Health Care Reform The Employer s Decision to Provide Health Insurance Under the Health Reform Law This article considers the employer s decision to continue or to drop health insurance coverage for its workers under the provisions of the 2010 health reform law, on the presumption that the primary influence on that decision is what will produce a higher worker standard of living during working years and retirement. The authors incorporate the most recent empirical estimates of health care costs into their long-horizon, optimal savings consumption model for workers. Their results show that the employer sponsorship of health plans is valuable for maintaining a consistent and higher living standard over the life cycle for middle- and upper-income households considered here, whereas exchange-purchased and subsidized coverage is more beneficial for lower income households (roughly 4-6% of illustrative single workers and 15-22% of working families). by Gaobo Pang, Ph.D. Towers Watson and Mark J. Warshawsky, Ph.D. Towers Watson The comprehensive health reform law passed in early 2010 is expected to have significant and far-reaching implications when implemented fully in 2014 and after. Among its goals, it is intended to expand access to health insurance coverage. Some are concerned that an undesirable effect of the law will be to encourage employers to drop their sponsorship of health insurance plans because of the relatively low penalty paid by employers for doing so and the generous federal subsidies available to workers who do not have affordable employer coverage and instead purchase insurance through state-organized or federal exchanges. Bredesen (2010, p. 31) says: There are a lot of businesses small, medium, and large in America that, when they do the numbers, are going to discover that dropping the health insurance coverage they now offer and moving their employees into the Individual Exchange Program is better for them and better for their employees. Recent surveys show mixed employer reactions to the health reform law. The International Foundation of Employee Benefit Plans (2011) reports that few employers plan to stop sponsoring health insurance in 2014 when the provisions of the reform law take effect. More organizations (about one-third of respondents) are increasing the emphasis on high-deductible health plans or considering adopting 42 benefits quarterly second quarter 2013
such plans. In contrast, Singhal, Stueland and Ungerman (2011) state that the shift away from employer-provided health insurance will be vastly greater than expected. They find that overall, 30 percent of employers will definitely or probably stop offering ESI [employer-sponsored insurance] in the years after 2014. Among employers with a high awareness of reform, this proportion increases to more than 50 percent, and upward of 60 percent will pursue some alternative to traditional ESI. In this analysis, we examine the effects of health insurance coverage on workers welfare and retirement preparation in a lifelong planning framework. The analysis, using an empirically calibrated computational long-horizon consumption and savings model, derives the optimal household income replacement rate for retirement and simultaneously calculates consumption and savings rates in working years to meet the replacement target. Workers in the model are assumed to purchase insurance on the exchange market or alternatively to be covered by employer-sponsored health plans. The model strategy aims to maintain a reasonably constant living standard before and after retirement. Standard of living here is defined as the level of discretionary consumption that is sustained after paying for food, clothes, transportation, housing and health care. The impacts of the health reform law are measured as the changes in consumption levels. We assume that the current tax structure stays in place, in particular, the exclusion from employee taxable income of employer contributions to health plans. We also model employer plans with non-age-related premiums in contrast to exchange plans where premiums will reflect age, within legal limits. We illustrate that, considered over the life cycle of the households, movement away from employer-sponsored health plans would make some workers worse off. In particular, the results for illustrative middle- and upperincome households show that the dropping of employersponsored coverage and the time inconsistency of subsidies through the exchanges lowers workers standard of living during the working years and through retirement. By contrast, for lower income households, exchange-purchased and subsidized coverage is preferable. Our estimates indicate that roughly 4-6% of single workers and 15-22% of working families among our illustrative households likely would be better off. The model incorporates varied household earnings profiles and defined contribution (DC) plan provisions as well as Social Security rules. The model makes detailed calculations of payroll taxes, federal, state and local income taxes, and other tax obligations on Social Security benefits and DC distributions under current law. To gauge spending needs, the model uses estimates of work- or age-related expenses based on typical consumer spending patterns (see Pang and Warshawsky (2009) for details). Regarding health care costs in particular, we incorporate the most recent empirical estimates and program in the income-linked premiums, subsidies and taxes under the new health reform law. Caution should be used in interpreting the model results. It is difficult to predict how health care costs, plan designs and employer contribution strategies will be modified after the provisions of the health reform law become fully effective. Also, this analysis tackles the question from the worker s perspective and does not consider the employer s perspective, including its administrative costs, workforce issues and regulatory responsibilities, nor the impact of plan nondiscrimination requirements. Therefore, these partial equilibrium results cannot necessarily be extrapolated directly or aggregated to get a macroeconomic inference. Nonetheless, we believe it is a helpful analysis to add to the debate currently underway about the new health care law because it gives a long-horizon lifecycle perspective for working households across the income and demographic distributions heretofore lacking in the discussion. Health Reform Law of 2010 and Health Care Costs Major Provisions of the 2010 Health Reform Law The new health reform legislation encompasses the Patient Protection and Affordable Care Act (ACA) and the Health Care and Education Reconciliation Act of 2010 (HCERA). The reform has many features. For our focus on lifecycle spending and retirement savings, we code the following provisions and assume they are effective over the lifetimes of households in our model: It is mandatory for individuals to obtain health insurance either through the group plans sponsored by their second quarter 2013 benefits quarterly 43
The model and statistics indicate that, with the switch from employer-sponsored group health insurance to the exchange-based insurance, about 4% of single workers around the age of 30, 6% of singles around the age of 45, 15% of couples around the age of 30, and 22% of couples around the age of 45 would be better off. The remaining majority would be worse off. employers or policies on the newly established exchanges. Exchange premiums can vary by age to a limited degree; the premium for a single 64-year-old is capped at three times the premium for a 20-year-old. Higher income individuals pay an additional 0.9% Medicare payroll tax (currently 1.45% for all workers) and a new unearned income Medicare contributions tax of 3.8% on investment income. These new taxes apply when income exceeds $200,000 for individuals and $250,000 for couples, not indexed to inflation. Households with incomes below 138% of the federal poverty level (FPL) are eligible for the expanded Medicaid program. 1 Households with incomes up to 400% of FPL that have no access to affordable coverage through an employer plan receive federal premium subsidies for health insurance purchased on an exchange. The federal subsidy is on a sliding scale, and the premium paid by these households is no greater than 2% to 9.5% of their income. The standard (silver plan) actuarial value is 70% in ACA, which means that the health plan on average pays 70% of the cost of covered benefits for a standard population. The law provides cost-sharing subsidies so that households with incomes up to 250% of FPL have health plans with higher actuarial values, ranging from 73% to 94%, and thus pay less out of pocket. The affordability of an employer-sponsored health plan is determined based on self-only coverage. It is deemed affordable if the worker-only share of the insurance premium is less than 9.5% of income. If the health plan for self-only coverage is affordable, the employee will not receive a subsidy for exchange-based coverage. Nor will other family members be eligible for subsidies through the exchange. Under the regulation, they are considered having minimum essential coverage through their relationship with the employee. Eligibility for minimum essential coverage other than coverage offered through the individual market or the exchange renders the spouse and dependents ineligible for the subsidy. If the employer-sponsored coverage failed to provide the minimum value, however, the employee and the family could apply for subsidies through the exchange. The subsidy provisions are intended to provide assistance to even middle-income households. However, the provisions may affect households differently as their incomes and demographics change. Suppose that a couple (both aged 30) currently earns $66,000 and has two children aged one and two, respectively. This income level is about 300% of the 2010 FPL, and the family would be eligible for federal premium subsidies, assuming that affordable employer plans are not available. Also assume an annual increase of 4% for income and 3% for the consumer price index (CPI) that is used to adjust the poverty threshold, and a financial independence at the age of 22 for children. By the age of 51, the couple s income will exceed 400% of FPL for a family of two and the couple will lose eligibility for subsidies. This simple example illustrates how the support from federal subsidies may be varied and limited in the perspective of long-term planning of particular relevance to households that spend and save according to the lifecycle model. 44 benefits quarterly second quarter 2013
Table I Annual Average Out-of-Pocket Expense per Capita by Age in 2010 Age 20-24 25-29 30-34 35-39 40-44 45-49 50-54 OOP ($) 358 494 576 621 678 775 937 Age 55-59 60-64 65-69 70-74 75-79 80-84 85+ OOP ($) 1,066 1,246 952 1,017 1,018 986 886 Note: Retirees aged 65+ are assumed to be covered by Medicare Parts A, B and D as well as Medigap supplement Plan F. Source: Towers Watson analysis of medical claims from large employers. Baseline Health Care Costs With Group Insurance Our baseline scenario about health care costs is that workers are covered by employer-sponsored group insurance. The annual average insurance premium is assumed to be $5,200 for single workers and $14,700 for a family of four in 2011. Premiums for employerprovided insurance do not vary with age. The employee share of the premium is 20% for single workers and 25% for married workers. The employer share is not included in the employer s taxable income. These assumptions are simple averages of the statistics from three separately conducted surveys: the 2010 Towers Watson Health Care Cost Survey that had respondents primarily from the Fortune 1000 companies, the 2010 Employer Health Benefits Survey conducted by Kaiser Family Foundation/ Health Research and Educational Trust (KFF/HRET), and the 2011 Employer Survey on Purchasing Value in Health Care conducted by Towers Watson and National Business Group on Health. Retirees in the model (aged 65 or older) are covered by Medicare Part A (hospital insurance), Part B (medical insurance) and Part D (prescription drug). The monthly Part B premium is assumed to be $100 per person for single filers with incomes of $85,000 or less and joint filers of $170,000 or less. 2 The standard Part D monthly premium is $32.34. Premiums are higher for several income brackets. For instance, monthly Part B and Part D premiums are $161.50 and $44.34, respectively, for singles with incomes of $85,001 to $107,000 and couples of $170,001 to $241,000. The current law provides that the thresholds of $85,000 and above are not indexed for 2011 through 2019 and thereafter are indexed to the CPI. We assume that this freeze on indexation will continue after 2019. In addition, retirees are assumed to purchase standard Medigap supplement Plan F without a high deductible, which had an annual premium of $2,000 per person on average in 2010 (MedPAC (2010)). Plan F premiums increase with age in practice. Our model includes a premium curve based on the rate quotes of large health insurance companies. The Plan F premium for retirees in their 90s is about twice that for 65-year-olds. Total health care costs are insurance premiums plus out-of-pocket (OOP) payments. OOP varies by age in the model, as shown in Table I. It is expected that some employersponsored plans likely will migrate to higher deductible plans that will fall into the bronze and silver plan categories in the new exchanges. Such plan designs may allow employers to lower costs but still fulfill the mandates of the new law. We assume a shift over time in cost sharing between employers and employees: OOP is assumed to grow 2.5 times larger in five years and insurance premiums for workers simultaneously decrease (by about 28%) so that total health care cost (OOP1premium) to the worker remains the same, but second quarter 2013 benefits quarterly 45
figure Hypothetical Profiles of Nominal Earnings 450 Nominal earnings ($000) 400 350 300 250 200 150 100 50 0 Rapid High Medium Low 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 5960 61 62 63 64 Age Source: Authors assumptions. OOP accounts for about 40% of total medical and drug charges, like a bronze plan. For retirees, OOP also is made 2.5 times larger but the Medicare supplement Plan F premium, now with a high deductible to be consistent with the preretirement plan, decreases to onequarter of the premium for a standard Plan F, based on MedPAC (2010). Both insurance premium and OOP increase over time owing to the rise in health care cost. We assume that health care costs initially increase at the rate of average wage growth but slow down to the average price inflation rate over 15 years, owing to various economic forces and further health reform efforts. These assumptions are optimistic, given that health care costs historically have outpaced average wage growth, but are necessary to make retirement financially feasible 30-40 years in the future for current young workers at usual retirement ages. Alternative Health Care Costs With Insurance on the Exchange The health reform law imposes penalties on employers if they fail to fulfill certain requirements. 3 The penalties are intended to encourage employers to provide health insurance coverage. Also, nondiscrimination rules apply to employer health plans; an employer that offers coverage to higher wage workers must also offer coverage to lower wage workers. Nonetheless, there is concern that some employers will drop the sponsorship of group plans. Towers Watson (2011) shows that 71% of large employers have no plans to exit sponsorship but 9% do plan to terminate their health plans and 20% are not sure. We therefore consider the alternative case that workers purchase health insurance through the new exchanges. In this case, we assume, because of competitive labor markets, that the employer share of group insurance premium is added to employee earnings. We acknowledge but do not quantify the tax implications that the added earnings are taxable but the employer subsidy of health care costs is not. On average, the market premium for exchange-based plans is assumed to be 15% higher than the group premium for similar levels of benefit, based on empirical estimates. This differential is due to ex- 46 benefits quarterly second quarter 2013
tra administrative costs, risk charges and other pricing features of insurance plans generally not found in employer self-funded health plans. The individual insurance premium increases with age in the model, and the aged 64 premium is three times the aged 20 premium, as allowed by the law. The premium for family coverage is similarly adjusted. We do not consider the possibly advantageous strategies of workers moving from employers without insurance coverage to those with insurance coverage as the workers incomes increase above the levels where subsidies are available. Nor do we consider employers not sponsoring and then sponsoring insurance coverage as their workforce characteristics change over time. We assume that sponsorship is a one-time permanent decision. Our analysis ignores the case that a family opts to purchase insurance through the exchange although the employer plan is affordable for self-only coverage and provides minimum value. As discussed earlier, if the cost of self-only employer-sponsored coverage is below 9.5% of household income, the spouse and children will be ineligible for subsidies, unless the employer coverage fails to meet the minimum value requirement. Family members could purchase coverage through the exchange, but they would have to pay the full cost of coverage. Economic Situations of Individuals and Families We consider varied income levels, based on the scaled factors for hypothetical earnings profiles under the assumptions used in the Social Security Trustees Report (see Clingman and Burkhalter (2009)). We use the low, medium and high factors that represent 45%, 100% and 160% of Social Security s average wage index (AWI). The Social Security factors, however, include a declining profile of nominal earnings in workers late 50s or early 60s, presumably because some workers have only part-time earnings that are included in the factors. We instead assume that workers continue full-time until retirement and that their nominal earnings after the age of 55 increase annually by half of the AWI growth rate. Workers are assumed to be currently aged 30 and will retire at the age of 65. The initial AWI is assumed to be $41,000 (the most recent average from Social Security). In addition, we consider a rapid growth profile that starts with the same level of earnings as the high case but is twice the latter in the final working year. The figure plots the age-earnings profiles in nominal terms. For couples, income levels in the figure apply to the heads and the spouses make 20% less. They have two children who are assumed to be aged one and two at the beginning of the analysis and will become independent at the age of 22. For tax and benefit indexations, the model assumes a CPI inflation rate of 2.8% and an AWI growth rate of 3.9% (1.1% real 1 2.8% inflation), based on the Social Security Trustees Report 2011 intermediate assumptions. We assume workers have a DC plan with no employer-matching contributions. Although most large employers give matching contributions, many small ones do not. The model results highlight the overall savings rate that is optimal. The current law Tax Code deferral and covered compensation limits apply, with indexations. The nominal investment return over the multidecade perspective of the model is assumed to be 5.5%. All DC account balances are assumed to be converted to inflationindexed life annuities upon retirement. Regarding life annuity pricing, a nominal interest rate of 5%, a 7.5% expense load and a 75% survivor benefit for joint and survivor annuities for couples are assumed. Households in their working years earn, consume and save for retirement. Once retired, they draw down their accumulated wealth, in the form of a lifelong steady flow of annuity income, to support consumption. Total income each year is divided into taxes, lifecycle expenses (food, clothes, transportation, housing and health care costs), savings and other discretionary consumption (ODC). Given that taxes are mandatory and many lifecycle expenses are indispensable, the model equilibrium criterion is based on ODC. That is, the equilibrium savings rate and replacement rate are simultaneously determined when the discretionary consumption, immediately before and after retirement, are equal, thereby maintaining the living standard into retirement. Implications of Health Insurance Provision for Retirement Savings and Welfare Savings and Replacement Rates With Employer-Provided Health Insurance Table II gives the baseline results of savings and replacement rates with employer-sponsored group health insur- second quarter 2013 benefits quarterly 47
Table II Baseline Savings and Replacement Rates: The Case of Group Health Insurance Earnings Profile DC Savings Rate (%) After-Tax Savings Rate (%) Replacement Rate (%) Singles Low 5.7 0.0 77.7 Medium 9.3 0.0 71.7 High 11.7 0.0 71.5 Rapid 15.2 3.1 62.6 Couples Low 3.9 0.0 75.2 Medium 7.9 0.0 67.5 High 11.2 0.0 69.5 Rapid 16.9 1.8 62.1 Source: Authors calculations based on an empirically calibrated computational savings model. ance. For instance, the medium single worker needs to save 9.3% of his or her earnings in working years, which will deliver a retirement income including Social Security equal to 71.7% of preretirement pay. Relative to others, lower income households need to save less because the progressivity of the Social Security benefit formula delivers a larger proportion of retirement income for them. The single worker with the low age-earnings profile needs to save 5.7% of earnings. For higher income households, the required savings rates generally are higher and replacement rates lower. The rapid worker needs to save 15.2% of earnings before tax and, because of the contribution limits in the DC account, 3.1% after tax, and has a target replacement rate of 62.6%. These individuals are more heavily taxed but will also experience a more significant drop in taxes upon retirement, thus calling for a lower replacement rate. The desired replacement rate usually is lower than 100% because retirees pay lower taxes and tend to spend less on food, clothing and commuting. There are exceptions, however, particularly if health care costs exhibit a substantial hike upon retirement. Note that higher income households face a smaller burden of health care costs in proportion to their income similar levels of costs are assumed across workers in the model except that Medicare premiums are adjusted for income levels, according to law. The results for married couples show a similar pattern as for singles. For example, the target replacement rate is 67.5% of preretirement earnings for the medium family and 62.1% for the rapid family. The former needs to save 7.9% of earnings in the DC account, while the latter needs to save 16.9% before tax and 1.8% after tax. Savings and Replacement Rates With Health Insurance on the Exchange Table III shows the results when the households are assumed to purchase health insurance through the exchange. Except for the low-income single worker, replacement rates are lower by 3.7-19.7 percentage points and savings rates are lower by 0.5-6.7 percentage points for the medium, high and rapid households, relative to the results with employersponsored plans in Table II. The main reason is that the households save less for retirement if they have exchangepurchased insurance. This is indicated both by the dollar amounts of savings each year (results not shown) and the lower savings rates in Table III. This may sound counterintuitive but serves well to explain the equilibrium 48 benefits quarterly second quarter 2013
Table III Savings and Replacement Rates: The Case of Health Insurance on the Exchange Earnings Profile DC Savings Rate (%) After-Tax Savings Rate (%) Replacement Rate (%) Singles Low 6.6 0.0 77.3 Medium 2.6 0.0 52.1 High 7.7 0.0 59.1 Rapid 14.8 1.9 59.0 Couples Low 3.3 0.0 66.2 Medium 1.8 0.0 51.5 High 7.0 0.0 57.9 Rapid 16.2 0.4 58.1 Source: Authors calculations based on an empirically calibrated computational savings model. concept of the model. Many of these illustrated households receive no federal subsidies and pay a higher health insurance premium on the exchange, particularly in near-retirement years. As health care costs take up a larger share of income, less income is left for discretionary consumption. In equilibrium, households equalize the standard of living both in working years and in retirement. That is, the consumption level in retirement should be lowered too through lower retirement income from less wealth accumulated, rather than solely cutting consumption in working years. This is particularly the case for the single worker with medium earnings. As health care cost grows with time and age, his or her discretionary consumption in working years is depressed. A fairly low level of retirement income (replacement rate 52.1%) is needed to maintain this low standard of living in retirement. The required savings rate is just 2.6%. Note that the worker s earnings are high enough to disqualify him or her for federal premium subsidies, and health care costs drop sharply upon the eligibility for Medicare at the age of 65. The story is the opposite for the single worker with low earnings. That worker s income falls within the range eligible for federal subsidies, which results in lower health care costs than under the baseline case. Rather than solely boosting consumption in the working years, the subsidies also raise the living standard in retirement through encouraging higher savings (6.6% in Table III vs. 5.7% in Table II). Consumption Spending (Welfare) With Different Health Insurances A further examination of the consumption profile reveals whether households are better off or worse off by getting health insurance on the exchange. Table IV gives the average levels of ODC around retirement. ODC excludes the expenses of food, clothes, health care, etc., which are modeled separately as dependent on age, income and so on. As discussed above, the model equilibrium controls that ODC maintains the same level before and after retirement. The discretionary consumption is lower for most households when they purchase exchange insurance (Panel B of Table IV) relative to the case of employer-sponsored group plan (Panel A). 4 For instance, ODC upon retirement is reduced by 24% (from $27,000 to $20,400) for the single medium-income worker and about 13% (from $51,000 to $44,300) for the high-income worker. The finding that lower discretionary consumption is associat- second quarter 2013 benefits quarterly 49
Table IV Other Discretionary Consumption Spending Around Retirement ($000, Nominal) With Different Sources of Health Insurance Average of Five upon Retirement Average of Five Earnings Profile Years Before (Age of 64 Level = Age of 65 Level) Years After a. With group health insurance Singles Low 1.1 1.4 2.5 Medium 24.8 27.0 29.8 High 47.3 51.0 55.6 Rapid 102.4 107.9 120.2 Couples Low 4.8 5.3 7.5 Medium 51.5 55.2 58.8 High 91.8 98.8 110.8 Rapid 188.7 200.6 223.2 b. With health insurance on the exchange Singles Low 3.0 5.5 7.0 Medium 19.5 20.4 23.4 High 41.9 44.3 49.5 Rapid 97.1 101.2 112.9 Couples Low 4.8 5.6 7.9 Medium 40.1 41.6 47.4 High 81.0 85.2 95.4 Rapid 178.5 187.5 208.9 Source: Authors calculations based on an empirically calibrated computational savings model. ed with exchange insurance is driven by the profile of health care costs with time and age. Average health care costs rise faster than earnings over time for most households: Health care costs rise at the AWI rate initially and then at the inflation rate; earnings grow slower than AWI after the age of 50 because the scaled factors decline thereafter; and nominal earnings after the age of 55 are assumed in this analysis to grow at half of AWI growth rate, as noted earlier. Meanwhile, the exchange health insurance premium triples at the age of 64 relative to the age of 20 level. These factors severely crowd out discretionary consumption in near-retirement years. The crowd-out effect is less pronounced for the higher income households because they have greater financial capacity for health care. For instance, ODC at retirement is reduced by about 6% (from $107,900 to $101,200) for the rapid worker. Households with low age-earnings profiles gain from this health reform, as indicated by higher consumption levels in 50 benefits quarterly second quarter 2013
Table IV. Federal premium subsidies reduce their health care costs. For other households, however, the federal subsidies are helpful only in early working years; they taper off later. This is because the poverty thresholds are adjusted for CPI inflation, which grows more slowly than nominal incomes. Also, when children become financially independent, some households will emerge above the threshold for federal subsidies. Table V Demographics of Selected Workers (% of U.S. Population) Differential Impacts of Health Reform Law Among the Current Population We estimate which groups of workers among the U.S. population, at two illustrative ages, would likely gain or lose as a result of the health reform law. First, we search for the break-even income level at which households in the model are indifferent between being covered by the employer-sponsored group plan or purchasing the exchangebased plan. The criterion is that discretionary consumptions remain the same after switching to the exchange plan. This break-even income is reached by scaling up or down the illustrative earnings profile we have modeled. According to the model, the break-even earnings are $18,000 for aged 30 single workers with no children and $32,000 for married couples with two children. To assess the impact of health reform law among the broad U.S. population, we also run the model for midcareer workers, specifically, workers currently aged 45. The same illustrative earnings profiles apply to these workers, but they are assumed to have accumulated certain retirement wealth from prior work. The levels of existing wealth are set as the account balances at the age of 45 that would have been achieved by the model workers saving optimally from the age of 30. For instance, aged 45 single workers and married couples with medium earnings profiles are assumed to have $83,000 and $125,000, respectively, in their retirement accounts. Note that the economic environment for the aged 45 workers is different from that for the aged 30 workers because the forces of inflation, indexation, health care cost increase and cost sharing between employer and employees are (partially) unfolding over the nowshorter time horizon. The resulting optimal savings and replacement rates (not reported) are necessarily different than those for aged 30 workers. Nonetheless, the key finding still holds that Workers Around Workers Around the Age of 30 the Age of 45 Single workers No children 39% 20% One or more children 6% 9% Married couples No children 21% 20% One child 22% 21% Two children 11% 21% Three or more children 1% 10% Total 100% 100% Source: Authors calculations based on Current Population Survey, March 2011. Only full-time workers are considered. The sample of workers around the age of 30 has 8,027 observations, including those aged 28 to 32. Children here are defined as household members under the age of six to be consistent with our model illustrations. The sample of workers around the age of 45 has 8,974 observations, including those aged 43 to 47. Children here are defined as household members under the age of 18. the lower income households are most likely to be better off with the subsidies to exchange insurance. According to the model, the break-even earnings are $19,000 for aged 45 single workers with no children and $44,000 for married couples with two children. Next, we examine some data about the U.S. population and estimate how many workers are making less than the break-even earnings and thus would be better off with the health exchange. Table V shows where our model households stand in the population. For example, single workers with no children account for 39% of the population around the age of 30, while married couples with two children account for 21% of the population around the age of 45. Table VI shows the statistics for actual health plan coverage for our illustrative households. The second quarter 2013 benefits quarterly 51
Table VI Differential Impacts of Health Insurance From the Exchanges on Households, With Earnings Below or Above the Model Break-Even Earnings Levels (% of Population) Workers Around the Age of 30 Workers Around the Age of 45 Single workers with no children Below Above Below Above Health plan provided through employer or union 4% 59% 6% 66% Health plan purchased directly, not related to employment 1% 2% 1% 3% Medicare, Medicaid, CHAMPUS, VA or military health care 2% 2% 1% 1% No coverage 10% 15% 7% 11% Insured, unclear type 1% 4% 1% 3% 100% 100% Married couples with two children Below Above Below Above Health plan provided through employer or union 15% 62% 22% 63% Health plan purchased directly, not related to employment 1% 2% 1% 2% Medicare, Medicaid, CHAMPUS, VA or military health care 6% 3% 2% 1% No coverage 7% 4% 5% 2% Insured, unclear type 0% 1% 1% 1% 100% 100% Source: Authors calculations based on Current Population Survey, March 2011. Only full-time workers are considered. The sample around the age of 30 has 3,106 observations of single workers and 725 observations of couples. The sample around the age of 45 has 1,755 observations of single workers and 1,640 observations of couples. According to the savings model, the break-even earnings are $18,000 for aged 30 single workers, $32,000 for aged 30 married couples, $19,000 for aged 45 single workers and $44,000 for aged 45 married couples. model and statistics indicate that, with the switch from employer-sponsored group health insurance to the exchange-based insurance, about 4% of single workers around the age of 30, 6% of singles around the age of 45, 15% of couples around the age of 30, and 22% of couples around the age of 45 would be better off. The remaining majority would be worse off. The health reform law may have no impact on a significant number of households that are currently already purchasing health insurance on the retail market or are covered by government-provided welfare or military programs. Conclusions This analysis uses a lifecycle model to measure the implications of the 2010 health reform law for living standard and retirement savings. We estimate how the target savings, replacement rates and, most importantly, consumption levels would change if workers were purchasing health insurance through the exchanges relative to the case of employer-sponsored group plans. Health care costs in the former case are expected to increase with the age of the insured. The results show that eliminating the employer sponsorship of health plans would take a large part of the budget and crowd out other consumption for moderate- and highincome households. This situation illustrates the value of employer-sponsored health plans for many households, because the federal subsidies for purchase of health insurance through the exchanges are not available to them or less than the tax-advantaged value of employer coverage. Reductions 52 benefits quarterly second quarter 2013
in the subsidy levels, as might be necessary under government deficit reduction actions, would further increase the scope and value of employer-sponsored coverage. By contrast, the availability of subsidies to purchase exchange insurance makes lower income working households better off. Looking forward, the landmark health care reform is expected to reshape the health care industry. It will have a farreaching influence on employers thinking and strategies with respect to health plan sponsorship, cost-sharing arrangements and the alignment of health programs with overall compensation. According to Towers Watson (2011), most large employers will take steps to reduce health plan costs below the thresholds that cause an excise tax to be levied on Cadillac plans in 2018, and some are considering DC arrangements or account-based health plans. Along with the emergence of new designs for group plans and exchange-based individual plans, many workers will be expected to take greater responsibility for health care and costs. For instance, the survey indicates that many employers (23%) are considering significantly reducing their subsidization of coverage for spouses and dependents by 2013 or 2014. These changes will be taking place alongside the larger decisions of employers to maintain or drop altogether the provision of health benefits to workers. Authors note: The authors thank Randall Abbott, Michael Archer, Shane Bartling, Robert Byrne, Charles Commander, Susan Farris, Mark Maselli, Stephen Parahus, Michael Orszag, Dave Osterndorf, Michael Pollack, Kevin Wagner, Joe Zimmerman and Tax Economist Forum September 21, 2011 seminar participants for useful comments. We are especially grateful for technical and data help from Ann Marie Breheny, Ryan Lore, Roland McDevitt, Steve Nyce and Mark Olson. Opinions expressed here are the authors alone, not necessarily those of their affiliation, and do not constitute saving or investment advice. Endnotes 1. This combines the 133% FPL level in PPACA with a 5% income disregard allowance. FPL is adjusted for family size and linked to the Consumer Price Index. The FPL in 2010 was $10,830 for a single person, $14,570 for a couple and $22,050 for a family with two children. 2. Most beneficiaries currently pay $96.40, a few pay $110.50 and new beneficiaries pay $115.40 for Part B in 2011. We assume $100 as a simple but close approximation of average cost across beneficiaries. 3. Employers with 50 or fewer employees are exempt from penalties. Other employers are assessed a fee of $2,000 per full-time employee, excluding 30 employees from the assessment, if they do not offer coverage and at least one full-time employee receives federal premium tax credit. Employers that provide coverage still need to pay a penalty if at least one full-time employee receives federal tax credit the penalty is the lesser of $3,000 for each employee receiving credit or $2,000 for each full-time employee. 4. Discretionary consumption increases with earnings as more income and resources become available. The average ODC in the five years before retirement is thus lower than the ODC upon retirement in Table IV. References AUTHORS Gaobo Pang, Ph.D., is a senior economist at Towers Watson. His research interests include pension finance and investment, lifecycle consumption and portfolio choice, and macroeconomic analysis. Prior to joining Towers Watson, Pang worked at World Bank, conducting macroeconomic research on sovereign debt sustainability, growth and efficiency of public spending. He can be contacted at Gaobo.Pang@towerswatson.com. Mark Warshawsky, Ph.D., is director of retirement research at Towers Watson. He is a recognized thought leader on pensions, Social Security, insurance and health care financing. Previously, Warshawsky was assistant secretary for economic policy at the Treasury Department, director of research at TIAA-CREF and senior economist at the IRS and Federal Research Board. He is on the advisory board of the Pension Research Council of the Wharton School. Warshawsky has written numerous articles, books and working papers and has testified before Congress on pensions, annuities, long-term care insurance and other economic issues. He can be contacted at Mark.Warshawsky@towerswatson.com. Bredesen, Phil, 2010, Fresh Medicine: How to Fix Reform and Build a Sustainable Health Care System, Atlantic Monthly Press, New York. Clingman, Michael and Kyle Burkhalter, 2009, Scaled Factors for Hypothetical Earnings Examples under the 2009 Trustees Report Assumptions, Actuarial Note No. 2009.3, Social Security Administration. International Foundation of Employee Benefit Plans, 2011, Health Care Reform: Employer Actions One Year Later, May. MedPAC (Medicare Payment Advisory Commission), 2010, Aligning Incentives in Medicare, Report to the Congress. Pang, Gaobo and Mark Warshawsky, 2009, Calculating Savings Rates in Working Years Needed to Maintain Living Standards in Retirement, Benefits Quarterly, Third Quarter, 25 (3), 31-42. Singhal, Shubham, Jeris Stueland and Drew Ungerman, 2011, How U.S. health care reform will affect employee benefits, McKinsey Quarterly, June. Towers Watson, 2011, Health Care Changes Ahead Survey Report. second quarter 2013 benefits quarterly 53