Employers to the Rescue?

In Part 1, I explained how the only way hospitals have been able to survive their money-losing Medicare and Medicaid patients has been to charge higher rates to private payers. That’s why private insurance now costs $1,788 more per family than it would if the government paid the same provider prices as everyone else. Moreover, health reform’s promised addition of 15 million new Medicaid patients, along with billions of dollars in lower Medicare payments, will drive the demand for private subsidies even higher. Additionally, as the current 27 million individually insured begin transitioning to the insurance exchanges in 2014, their continued ability to pay higher hospital charges is doubtful. Ditto for the 17 million uninsured who are expected to sign up for exchange insurance. Indeed, under health reform, exchange insurers may need their own external financial assistance. That leaves only private, employer-based insurance to pick up the slack by paying ever higher hospital prices. That, too, is unlikely to happen.

Currently, 163 million people get health coverage where they work, the majority from employers that essentially operate their own insurance companies. Despite President Obama’s promise to sustain the employer-based system, health reform actually makes it considerably more difficult for companies to continue offering it, even creating incentives to drop it. Added are new costs, risks, and administrative burdens in the form of play-or-pay penalties; benefit increases; burdensome reporting requirements; limits on insurance premiums; expanded dependent-coverage mandates; unlimited ceilings on annual and lifetime benefits; minimum employer contributions; and complex limits on patient cost-sharing. These serve to further destabilize employer insurance which, as I have written previously, is fundamentally unsustainable in any event.

For years, I’ve asked employers this question: “If you could take the money you’re paying now for health insurance and just give it to your employees, knowing they could buy equal or better coverage on their own, would you do that?” So far—once they figured out it’s not a trick question—they’ve answered with an overwhelming “yes,” whether they’re five-employee mom-and-pops or Fortune 500 companies. Often, the answer comes back as a rhetorical, “Why wouldn’t I ?” The only “no” answers have come from firms with collective bargaining agreements requiring coverage and the occasional large-employer human resources manager concerned about her empire. I’ve never gotten a negative response from CEOs, who tend to point out that managing the complexities of health insurance is not in their skill set, nor is it relevant to their companies’ strategic focus.

Already, small employers have been crowding the insurance exits because they simply can’t afford it any more. The primary reason we haven’t seen an outright stampede is that many have been able to slow premium increases with ever-higher employee deductibles. This past year alone, employer coverage of high-deductible HSA plans—with deductibles as high as $11,900—grew by 33% for large groups and 22% for small. Health reform, however, places complex limits on such deductibles, reducing their usefulness for mitigating future premium increases.

Originally, employers provided health insurance to be more competitive in their labor markets. It was cheap and commonly referred to as a “fringe” benefit. But with now-astronomical premiums growing at often double-digit rates, only two defensible reasons remain for employers to continue offering it. First, without it, workers and dependents with serious health problems have no alternative for essential, affordable coverage. Second, health insurance provided by employers is tax-free to employees, but equivalent cash compensation is fully taxed. The reform law, with its universally available insurance exchanges and generous middle-class premium subsidies (and free Medicaid for many earning $10-15/hour), effectively removes both barriers to exit. And the $2,000/employee play-or-pay penalty, according to Medicare’s actuary, “would not be a substantial deterrent to dropping or forgoing coverage.”

Estimates of employers dropping coverage under health reform vary from extreme to minimal. Advocates for the latter are undoubtedly comforted by a recent poll showing the majority of employers having no intention of dropping their insurance programs. However, the same poll also shows a high degree of employer ignorance and uncertainty about the new law. As the fog lifts and the economic incentives become clear, have no doubt that America’s business enterprises—small and large—will act to maximize their own economic interests. No amount of moral suasion or superficially good intentions will upend that reality. Thus, expect health reform to accelerate the decline of employer-based health insurance in favor of employees simply buying exchange insurance that has better coverage than they’re getting now. With that decline, expect hospitals to face increased difficulty funding their growing Medicare and Medicaid losses.

Hospitals must anticipate the risk of losing their ability to shift growing government losses onto private payers. For most, responding will require nothing less than replacing the standard business model that has sustained them for decades. Those that don’t could find themselves in mortal jeopardy. Lest you think I’m just another Cassandra predicting the end of the world as hospitals know it, remember two things. First, more than a thousand hospitals were forced to close (including two in my hometown of Colorado Springs) as a result of the 1980-2000 managed care revolution. Second, Cassandra was actually right in her predictions, just cursed never to be believed.

Coming next in Part 3: How hospitals can survive, even thrive, under health reform.