Will Employers Drop Insurance Coverage?

A controversial McKinsey report came out in 2011 predicting that 30% of those with employer sponsored insurance would lose coverage because of the provisions in the Affordable Care Act.  This study along with one by Towers Watson (predicting that 10% would lose private coverage) has been used by opponents of the legislation in their criticism of various aspects of the new law.   Even proponents recognize that there will be some crowding out of private coverage with the CBO estimating that 11 million employees will lose their coverage, or about 7%. 

There is no doubt that ObamaCare will change the balance between group insurance (through employer-based plans) and individual insurance (obtained via the exchanges).  The incentive to drop a plan is obvious for even the casual observer.  The cost of employing the median worker (earning $50,000 annually) is shown below.  It will cost the employer who sponsors a group plan and pays the average of 75% of a family premium is $41,500.  The cost of employing that same worker, if the employer chooses not to play the insurance game and pay the penalty, is only $36,985, a savings of over $4,500. 

With Insurance


Without Insurance


Salary Paid



Family Premium (75%)



Salary + Insurance



FICA (7.65% Medicare Salary)



BT Personnel Expense



Tax Deduction (35%)



AT Personnel Expense






Personnel Expense AT & Penalty


What will the employer do with the savings?  I believe there is reason to believe that the employer (who was previously paying over $10,000 to insure the worker’s family) will give the savings to the employee to purchase insurance in an exchange.  This employee can purchase a family plan in the exchange for only $3,385, receiving a generous subsidy to pay the rest of the premium.  So the employee has insurance and an additional $1,000.  Everybody benefits.  In fact, it might benefit the employee to simply pay the penalty tax and forego insurance until it’s needed.  Then, because ObamaCare ignores all sound actuarial principles of insurance and requires insurance companies to issue coverage to all who apply, sick or healthy, the uninsured can opt into coverage anytime it’s convenient.  This sort of gaming will lead to insurance pools populated with higher than average risk, leading to higher premiums.  And down that slippery slope we go.    

The opinions expressed in this blog post are mine alone, and do not reflect the opinions of Baylor University.   Baylor is not responsible for the accuracy of any of the information provided in this post.

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