Dropping Employer-Sponsored Insurance Could Benefit Health Care System

Special thanks to Emily Egan for her thoughtful contributions, writing and ideas for this post.

In 2010 President Obama told the American public that if they liked their health care coverage, they would be able to keep it. And, despite his signature health reform law, the Affordable Care Act (ACA), intending to expand the country’s employer-based health insurance system, many now estimate that the law will, in fact, do just the opposite. It is projected that a consequence of the coverage provisions implemented in 2014 will be for many companies to drop health care coverage for their employees.

To date, the majority of research studies, modeling estimates and employer surveys have predicted some level of employer insurance drop. While this is usually framed as a negative consequence of the law, moving away from our employer system may actually have positive implications for the health care system and individuals.

As a result of an expanded individual market, Americans participating in the health care system might see benefits in three specific areas: cost, transparency and portability.

The benefits would not manifest through Americans losing employer sponsored coverage, but in gaining new coverage from a choice of plans in a more robust individual market.

The individual market for health care insurance is historically underdeveloped compared to the employer-sponsored market due to high costs, individual underwriting, and the ability of insurers to deny applicants based on pre-existing conditions. This system began as a result of wage caps during World War II, and then expanded when preferential tax treatment for employer plans was codified into law. The dominance of employer-sponsored insurance (ESI) was solidified in an era of single income households where the breadwinner rarely changed jobs.

However, the individual market will soon experience substantial changes as a result of the ACA, and could become much more attractive to individuals as their choices increase. Further, knowing that employees will be able to find decent coverage elsewhere could become an incentive for employers to dump ESI.

In terms of improving cost, it is possible that when individuals have more consumer choice with regard to plans (rather than a single plan or a choice of several tied to one employer); most would be likely to choose lower-priced plans that require higher deductibles and out-of-pocket spending. This price sensitivity would not only reduce the aggregate amount spent on insurance, but may work to reduce unnecessary utilization of medical services and more price sensitivity when it comes to choosing providers, medications, and treatment plans. Which could, in turn, lead to an additional improvement: transparency.

Anyone who has attempted to navigate through the health care system can attest to the lack of transparency from providers and health systems. Most individuals do not ever see pricing information, as they are largely shielded from health care costs via their insurance providers. However, if individuals begin paying for treatment out of pocket up to a certain deductible, the demand for transparent and bundled prices should increase, and providers would be forced to respond or risk seeing patients walk away. We’ve already seen the popularity of retail clinics among those who are uninsured and use of high-deductible health plans by many Americans, in part, because of the clear pricing structure.

The third potential positive implication of significant ESI drop could be felt through an increase in the demand for portability of plans. Labor markets of 2013 look very different from those of the post- World War II era. Job transitions occur much more frequently, and with ACA implementation, health insurance providers are likely to alter their network of physicians. For patients with complex or chronic conditions, switching networks and losing access to a trusted physician as a result of a job transition, a job loss, or early retirement, can have harmful health consequences. However, with individual insurance coverage, loyalty to providers exists outside of ESI. Americans could soon have more flexibility to keep their coverage by not using ESI.

While it would certainly be preferable for major shifts in health care to be the result of thoughtful and well-researched strategy, there are potential unintended positive results of new ACA policies that align incentives such that it no longer makes sense for employers to purchase expensive insurance plans on behalf of employees.

Consequentially, the transition is unlikely to be a smooth one in the coming years, but the benefits of changes in individual market insurance coverage could outweigh the unavoidable growing pains of the changing market.

If a cycle of positive individual market results increases, more and more people could move to the individual market, by choice or force. Only time will tell.