“If you like your health-care plan, you can keep your health-care plan.” That was what Barack Obama promised, time and again, to voters nervous about his plans to shake up America’s health-care system. It was an empty promise, a bit like saying: “If you like your husband, I promise he won’t divorce you.”
In 2014 the main provisions of Obamacare will come into force. The biggest uncertainty is whether the law will prompt employers, which currently provide most working Americans and their families with health insurance, to stop doing so. Surveys suggest most firms that currently provide their staff with insurance will not drop it straight away. But some will. And even for those that keep insurance, big changes are inevitable.
Today nearly 150m Americans rely on their employers for health benefits. This system arose by accident: the government imposed wage controls during the second world war, so companies offered health benefits instead of pay rises to attract staff. Then, in 1954, employer-provided health insurance was made tax-free.
Ever since, it has been much cheaper for employers to offer staff a dollar of health insurance than a dollar of wages. So they have poured money into health plans, the price of which has doubled in the past decade. The average cost of covering an employee at a large firm with a family is a hefty $15,745 a year, according to the Kaiser Family Foundation, a think-tank.
This vastly reduces cash wages. But most employees don’t complain. Few realise that the money companies spend on health care comes out of the same pot as wages. And besides, there is no good alternative. Individuals do not receive the same tax breaks as employers when buying health insurance. And they cannot bargain with insurers the way a company can. So they inevitably pay more for the same level of insurance, if they can obtain insurance at all. Insurers routinely turn away individuals who are already sick.
But from January 2014 Mr Obama’s law will make the individual market more attractive. Insurers will no longer be allowed to refuse to cover an individual because he is not healthy, or to charge him an exorbitant fee. Individuals with incomes of 100-400% of the federal poverty level will qualify for subsidies to buy insurance on new state health exchanges.
The catch is that employers may see this as a chance to save money. If Uncle Sam is subsidising individual health insurance, workers will not be quite so desperate to find an employer that will cover them. This is especially true if firms that stop offering health insurance pass some of the savings on to workers in the form of higher wages.
Mr Obama does not want companies to dump their staff on his health exchanges, so his health law will impose a fine of $2,000 per worker on any employer that does not sponsor health insurance (employers with 50 workers or less are exempt). Some firms will simply opt to pay the fine, however. A 2011 survey from McKinsey, a consultancy, found that 30% of employers would “definitely or probably” drop insurance in the years after 2014. Among those who actually understood health reform, a remarkable feat, more than half said they would.
The McKinsey report sparked uproar—its predictions were more extreme than those of the Congressional Budget Office. But surveys from other consultancies were not much cheerier. Deloitte found that 9% of employers expected to drop coverage over the next three years, and a further 10% were undecided. In a survey by Mercer, 21% said they were likely to end coverage in the next five years.
Even employers that continue to sponsor insurance are changing their health plans. Firms are making workers pay more of their health costs directly out of their own pockets. This might restrain the overall cost of health care. Currently, many doctors are paid for each extra test or procedure they perform, so they overprescribe. Insured workers have little incentive to say no. But if they had to foot some of the bill directly, they might ask whether yet another dental X-ray was really necessary.
Mercer found that 43% of employers expect workers to pay more for health care in 2013. Big companies are less likely to drop insurance entirely but more likely to bump up the proportion workers must pay directly: 60% expect to do so this year.
Another intriguing change is the rise of “defined contribution” health plans. These are like the pension schemes that most firms now offer, in which workers receive a fixed sum to invest for retirement, rather than being promised a fixed pension when they retire. Beginning this year, Sears, a giant retailer, and Darden, a restaurant company, are giving employees a fixed sum to spend on health insurance sold on a private exchange. Other firms, particularly small ones, are watching closely. Sears and Darden are using an exchange run by Aon Hewitt, an insurance broker. Mercer and other firms are also launching exchanges in anticipation of rising demand.
Such plans may make employers’ costs more predictable. But they do little to contain the cost of health care itself. Dean Carter, the head of personnel at Sears, reckons that employees will become healthier as they grow more conscious of costs—they may decide to lose weight or quit smoking. Yet there is a danger that workers will delay seeking essential treatment for fear of the bill. That could leave companies with a sicker, less productive workforce.
All stories must include the following credit line: © The Economist Newspaper Limited, London (January 26, 2013)