WILL DIVESTMENT FROM EMPLOYMENT-BASED HEALTH INSURANCE SAVE EMPLOYERS MONEY? THE CASE OF STATE AND LOCAL GOVERNMENTS IN THE U.S

Purpose: Reforms introduced by the U.S. Affordable Care and Patient Protection Act (ACA) build new sources of coverage around employment-based health insurance. However, firms may find it cheaper to have their employees obtain insurance from these sources instead, even after accounting for penalties (for non-provision of insurance) and employee bonuses (to ensure the shift is cost neutral for them). State and local governments (SLGs) employ 12,000,000 workers and have strong economic incentives to consider such “divestment” as many have large unfunded benefits liabilities. We evaluated the divestment decision from the SLG perspective and considered the extent of possible cost-shifting to the federal government.

Method: We investigated whether SLGs would save if they: (1) shifted all employees and under-65-retirees to alternative coverage sources; (2) shifted only employees whose household incomes indicate they would be eligible for federally subsidized coverage and all under-65-retirees. We estimated age, sex, and region-specific medical care costs (and hence value of insurance) from the Medical Expenditure Panel Survey using robust restricted cubic spline regressions. We imputed these costs to households with current workers and retirees from SLGs below the age of 65 in the Current Population Survey. Microsimulations assessed the liabilities of SLGs for the full spectrum of households under various insurance divestment policies accounting for employer penalties and each state’s current Medicaid expansion status. The microsimulations used a novel two-step fixed point approach to estimate increased employee compensation for household tax liabilities of being shifted onto the ACA and consequent shifts in federal poverty level and reductions in ACA subsidy eligibility associated with these transfers. 

Result: Because there is no employer penalty for divesting from covering under-65-retirees, divestment could save $18 billion over 10 years. Full divestment including current workers would cost SLGs more than they currently pay, due primarily to employer penalty costs. Selective divestment for workers whose households qualify for ACA subsidies could save SLGs nearly $119 billion over 10 years at the expense of the federal government.

Conclusion: Many state and local governments have strong incentives to consider divestment from health insurance coverage for their retirees and portions of their current workforce. Such incentives exist for private firms as well, which could both cleave health insurance from employment and substantially drive up the federal cost of the ACA.