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Why employers won’t drop health coverage – Bredesen’s blunder

Tennesee Gov. Phil Bredesen is driving today’s AP story front-paged in the News and Observer that “some experts” believe employers will drop health coverage because of the new health reform law.

To get to Bredesen’s point, one must set aside the real-world experience of Massachusetts where health care reform enactment several years ago resulted in no significant loss of employer-based coverage despite much weaker penalties for large employers who drop coverage than in the federal reform law. One must also accept the mindset that says most American companies care so little about doing the right thing for their workers that they would severely disrupt decades of employee and family health coverage in a heartbeat if they feel it might save a few pennies. Finally, one has to set aside the independent nonpartisan Congressional Budget Office estimates that very few employers nationwide would drop coverage. This is because the current substantial tax benefits for employers who offer health coverage combined with the requirement to contribute if businesses fail to offer coverage mean it just doesn’t make financial or business sense for employers to drop benefits.

And Bredesen doesn’t exactly have a very good track record himself when it comes to fixing the health care system. Five years ago he cut over 200,000 sick, disabled and older people in Tennessee off the state’s Medicaid program in a draconian effort to reduce health costs. Cindy Mann, Director of the Center for Children and Families at Georgetown said at the time:

”What he’s decided to do is save health care costs simply by not giving people health care.”

So Bredesen is right in character. Rather than starting the discussion about how to best use the tools in the new health reform law to start to reduce health costs for businesses and governments, he’s attempting to take an ax to the premise that everyone should be able to afford decent coverage.

Bredesen may also harbor some resentments from a bruising he took from health advocates that deep-sixed his chances to be Obama’s Secretary of Health and Human Services last year. After all, how to explain his criticism of the national health law two weeks before the election?

11 Comments

  1. Randall

    October 25, 2010 at 11:36 am

    In your guesstimation of what employers might do, bear in mind two factors: large employers work policy at a national level (so Massachusetts would not weight much unless all employees were in Massachusetts… so this example is perhaps not so relevant), and secondly, taking your point about American Company’s caring little (actually not caring little), if the subsidized national program is any good, it might be better than any given private alternative. If there are savings, the company might prefer to give these to the employees directly.

  2. Adam Searing

    October 25, 2010 at 11:47 am

    The problem is that if you eliminate health benefits, you eliminate a huge benefit you are giving your employees. If you increase your employee salaries to make up for this, that increase in salaries is treated as taxable income – whereas health benefits are not taxable income. Therefore both employees and employers would pay significantly more in taxes if companies chose to increase employee salaries to make up for taking away their health benefits.

    The employer/employee tax break for health benefits is worth billions and is a huge benefit for both employers and employees, even though it is a tax break most people don’t think much about.

    So, even on just a straight fiscal argument, unless a company is willing to basically compensate its workers much less (and give up the huge tax break they get for compensating workers more by offering health coverage), it’s very unlikely that dropping coverage is fiscally smart.

  3. BusinessOwner

    October 25, 2010 at 12:36 pm

    As a small business owner I can tell you that as the law stands now we will be dropping our existing health insurance. Not because we do not care about our employees but because the government option will be cheaper. I suggest that everyone own and operate a small business at razor thin margins (which is what the current business climate allows) before they comment on these issues.

  4. AdamL

    October 25, 2010 at 12:55 pm

    Some small biz owners will drop insurance. Other small biz owners will offer insurance once new options are available in 2014. But many small businesses don’t offer coverage. The debate is over large businesses and whether or not they will drop coverage.

    Bredesen says they will drop because he thinks it makes business sense. But most analysts disagree because a large business gets enormous tax breaks for offering coverage. Unless a big business thinks it can compete for workers while massively reducing benefits they will maintain coverage. If the business wants to drop health insurance and raise pay then they no longer get the tax benefits. Bredesen’s argument doesn’t make sense for most large employers.

  5. gotocamera

    October 25, 2010 at 1:05 pm

    great information

  6. Adam Searing

    October 25, 2010 at 1:16 pm

    And small businesses hold all the cards with the new health law. If a business has under 50 employees they face no fines or charges if they choose to not offer coverage to their employees – just as the law is today.

    If a small business does decide to offer coverage, they can take advantage of substantial tax credits to help pay for that coverage – the same way big companies do now.

    If a small business thinks it’s best for their employees to not offer coverage and join the health exchange, then great – that’s what the exchange is there for, to get a large number of people into one pool to lower costs for everyone.

  7. Joe

    October 25, 2010 at 3:30 pm

    Employers get no “tax benefit” from offering health insurance versus just paying employees more. Each dollar of compensation whether in the form of health benefits or pay is deductible by the employer. The employee gets the tax benefit, not the employer. Bredesen’s argument is simple, if an employer has to pay a $2,000 penalty per employee for not offering health care, but it is currently paying twice or three times that for offering care, do the math. If the penalty is static but health care costs continue climbing at 2 or 3 times the rate of inflation, it makes abandoning health care that much more attractive, particularly if employees can go to an exchange and get the insurance themselves.

  8. Wellescent Health Blog

    October 25, 2010 at 3:38 pm

    If businesses want to remain competitive, part of their compensation is the set of benefits they offer. If they wish to attract and retain talent, they need to retain some manner of benefits whether they provide it themselves or through some external plan. Even in countries like Canada, where socialized medicine covers all the basics, employers still compete at some level based on their benefits.

  9. Adam Searing

    October 25, 2010 at 3:55 pm

    Joe – the tax code is clear. Employers must pay SS/Medicare taxes on wages they pay their employees:

    http://www.irs.gov/businesses/small/article/0,,id=172179,00.html

    Pay more in wages to make up for paying for no health benefits and a business pays more in tax. Yes, it is that simple and Bredesen is the one being misleading.

  10. William Murrat

    October 25, 2010 at 4:59 pm

    Technically, I don’t think you are correct in this assumption. For instance, an employer can set up an HRA plan where each employee receives a monthly allowance to purchase their own health insurance from any company they may choose. This is a tax deductible expense for the business, and a tax-free benefit to the employee. The employee can choose a HSA insurance plan for further tax savings, and the employer reduces his health costs by 20-30%, in addition to covering more out of pocket expenses.I can’t figure out why more employers don’t go this route.

  11. Adam Searing

    October 26, 2010 at 9:32 am

    Guys, argue with the IRS, not me.