Mike Shedlock

In End of Employer-Provided Healthcare: By 2020, S&P 500 Companies May Dump 90% of Workforce into Obamacare I noted that the New York Times, Yahoo!, McClatchy and other mainstream media outlets referred to a healthcare report without having the decency of providing a link.

Sadly, this is the norm. Bloomberg, Reuters and countless others are guilty of the same practice on numerous occasions.

Link to the Report

Reader Julian managed to find a link to the report.

Please consider The Affordable Care Act Could Shift Health Care Benefit Responsibility Away From Employers, Potentially Saving S&P 500 Companies $700 Billion by S&P Capital IQ.

Here are a few charts from the report.

Historical and Estimated Healthcare Premiums



Employer Healthcare Contributions



Average Healthcare Premiums



Using Its Proprietary Model, Global Market Intelligence Calculates Significant Cost Savings Potential For U.S. Companies

To investigate the potential intermediate to long-term ramifications of the ACA, GMI Research constructed a proprietary model to evaluate how companies might, over time, move away from the traditional health care insurance relationship with employees. This model assesses the impact on both employees and corporate America, benchmarked by S&P 500 member companies. This study also evaluates a more general impact on the economy by including a review of companies that have more than 50 employees.

Modeled results suggest that companies have much to gain from moving employees to exchanges enabled by the passage of the ACA. As companies come to grips with the potential impact on employee morale as well as the potential use of health care coverage as a recruitment tool for skilled workers, the financial impact of limiting or eliminating its role in employee health care coverage will be a significant boost to corporate earnings, especially over the long term if health care costs continue to escalate. For S&P 500 companies alone, hundreds of billions of dollars of expenses could be transferred to employees and to the Federal government and to some extent the tax payer over a 10-year period, despite government-imposed penalties incurred by corporations (detailed later in this study).

Other Factors

Other factors could contribute to greater savings, such as corporations altering their benefits relationship with retirees.

As part of the transition, corporate America will likely alter the relationships it held with retirees. For its retirement plans, a company may see an opportunity to limit its future risks and obligations and rid itself of the health-care-related costs of retired employees that have grown to levels likely not foreseen when the retirement plans were created. A recent example of a potential change is the September 2013 announcement by IBM that it planned to move about 110,000 retirees off its company-sponsored health plan and provide them instead with a payment to purchase health insurance on an exchange. The growing costs of the plan, which the company said made the plan unsustainable, sparked IBM's action. By its actions, IBM solidifies the idea that companies can transfer the risk of future cost increases to the employees while keeping the near-term effect relatively neutral for the employee.

Another change may be a reduction in the number of corporations contributing towards the health care costs of its employee's working spouses. United Parcel Service (UPS) provided an example of this, when they dropped coverage for working spouses of its nonunion workers. UPS noted, in an available FAQ about the change, that the move, which affected about 15,000 working spouses, was because "the rising cost of health care in general, combined with the costs associated with the Affordable Care Act, have made it increasingly difficult to continue providing the same level of health care benefits to our employees as an affordable cost." UPS expects the move to save the company about $60 million per year.

Savings

  • Using its model, S&P Capital IQ estimates S&P 500 companies would save about $700 billion through 2025.
  • Total savings to U.S. businesses with 50 or more employees could amount to $3.25 trillion.
  • Factor in businesses with less than 50 employees and the savings would be even greater.


The major assumption in Capital IQ's projection is the projected rate of healthcare cost increases.

Table of Scenarios

  • Scenario One: Using the average health care inflation rate of 7.5% since 1999 (according to the Kaiser Family Foundation) through 2015 and then dropping to 6.5% per year.
  • Scenario Two: Using a lower average health care inflation rate of 5% through 2015 and then dropping to 4% per year.
  • Scenario Three: Using a higher average health care inflation rate of 10% through 2015 and then dropping to 7.5% per year.
  • Scenario Four: Using the health care inflation rate from Scenario One but shifting to a higher amount of workers enrolled in health care to full-time from part-time, since companies may be less likely to offer insurance to part-timers.


Capital IQ's model assumes scenario 1 has a 40% likelihood, and assigns 20% to the remaining scenarios.

Is Capital IQ's Reasonable?

Is Capital IQ's model reasonable? The answer is not as straight-forward as one may think. Obamacare itself does absolutely nothing to reduce costs, but costs may drop anyway.

I expect healthcare and education costs to drop simply because the current exponential paths are not sustainable.

Cause and Effect

More importantly, costs may drop simply because businesses do exactly what Capital IQ assumes!

A couple of readers picked up on that possibility in comments to my previous report. For example, reader Michael states "Having individuals responsible for their own health insurance is the best thing that could happen to US healthcare."

In regards to employer provided healthcare, reader Kevin surmised "Employers never should have been providing such benefits in the first place."

Reader Jon noted "My insurance company was billed $22,000 for hernia surgery. The entire pre-surgery, surgery, and post time was about two hours."

The outlandish cost mentioned by Jon is exactly what happens when someone else picks up the tab and there are no incentives to reduce cost anywhere in the system.

Here is another example: Those in no-deductible or low-deductible plans (frequently union mandated) plans have their costs assumed by taxpayers. Common sense explains what happens.

Wildcards

There are other influences to consider. For example, will Walmart or other low-cost companies create more competition? I hope so and expect so. If much-maligned Walmart opened up clinics and entered the business, we could see costs drop in a hurry.

What Happens Next?

We do not yet know the end result. If the shift away from employer-provided healthcare occurs (and I believe it will happen), will individuals be responsible to contain costs (and thus demand better care for less), or will Obamacare pick up the tab?

If the latter, healthcare costs could soar making the projected savings greater. If the former, it may appear the savings were less. However, the reality may be costs are less precisely because companies no longer are willing to foot the bill!

Free market competition is always a good thing. So is individual responsibility.

Fantasy Scenario

Given government programs typically do the opposite of what is expected, there is a chance that the perverse effect of Obamacare is the exact opposite of what Obama intended: Companies dump healthcare, consumers become more cost-conscious because they have to, Walmart adds badly needed competition, and single-payer dies on the vine.

I leave the odds of that happening up to reader fantasies.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com


Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.