The Patient Protection and Affordable Care Act (PPACA) became a federal statute in March of 2010 (H. R. 3590, 2010). The PPACA required that group health plans and health insurance issuers cover all applicants for health insurance without regard to pre-existing conditions or sex of the applicant. Dependent insurance is required to cover uninsured children up to the age of 26. The PPACA further required that group health plans and health insurance issuers provide a stipulated minimum standard benefit at the same rates for everyone. Subsidies were available for eligible individuals, small business, and families. Government subsidies were made available for low income individuals and families, and small businesses, and operated on a sliding scale. An insurance exchange allowed small companies and individuals to compare health insurance policies and to purchase insurance with a government provided subsidy, if eligible. Employers not offering health insurance will receive a penalty. As with any major overhaul of an institution, the PPACA attracted its share of critics and commentary. The purpose of this paper is to examine the implications of the PPACA for employer-based health insurance and to discuss the advantages and disadvantages of employer-based group health insurance and the effects of adverse selection, uncertainty and moral hazard.
The overall advantage of group health insurance is that the largest number of uninsured is among young adults, and with the PPACA provision for dependent insurance, this population will now have better coverage. Young adults are expected to access healthcare at a greater rate and thereby have a better health status (Antwi, Moriya & Simon, 2013). To the employer, the advantage of employer-based group health insurance is that the premium rate will reflect the pooled risk. In any group insurance, the few individuals who represent the most of expensive claims will be offset by the premiums paid by the healthier ones (Buchmueller, Carey & Levy, 2013).
Buchmueller, Carey and Levy (2013) list three advantages to the employer of group health insurance: the premiums do not come under state or federal taxes or Social Security payroll taxes, the premiums are considered part of the wage and therefore the employees receive a lower wage, and the employer benefit package generally reflects the employees’ insurance preferences. Larger firms receive a greater benefit from providing group health insurance than do smaller firms due to the economy of scale. The administrative costs of operating the health benefit package are relatively stable and do not vary radically from 25 employees to 1,000 employees (Buchmeuller, Carey & Levy, 2013). Also, the tax savings on the insurance premiums are greater on higher salaries than on lower ones and therefore firms with higher-salaried employees have a relative advantage (Buchmeuller, Carey & Levy, 2013).
The disadvantages for the employer to provide group health insurance is that the PPACA’s requirement that all applicants be covered regardless of pre-existing health conditions allows the group to be biased in the direction of greater healthcare costs. Now there is a greater chance that the group will be self-selecting and subject to moral hazard and adverse selection. Moral hazard is a situation in which the insured may be encouraged to engage in riskier behavior than if s/he had not been insured on the basis that the insured is not the one to bear the costs of the behavior Mirrlees, 1999). The term also includes the notion that the insured has more information on their actions and intentions than does the insurer. Adverse selection occurs when individuals engaging in riskier health behavior cannot be charged an additional premium than those who do not engage in riskier health behavior (Mirrlees, 1999). For example, health insurance companies are obliged to provide the same coverage at the same rates to individuals who consume alcohol and tobacco as those who do not. A self-selecting group introduces the factor of uncertainty. With regard to health insurance, uncertainty is the inability of the insurer to incorporate future adverse events in the calculation of insurance rate decisions. Moral hazard, adverse selection and uncertainty are related factors that together pose a threat to the ability of health insurance providers predict the cost of healthcare for the group and set an appropriate premium rate that will allow them to cover health claims adequately and make a profit.
The controversy surrounding the PPACA is whether or not employers will drop their group health insurance plans. Pilzer and Lindquist (2014) predict that 90% of employers will drop their group health insurance in the coming decade. The reason for dropping group health insurance is the fact that the rise in healthcare costs has outstripped any other employee-related costs. This reduction in employer-provided health insurance will be particularly marked among small firms. The employers will drop the insurance in favor of defined contribution plans (Pilzer & Lindquist, 2014).
Urbel (2013) takes the view that employers will not drop their group health insurance plans. Urbel (2013) addresses the controversy that health insurance exchanges and federal subsidies included in the PPACA encourage employers to cease offering group health insurance as part of the employment benefits on the basis that the government will now provide health insurance to everyone. The fear of many health providers and health insurers is that PPACA is the thin edge of the wedge for the government assuming control over the healthcare industry. Urbel (2013) argues against the demise of employer-based group health insurance by reviewing trends in group health insurance. Specifically, from 2000 to 2011 larger firms with 100 or more employees have continued to offer employer-provided health insurance. However, smaller and medium-sized firms have dropped their health insurance plans. The explanation as to why the larger firms are retaining their insurance is that the larger number of employees offers a better pooled risk and protects against losses due to moral hazard and adverse selection.
Buchmeuller, Carey and Levy (2013) suggest that the PPACA does not substantially change the economics of health insurance and predict a small decline in employer-sponsored health insurance in the coming years. Private insurance provided by employers and by the state are both pooled and the economies of scale remain the same. The authors suggest that the recent decline in employer-sponsored health insurance has more to do with the combination of stagnating middle-income salaries and rising health care costs. Buchmeuller, Carey and Levy (2013) also suggest that at this point there is insufficient data to make an accurate prediction. One piece of the puzzle that was missing at the time of the writing of the article is that the penalties for not providing health insurance took effect in 2014 and the magnitude of employer response was not available to them. Buchmeuller, Carey and Levy (2013) conclude that the expansion of private insurance consequent to the PPACA could be beneficial in the long run. A better-functioning private insurance would offer individual’s security when changing employment and will reduce the chance of “job-lock” and encourage entrepreneurship. The end result will be an improved labor market.
In his Washington Post article, Waldman (2015) reviewed the results of the Kaiser Family Foundation survey conducted on individuals who have opted for individual insurance. The results indicated that those who have private insurance obtained their insurance from a PPACA exchange. The survey suggests that most people are happy with their individual insurance and that it meets their needs. Waldman did not comment on whether or not PPACA will spell the end of employer-provided health insurance, but he strongly implied that PPACA exchanges have been successful and to this extent, he agrees with Buchmeuller, Carey and Levy (2013).
In summary, there is insufficient information at this point to pass judgement on the PPACA in terms of its being responsible for the decline of employer-provided health insurance. The changes that are taking place appear to be among the smaller and medium-sized firms who are not protected from the rise in healthcare costs by pooled risk. Further, there is no incentive for employers of more highly paid employees to drop their group health insurance.
References
Antwi, Y., A., Moriya, A. S. & Simon, K. (2013). Effects of Federal Policy to Insure Young Adults: Evidence from the 2010 Affordable Care Act’s Dependent-Coverage Mandate. American Economic Journal: Economic Policy, 5(4), 1–28. http://dx.doi.org/10.1257/pol.5.4.1
Buchmueller,T., Carey, C. & Levy, H. G. (2013). Will Employers Drop Health Insurance Coverage because of the Affordable Care Act? Health Affairs, 32(9), 1522–1530.
doi:10.1377/hlthaff.2013.0526.
H. R. 3590. (2010). 111th Congress, 2nd Session.
Mirrlees, J. A. (1999). The Theory of Moral Hazard and Unobservable Behaviour: Part I. Review of Economic Studies, 66(1), 3-21.
Pilzer, P. Z. & Lindquist, R. (2014). The End of Employer-Provided Health Insurance: Why it’s Good for You, Your Family, and Your Company. Hoboken, NJ: Wiley.
Urbel, P. (2013, November 14). Obamacare and the end of employer-based health insurance. Forbes. Available at http://www.forbes.com/sites/peterubel/2013/11/14/obamacare-and-the-end-of-employer-based-health-insurance/#4028a5487eb6
Waldman, P. (2015, May 21). Sorry, Republicans: Obamacare is getting more and more entrenched. Washington Post. https://www.washingtonpost.com/blogs/plum-line/wp/2015/05/21/sorry-republicans-obamacare-is-getting-more-and-more-entrenched/
