as free wellness clinics. "It may be less expensive to shift from providing insurance to providing free wellness services or clinics, which can help companies stay competitive in the labor market," he says.

A hazy future

Regardless of what polls show, it's hard to predict the impact of federal health care reform on employer-sponsored health insurance until 2014. Many areas of the law are still in flux.

According to Graham, some states "are actively hostile" to the proposed health insurance marketplaces. "I believe there is going to be a train wreck."

Furthermore, political pressure could undermine the future of the exchanges. "If either the Democrats solidify control or the Republicans take over the White House, you could have a completely different paradigm come 2013," Piper adds.

While some firms may indicate they intend to cancel their employee health plans, most are unlikely to do so as soon as the exchanges go live in 2014.

"They tend to wait for a few larger employers to take the hit before making a move," says Piper. "Employers tend to be fairly cautious and circumspect about any discussions, but they are certainly assessing their options, and they've been doing (computer) modeling, hiring consultants, and thinking about what their options are."

However, if the federal health care plan is implemented as drafted, Piper predicts the employer-sponsored health insurance market will begin to dry up as more employees enter the exchange system.

"Whenever the government enters a marketplace and pays for something that had previously been paid for with private money, it creates a strong incentive for those who had previously paid for it with their own money to ask, 'Why should I continue to do that?'" Piper says. "That's one of the moral hazards of this kind of system."