More employers consider dropping health coverage, report says

When President Obama spoke before the American Medical Association House of Delegates in June 2009 to introduce his plans for health system reform, he sought to reassure opponents by noting: "If you like your health care plan, you will be able to keep your health care plan. Period. No one will take it away. No matter what."

Many surveys conducted after the Patient Protection and Affordable Care Act passed in March 2010 appeared to say just that, with few employers declaring they would stop offering insurance.

But on June 7 came a curveball from McKinsey & Co. The large consulting firm put out a report noting that almost a third of 1,300 employers surveyed would "definitely or probably" stop offering insurance as a benefit in 2014, when the act is fully in effect. Among employers with a "high awareness" of reform, that number increased to 50%.

The Obama administration, citing how out of whack the numbers were compared with most other studies, dismissed the McKinsey research as unrepresentative of what businesses will actually do. However, opponents of health reform jumped on the study as proof that the law will cost much more than Obama says it will -- especially if many more people than expected end up getting government-subsidized individual health insurance.

McKinsey attributed its education of employers in the survey for the much higher percentage that said they might drop coverage. "We believe that once employers understood that their employees would be able to get affordable coverage, they were much more willing to move away from health benefits as a form of compensation," Drew Ungerman, a Dallas-based principal for McKinsey and a co-author of the report, said in an interview posted with the report on the McKinsey Quarterly online business journal.

By comparison, a study by Mercer released in November 2010 found that 20% of employers with fewer than 500 employees would drop coverage, while only 6% of those with more than 500 employees would do the same.

A U.S. Dept. of Labor-backed report by the RAND Corp. said that, in most cases, many employers that don't offer health benefits now would do so under reform, while the number of employers dropping coverage would be negligible. A report by the Congressional Budget Office said 7% of employers would stop offering coverage.

McKinsey did not release survey materials, including exactly what it told employers, and the questions it asked, citing the research's proprietary nature. According to a June 10 Washington Post report, the Obama administration and top congressional Democrats asked McKinsey for the survey methodology, but McKinsey refused to divulge it.

A group of nine House Democrats on June 16 sent a letter to McKinsey Managing Dierctor Dominic Barton, requesting the company release the survey's questions and methodology. The Democrats said McKinsey staff had confirmed that the survey was generated by the company, not by a client. "Thus, the decision to release associated materials seems to be wholly within the purview of McKinsey." Barton, as of American Medical News' posting date, had not responded to the letter.

Senate Finance Committee Chair Max Baucus (D, Mont.) on June 16 also sent a letter to McKinsey, demanding that it reveal its methodology. He asked McKinsey who funded the survey and whether the company expects "to benefit financially from the results of this survey." The letter reveals that on June 15, McKinsey agreed to a meeting with the committee to discuss the survey's findings.

Survey reaction

In a June 8 post on the White House blog, the Obama administration, which has been encouraging employers to boost health coverage, called the McKinsey survey an "outlier" and "at odds with history." The administration cited research in Massachusetts that more employers are offering health insurance than they did five years ago, when the state instituted its own health reform similar to the national health reform law.

"This one discordant study should be taken with a grain of salt," Nancy-Ann DeParle, assistant to the president and deputy chief of staff, wrote on the blog.

However, opponents of health system reform cited McKinsey as proof that the health reform law would be a government budget-buster, because of the number of people who might end up getting government-subsidized individual insurance instead of private employer-based plans. A family of four with income up to $89,000 per year would be eligible to buy, with government assistance based on income, health insurance through state-based exchanges.

"The massive shift of health costs to taxpayers, thanks to the disruption of employer-sponsored health insurance, will add further to the burgeoning federal budget deficit," said Grace-Marie Turner, president of the Galen Institute. She founded the organization, which advocates "free market" health policy, in 1995 in the aftermath of the dissolution of attempts by President Bill Clinton to reform the health care system.

McKinsey's report did not address the possible financial implications to the federal government of such a large downward shift in the number of employers offering health insurance. However, the report said the shift could be advantageous to employers and employees.

"Lower-income people could end up paying very little for health care, in some cases receiving better coverage then they [had] before," Ungerman said.

Meanwhile, employers might be able to maximize their return on investment on benefits by offering higher salaries, more vacation time, or defined-contribution plans instead of health insurance.

However, the McKinsey report also suggested that companies examine "shifting toward part-time labor, allowing lower-wage employees to qualify for exchange subsidies."

Although Mercer's study said employers would risk losing talent by no longer offering health insurance, McKinsey said previous research found that 85% of employees would stay with their current employer even if it stopped offering insurance. McKinsey noted that employers would be more likely to keep employees, at least initially, if it made up for the loss of coverage with other benefits.

Ungerman said employers need to start thinking about how they will offer benefits once health system reform is fully enacted, particularly because changing benefits is a slow process that often takes several years.