Whether an employer continues to offer health insurance once state-run insurance exchanges take effect in 2014 will largely depend on the size of the employer, according to a survey by Mercer.

Only 6% of large employers with less than 500 employees report they are likely to drop health coverage after the insurance exchanges go into effect in 2014. That number drops to 3% for employers with 10,000 employees.

Large employers "are reluctant to lose control over a key employee benefit," says Tracy Watts, a partner in Mercer’s Washington, D.C. office.

"But beyond that, once you consider the penalty, the loss of tax savings and grossing up employee income so they can purchase comparable coverage through an exchange, for many employers dropping coverage may not equate to savings," she adds.

Small employers, however, took a different perspective on whether they will provide health coverage in 2014 because of the exchanges. For instance, 20% of businesses with 10 to 499 workers say they’re likely to drop health insurance.

The reason, in part, stems for small businesses gravitating toward fully insured health plans, which makes them vulnerable to large rate increases because of a small risk pools and minimal purchasing power.

"You can see why the idea of dropping employee health plans would be attractive to small employers," especially those with a hight turnover rate and low-paid workforce, says Beth Umland, who directed the study for Mercer.

"On the other hand, when you look at the experience in Massachusetts, where insurance exchanges have been operating under state-based health reform for over three years, it hasn’t happened," she explains.

The survey represents the responses of more than 2,800 employers. Other key findings from the survey include:

While 17% of employers with 50 or more employees say that the new PPACA requirements generally taking effect for 2011 – extending coverage eligibility to dependents up to age 26 and removing lifetime benefit limits – will have no effect on their cost in 2011, nearly as many (16%) estimate that it will raise cost by 5% or more. Mercer analysts report that PPACA will increase cost by two percent or less.
When asked about their most likely response to the excise tax, about a fourth of employers with 50 or more employees (23%) say: “We will do whatever is necessary to bring cost below the threshold amounts.”

An additional 37% of employers say they will attempt to bring the cost below the threshold amounts, but acknowledged that “it may not be possible.”

Only 3% say they will take no special steps to bring cost below the threshold amounts, and the rest (37%) predict their plans won’t ever hit the cost threshold, which will be tied to CPI and increase each year.  

"It’s important to keep in mind that this new tax is still eight years out and a lot could change between now and then," says Watts. "Given how often ERISA, tax, Medicare and Medicaid rules are modified, there’s a good chance that the excise tax that takes effect in 2018 won’t be exactly the same as the sketch we’re working from today," she adds.

This story has been reprinted with permission from Employee Benefit News.

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