Guest Article

(From the April 2, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

CBO Projects Only a Small Reduction in Employment-Based Health Coverage under the Affordable Care Act

Consistent with its earlier predictions, the Congressional Budget Office, working together with the Joint Committee on Taxation, continues to project only a small reduction in employment-based health insurance as a result of the Patient Protection and Affordable Care Act (Act).

The March 2012 report projects that 3 to 5 million fewer people will obtain coverage through their employer each year during the period 2019 through 2022 than would have been the case without the Act. In 2010, the CBO similarly projected that 3 million fewer people would obtain employment-based coverage in 2019.

In explaining how it modeled the study, the report sheds light on how the incentives and penalties under the Act are expected to impact employer decisions to offer coverage and employee decisions to accept that coverage or obtain coverage through an Exchange. Under four alternative scenarios, the CBO projects that the number of people who will obtain employment-based health coverage in 2019 will range from a reduction of 20 million to a gain of 3 million. The report explains that the overall effect of a large reduction in employment-based coverage will depend on the share of workers losing coverage who are eligible for Medicaid, CHIP, or Exchange subsidies and the tax rates those workers pay. Under the scenario with the largest reduction in employment-based coverage, the cost of the Act to the federal government is actually lowered (relative to the baseline which assumes the pre-Act laws remain in effect) because the extra costs for Medicaid and the Exchange subsidies "are more than offset by the increased revenue resulting from the higher taxable compensation among workers who receive higher wages in lieu of health benefits." The report concludes that a sharp decline in employment-based coverage is unlikely and, even if it occurs, will not dramatically increase the cost of the Act.

For 2019, a net loss of 5 million people obtaining employment-based coverage is projected to occur as a result of: (i) 11 million people losing coverage because the employer ceases to offer it (these will tend to be smaller employers with lower-wage workers likely to be eligible for Medicaid, CHIP or the subsidies); (ii) 3 million people declining employment-based coverage in favor of other coverage (such as coverage through the Exchange for those whose employment-based coverage is deemed unaffordable); and (iii) 9 million people obtaining employment-based coverage from employers who would not have offered coverage in the absence of the Act.

The Exchange subsidies, together with the tax exclusion for employer-provided health coverage, are key factors in the analysis. The report gives four examples of how they would impact employee coverage decisions.

The report observes that other analysts who modeled the Act's changes have reached similar conclusions regarding how it will impact employment-based coverage. The Centers for Medicare and Medicaid Services, for example, concluded that in 2019 about 1 million fewer people will have employment-based coverage than under prior law.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2012, Deloitte.