Employer-Sponsored Insurance and Health Reform: Doing the Math

Originally published by the Center for Studying Health System Change (HSC), a nonpartisan policy research organization that operated with principal funding from the Robert Wood Johnson Foundation.

NIHCR Research Brief No. 11 -- December 2012

Authors: Jean M. Abraham, Peter Graven, Roger Feldman

The Role of Employer-Sponsored Insurance Before Reform

Nearly 60 percent of Americans under age 65 obtained their health insurance through an employer at the time of this study, but that share had been declining steadily, driven primarily by the relentless rise in health care costs. The erosion of employer-based coverage hit low-wage workers and employees of small firms hardest. With national health reform legislation scheduled to take effect in 2014, there was widespread concern that the new law might accelerate the ongoing decline in employer coverage. Published estimates of how reform would affect employer decisions to offer coverage varied widely.

What the Study Examined

Researchers from the University of Minnesota, working with HSC, undertook a national study to quantify the economic incentives employers faced in deciding whether to offer health coverage to active workers -- both under the pre-reform rules and after reform implementation. Their analysis combined the effects of three policies: the longstanding tax exemption for employer premium contributions, the new penalty on larger employers that failed to offer affordable coverage (effective in 2014), and the premium tax credits available to lower-income individuals who could purchase insurance through the new state-based exchanges if they lacked access to affordable employer coverage.

Key Findings: Most Workers Would Keep Employer Coverage

The study found that establishments employing the vast majority of workers -- 81 percent -- who already had employer-sponsored coverage would continue to have an economic incentive to maintain it after reform. The economic incentive to offer benefits was expressed as a per-employee dollar figure derived from the combined effects of the tax exemption, the employer penalty, and the exchange subsidies.

Where the Incentives Shift Most

After reform took effect in 2014, workers at large firms, those with union representation, and those in higher-wage industries such as professional and financial services would see only modest changes in their employers' economic reasons to continue offering coverage. The picture was different for other segments of the workforce. Because establishments with fewer than 50 full-time employees were exempt from the employer penalty, many small firms would no longer face as strong an economic motivation to provide health benefits. The same held true for low-wage firms, since many of their workers would become eligible for subsidized coverage through the exchanges.

An important qualifier, however, was that only about a third of workers in small, low-wage firms with fewer than 50 employees were being offered health benefits at the time of the study. So while the reform law reduced the economic incentive for these firms to offer coverage, many of them were not offering it to begin with -- meaning the practical effect on the number of workers losing existing coverage could be smaller than the raw numbers suggested.

Policy Implications

The findings suggested that fears of a wholesale collapse in employer-sponsored insurance were likely overblown. The tax exemption alone provided a powerful incentive for most employers to keep offering coverage, and the employer penalty added an additional financial reason for larger firms to stay in the game. At the same time, the analysis made clear that the law's effects would not be uniform. Small and low-wage employers faced a meaningfully different set of incentives than their larger, higher-wage counterparts, which could further widen the existing gap in employer coverage between different segments of the workforce.

This article was originally published by the National Institute for Health Care Reform (NIHCR).

Sources and Further Reading

AHRQ -- Federal health care quality research agency.

Centers for Medicare & Medicaid Services -- Federal agency overseeing public health insurance programs.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and funding.