Will Companies Stop Offering Health Insurance Because of the Affordable Care Act?


Major provisions of the 2010 health-care-overhaul law will take effect in January. That’s when employers with 50 or more full-time workers must offer them health insurance or pay penalties. Likewise, individuals must obtain insurance or pay penalties.

Analysts say they expect some employers to stop offering insurance, because the penalties will be less expensive. Other employers already are moving to reduce the law’s impact by limiting hiring or reducing some workers’ hours.

We asked a panel to tackle the question: Will the Affordable Care Act, as the law is formally known, lead many employers to stop offering health insurance? Our panelists are Kevin Kuhlman, a manager of legislative affairs at the National Federation of Independent Business, a research and lobbying group for small business; Christine Eibner, an economist at RAND Corp. who has studied the possible effects of the law on health-insurance markets; and David Marini, managing director, strategic advisory services, at Automatic Data Processing Inc., ADP +1.37% who also has studied the law’s effects. Here are edited excerpts of their email discussion.

Employers’ Calculations

WSJ: Will the health-insurance law lead many employers to stop offering health insurance?

Steven Purcell/NFIBKevin Kuhlman

Mr. Kuhlman: The decision by employers to stop offering health insurance to employees as a result of the health-insurance law is far from certain. We do know that the cost of health insurance continues to be the No. 1 problem for small-business owners, as it has been for over 25 years. We also know that erosion of employer-sponsored health insurance predates the law, but increased health-insurance costs from the law may exacerbate the erosion.

Health-insurance premiums have increased by over 100% in the past 10 years. During that same time period, the percentage of Americans with employer-sponsored health-insurance coverage has dropped by 10 percentage points.

The law is structured in a way that may make it advantageous for certain employers to drop coverage, and advantageous for certain employees to have their coverage dropped. We hear from NFIB members just above the 50-employee threshold that they do plan to discontinue health-insurance coverage or make other personnel decisions to avoid the employer mandate. Some smaller NFIB members are concerned that their offer of coverage to employees will restrict certain employees from accessing generous tax credits and cost-sharing subsidies in the individual exchanges.

Diane Baldwin/Rand CorporationChristine Eibner

If the law is unable to contain health-insurance costs, or worse, increases health-insurance costs significantly, we believe it will lead many employers to stop offering health insurance.

Ms. Eibner: I agree that employer decisions in the face of the complex policy changes introduced by the Affordable Care Act are far from certain. Our model predicts that the number of individuals enrolled in employer-sponsored coverage will increase as a result of the law, with our most recent estimates showing an increase of about four million people enrolled on employer-sponsored insurance.

In Massachusetts, which implemented health-insurance reforms similar to the Affordable Care Act in 2006, the share of employers offering health-insurance coverage rose from 70% in 2005 to 76% in 2011.

Mr. Marini: In the larger market, we are not seeing clients looking to stop offering health-insurance benefits. We are, however, seeing them react to how they offer benefits.

For example, in a May 2012 ADP survey we found that more employers are offering wellness programs, health savings accounts and high-deductible health plans.

David MariniDavid Marini

There are specific types of employers where the ACA impacts can be sufficiently large enough to materially impact financial performance. This is particularly true for industries with workforces that have a high proportion of nonexempt, full-time employees who do not elect health benefits today but may do so rather than pay tax penalties beginning in 2014, and workforces with a high proportion of part-time employees who could be reclassified as eligible for health coverage beginning in 2014.

A number of companies that fit the above profile may be looking at carefully managing their part-time population so employees do not get classified as eligible for health coverage.

Workforce Implications

WSJ: The law requires employers with 50 or more employees to offer insurance to employees who work an average of 30 hours per week. We’ve reported that some retailers and restaurant operators are hiring more part-time workers, or limiting part-timers to 29 hours per week, to avoid the insurance mandate. How prevalent will these sorts of changes be?

Ms. Eibner: There is some evidence from past health-insurance reforms to suggest that firms do make these types of structural changes to avoid requirements such as mandates.

For example, economist Thomas Buchmueller and colleagues found that Hawaii—a state that implemented an employer mandate in the 1970s—experienced a shift toward part-time employment after the mandate became fully effective.

However, coverage in employer-sponsored plans also rose during the same time period, suggesting that the shift to part-time work was not large enough to fully counteract the effect of the mandate.

Mr. Marini: There are organizations that are looking to limit the number of hours to below 30. This is most prevalent in organizations that fit the criteria that I discussed earlier, which would include the retail, hospitality, and food and beverage industries.

I have talked with a number of clients that are not trying to limit the hours. For example, I have talked to a specialty retail organization that is conducting studies of sales associates to understand if a more experienced worker produces more sales. Ultimately, this could lead them to hire more full-time employees with benefits.

Mr. Kuhlman: NFIB members have been expressing their concerns with the new federal full-time employee definition of 30 hours per week created by the ACA. We hear from members taking steps to reduce employee hours from full-time to part-time status, or at least considering the decision.

The good news is there is a simple solution to this problem. In mid-April, an NFIB member from Richmond, Va., testified before the House Small Business Committee advocating for a simple solution: increase the hourly threshold of the statutory definition of full-time employee.

Impact on Part-Timers

WSJ: What will happen to part-time employees whose hours are reduced? Will they be able to obtain coverage at the exchanges? Or will they go without insurance?

MS. EIBNER: Individuals are eligible for federal tax credits on the exchanges if they have incomes between 100% and 400% of the federal poverty level (up to $45,960 for a single person and $94,200 for a family of four in 2013), they are not eligible for Medicaid, and they do not have an affordable offer of coverage from an employer.

If the company offers coverage, low-income workers will generally not be eligible for federal tax credits available on the exchanges. If the company drops its health-insurance coverage, higher-income workers will not be eligible for the tax advantages provided by employer coverage.

Shifting some segment of the workforce to part-time status would provide a way to allow lower-income workers to take advantage of federal exchange tax credits, while continuing to enable higher-income workers to benefit from the tax advantages associated with employer coverage. But, clearly, reducing workers’ hours introduces other challenges, both for workers and their employers.

Mr. Marini: There are many companies that I am talking to that believe, at least in 2014, many of their low-income employees will elect to pay the $95 penalty rather than purchase health-care insurance. In subsequent years, the penalties for not acquiring insurance get higher and we may see more people electing to acquire insurance as the penalties increase.

The Massachusetts Model

WSJ: Christine said earlier that the percentage of employers offering health insurance in Massachusetts increased after that state adopted a regime similar to the ACA. Why was that? How likely is it to be replicated nationally beginning next year?

Mr. Marini: One of the reasons we may be seeing employer coverage increase when exchanges are introduced is because the employer plan may offer richer benefits.

We found that individual employees earning between $22,340 and $45,000 per year will likely be able to obtain cheaper coverage through their large-employer plan. Single employees earning less than $22,340 per year will likely find a public exchange is less expensive than group health benefits for self-only coverage.

Ms. Eibner: First, both the ACA and the Massachusetts law impose penalties on mid- to large-size employers that do not offer coverage. Second, and perhaps more important, workers face penalties if they fail to enroll in insurance, due to the individual mandate. Under the Affordable Care Act, these penalties will eventually be more than $2,000 a year for many families, making health insurance more valuable to workers. The combination of increased worker demand for insurance, employer penalties and tax advantages associated with employer-sponsored coverage may cause some employers to begin offering health insurance as a result of the law.

Mr. Kuhlman: Massachusetts already had nearly all of their citizens covered by insurance, around 92%, suggesting Bay State residents value health insurance. After passage of the state coverage-expansion law, Massachusetts was able to expand coverage to 98% to 99% of the population.

The real obstacle to expansion of employer-sponsored health insurance is the cost of the coverage. Businesses in Massachusetts are intimately aware of cost challenges. Small-group health-insurance premiums are the highest in the country and continue to increase.

There is much uncertainty on how much these provisions and other requirements in the law will impact health-insurance premiums, but small-business owners are expecting costs to increase.

Mr. Thurm is a senior editor in The Wall Street Journal’s San Francisco bureau. He can be reached at

Corrections & Amplifications
The main headline on the charts has been revised. An earlier version of the graphic had a headline, “Diagnosing a Shortage,” intended for a different chart.

A version of this article appeared June 17, 2013, on page R5 in the U.S. edition of The Wall Street Journal, with the headline: Will Companies Stop Offering Health Insurance Because of the Affordable Care Act?.

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