Why health care spending has declined at small companies

The Urban Institute Health Policy Center released a study in October 2012 during early implementation of the Affordable Care Act (ACA) that shows that spending on employer-sponsored coverage by small businesses declined since passage of ACA. The study titled “Implications of the Affordable Care Act for American Business” is quick to point out that the reduction is not attributable to cost-cutting measures in the law – these mostly affect Medicare – but rather to the accelerate cost shifting of financial burdens to employees. Cost shifting from employers and government to individual health care consumers is widely recognized as a core strategy of health care reform. In the years after 2012 we continued to see more evidence of the same strategy.

Perhaps the largest driver in the cost reduction, not covered in the report, is the massive effort by insurance agents to convert small businesses from defined benefit to defined contribution plans. This strategy preserves the agent’s relationship and insulates the employer from future cost increases. Usually this involves adoption of a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA) combined with high deductible insurance.

The Urban Institute study also indicated that the proposed online insurance exchanges have not yet had any significant effect on the small business health market. The report does not comment on speculation that many small business employers who currently offer health coverage will cancel those plans and send employees to individual health insurance exchanges in 2014. The individual health insurance exchanges will offer premium subsidies for most individuals who apply through an exchange. Since small companies are not required to provide health coverage to employees, there is little risk and now a financial incentive to disband employer-provided health insurance in favor of an uninsured medical expense reimbursement plan or supplemental medical insurance.

The study also shows costs have not decreased for larger employers (over 1



,000 employees). This is probably because these employers are less likely to be able to implement cost-shifting strategies used by smaller firms. Employers with 100 to 1,000 employees are predicted to see healthcare costs increase 4.3% this year.

Some industry reviews and public media coverage of the Urban Institute (I conclude) incorrectly attribute the cost reduction to the effects of PPACA. These comments may be politically motivated opinions not based on observed evidence.


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