McKinsey: 1/3 Of Employers Will Drop Health Coverage

An early-2011 survey of more than 1,300 employers by McKinsey & Company found 30 percent of respondents will “definitely” or “probably” stop offering employer-sponsored health insurance after 2014.

In the June 2011 McKinsey Quarterly, health care reform “fundamentally alters the social contract inherent in employer-sponsored medical benefits and how employees value health insurance as a form of compensation.”

By guaranteeing the right to health insurance regardless of medical status, reform minimizes any moral obligation employers would feel to cover the sickest employees, who would otherwise be denied coverage.

Furthermore, beginning in 2014, those who are not offered affordable health insurance by their employer can receive cost-sharing subsidies and income-indexed premium. “That reduces the social-equity advantage of employer-sponsored insurance, by enabling these workers to obtain coverage they could not afford on today’s individual market. It also significantly increases the availability of substitutes for employer coverage.”

As a result, according to the publication’s authors, whether to offer health insurance becomes mainly a business decision for employers.”Employers will have to balance the need to remain attractive to talented workers with the net economics of providing benefits—taking into consideration all the penalties and tax advantages of offering or not offering any given level of coverage.”

The publication notes a Congressional Budget Office report suggests only about 7 percent of employees currently covered by employer-sponsored insurance would have to switch to subsidized exchange policies in 2014.

However, McKinsey’s research finds 45 to 50 percent of employers say they’ll definitely or probably pursue alternatives to offering health insurance. “Those alternatives include dropping coverage, offering it through a defined-contribution model, or in effect offering it only to certain employees.”

Interest in these alternatives rises with awareness of reform; among employers with a high awareness, the percentage of employers wanting to drop coverage increases to more than 50 percent, and upward of 60 percent will pursue some alternative to traditional ESI.

Among employers not likely to drop ESI, according to McKinsey’s authors, three of the top five reasons given (and two of the top three) were concerns about talent attraction, employee satisfaction, and productivity. “Among employees, however, McKinsey consumer research found that more than 85 percent—and almost 90 percent of higher-income ones—say they would remain with an employer that dropped ESI. “Overall, employees value cash compensation several times more than health coverage. Further, many younger employees also value career-development opportunities and work–life balance more than health benefits.”