How Employers Are Responding to the

ACA
Robert Galvin, M.D.
N Engl J Med 2016; 374:604-606February 18, 2016DOI: 10.1056/NEJMp1514649

The Affordable Care Act (ACA) changed employers role in the U.S. health care system.
Employer-sponsored insurance, a long-standing system component, provides health
coverage for more than 160 million Americans. While preserving the employer-based
system, the ACA fundamentally altered it by making the provision of health benefits
mandatory rather than voluntary for employers with more than 50 employees and
establishing minimum criteria for affordability and coverage. In addition, a play or pay
model was created, providing employers with an exit: employees would no longer become
uninsured if their employers dropped benefits but could instead purchase guaranteed and
potentially subsidized insurance through public exchanges.
Two financial milestones are leading employers to evaluate whether they want to play or
pay. In 2015, employers with more than 100 employees became subject to a sharedresponsibility penalty for coverage that didnt meet federal standards; further down the
road, a 40% excise tax on coverage over a maximum dollar value (the so-called Cadillac
tax) is due to go into effect (implementation was originally set for 2018, but Congress
recently voted to delay it by 2 years). Although its still early in the game, employers are
making key decisions that affect patients, health care providers, and insurers.
So far, almost all employers have continued to play. Given that sponsoring health
benefits is not a core business function, why are so few firms ceasing to do so? The biggest
reason is that there is no cost advantage to discontinuing health coverage. The simple
math that a $2,000 fine is less than the $10,000 average per-employee cost of coverage is
complicated by the tax deductibility of employers health care contributions. The increase
in nontax-deductible salaries that would be needed to keep projected health care costs
from damaging employee recruitment and retention efforts exceeds the savings an
employer could expect from dropping health care coverage.
A second reason is that the business community is skeptical that the government can
manage large social programs efficiently and therefore expects the penalties to increase.
And a third, underappreciated reason is that growth in health care costs has slowed
substantially over the past several years, so employers dont feel compelled to make a
change.
Private insurance exchanges have been promoted as a nongovernmental exit option. These
products allow firms to outsource the design and delivery of health benefits. They differ
from the public exchanges in that employers can continue to be regulated under the

Employee Retirement Income Security Act (ERISA) and remain self-insured which
means lower costs and less exposure to regulation but employees receive no meansbased subsidies. Despite aggressive marketing by such exchanges, very few companies
have adopted this strategy for active employees, according to the Employee Benefit
Research Institute. Most of the big-name companies that have pursued this route compete in
low-wage labor markets in which offering health benefits is not considered essential to
finding employees; their move to private insurance exchanges is not indicative of a broader
trend. Theres no evidence that private exchanges can control costs any better than
employers are doing on their own.
Employers will face a second financial milestone if the Cadillac tax becomes effective in
2020. The provision, levying a 40% nondeductible tax on the value of health benefit plans
exceeding a specified amount (currently $10,200 annually for
individuals), has captured the attention of chief executives, who are
focusing more on health care than they have since the attempted Clinton
health care reform of the 1990s. Given a 5% annual cost increase, 27% of
employers could face this tax in 2020 (see graphPercent of Employers
Offering Health Benefits with Plans That Would Exceed Cadillac-Tax
Threshold with 5% Premium Growth.).1
The taxs future is uncertain, since both Democrats and Republicans have reasons to dislike
the provision. Its outright repeal outside the context of broader tax reform is unlikely, given
the amount of funding that would have to be replaced (about $87 billion through 2021), but
its implementation could conceivably be postponed on an annual basis. The taxs uncertain
future is likely to moderate but not reverse employer actions to control costs. Employers
will do what it takes to avoid paying a future tax but will slow down the pace of change if
employees complain or if they encounter problems with recruitment or retention.
Lacking the authority that the Centers for Medicare and Medicaid Services has to
administer health care prices, employers have long struggled to control costs. Some
approaches, such as self-insurance, managed care, and competitive bidding of health
insurers, have been effective. Others, such as efforts to influence employees lifestyle
choices or to manage chronic conditions through call centers, have proved to cost as much
money as they save. Increasing employees cost sharing has been the primary tool
employers have used to address rising health care expenditures.
To address the increased costs brought on by the ACA, employers have sought first to limit
eligibility for coverage. Many have eliminated retiree benefits, and some are aiming to
move workers to a less-than-30-hour workweek so that they dont qualify for coverage. But
curtailing hours or cutting jobs has been more difficult than predicted. Employers had
already thinned out excess labor capacity over recent decades, and its challenging to shift
workers to part-time employment while maintaining service quality and customer
satisfaction. Some employers are reducing coverage for spouses and dependents but are
wary of jeopardizing recruitment and retention.
Employers have turned to two new benefit designs to control costs: defined-contribution
plans and consumer-directed high-deductible plans (CDHPs). Both attempt to make

employees act more like consumers to make choices based on prices and their
preferences. Defined contributions affect employees at the time of their annual choice of
coverage. Employers fix their contribution on the basis of a specific benefit design, and
employees may buy up or down to purchase more or less insurance, but without any
additional employer subsidy for a more expensive plan; less expensive designs generally
include narrower provider networks.
The CDHP model affects enrollees when theyre seeking a health care service. They are
subject to a high deductible (about $2,500 for individuals) and draw on an associated taxadvantaged health savings account. These plans frequently provide access to information on
prices of services, and enrollees benefit financially if they choose lower-cost options. Early
experience indicates that both these approaches save money in the short term. More
employees in defined-contribution plans buy down to less coverage than buy up to more
coverage,2 and CDHPs result in markedly reduced service utilization.3
But CDHPs have engendered controversy. Many policy experts believe this model is
simply another form of cost shifting that leads enrollees to avoid necessary care.
Proponents argue that CDHPs motivate people to behave as consumers, being smarter
about what interventions they pursue and at what cost. One study demonstrated that
enrollees used price information to obtain lower-cost services, with the largest savings
obtained in imaging and laboratory services.4 Other studies have indicated that higher outof-pocket costs result in less utilization of both unnecessary and necessary services, and a
recent report revealed no evidence of shopping.5 Its unclear whether the small
percentage of any population that accounts for the majority of health spending will in fact
shop for services on the basis of quality and cost. Although the definition of consumerism
in employer-sponsored insurance is fuzzy, more than 45% of employers are offering such
account-based plans, and the number is growing. Employers move to consumerism is
having substantial effects on providers,ranging from decreased use of services and
challenges in collecting deductiblesto demands for public release of information on prices
and quality.
In an environment of controlled health care costs and favorable tax treatment, employers
competing for skilled labor will continue to sponsor health benefits and not move
employees to an exchange. The situation could change if and when employers health plans
begin hitting the threshold for the Cadillac tax. Even then, however, whether to pay rather
than play will be an economic decision made by individual companies, and I believe there
will no rush for the exits.