The Decline of Employer-Based Health Insurance

The global consulting firm McKinsey & Company set off a firestorm when it released a report last week suggesting that 30 percent of U.S. businesses will stop offering health care benefits to their employees after most of the provisions of the Affordable Care Act go into effect in 2014.

The White House was quick to challenge the validity of the report, noting that McKinsey has so far refused to provide any details of the methodology used to reach its conclusion. All McKinsey will say is that its report was based on a survey of 1,300 employers and "other proprietary research."

White House deputy chief of staff Nancy-Ann DeParle, who previously headed the president's office of health care reform, called it an "outlier" and cited other studies predicting that few if any employers would drop coverage because of the Affordable Health Care Act.

Congressional Republicans were just as quick to defend the McKinsey report, which they are citing as fresh evidence that the new federal law -- crafted in part to protect the employer-based system -- will have disastrous consequences.

Employer-Based Health Insurance System is Crumbling

Who's right? Well, pardon the cliché, but only time will tell. What we can say for sure right now is that the hubbub over the McKinsey report has obscured a reality neither side is acknowledging. What is indisputably true is that the employer-based system has been crumbling for several years. And, with or without the Affordable Care Act, it's very possibly on its last legs. Repealing the law, as every GOP presidential candidate pledged to do during the debate in New Hampshire Tuesday night, would probably only hasten its complete collapse.

When I began working in the insurance industry in 1989, the vast majority of Americans -- well over two-thirds of the population -- got their coverage through employers. Just about every year since then, the percentage has been declining.

According to the Economic Policy Institute, the share of Americans with employer-sponsored health insurance declined from 64.2 percent in 2000 to 58.5 percent in 2008. Most of that decline occurred during the Bush Administration, and before the most recent recession began.

The figure is undoubtedly lower today because millions of workers lost their jobs -- and along with them, their health insurance -- during the recent economic downtown. When the recession officially began in December 2007, the U.S. unemployment rate was just 5 percent. It peaked at 10.1 percent in October 2009, four months after the official end of the recession, but it is still more than 9 percent today.

Another factor in the decline of Americans with employer-sponsored coverage is that the number of businesses still offering it has also dropped precipitously in recent years. The Kaiser Family Foundation, which keeps track of health insurance trends, found that the number of firms offering coverage fell from 69 percent in 2000 to 60 percent in 2009. The erosion was even more pronounced among companies with fewer than 10 workers, falling from 57 percent to 46 percent during the same period.

According to Gallup, the situation has only gotten worse since 2009. In a November, 2010 Gallup poll, just 44.8 percent of American adults reported having health insurance provided through their employer.

One of the less obvious reasons for the unraveling of the employer-based system is that an ever-increasing number of workers are taking a pass on the coverage even if their employers still offer it, according to the Employee Benefit Research Institute. Why? Because employers are requiring that their workers pay a bigger portion of the premiums, and they're making them pay more out of their own pockets in the form of higher deductibles and co-payments. Many workers simply can't afford to take on the additional financial burden.

Collective Punishment for the Insured

The insurance industry has also played a leading role in the decline of the employer-based system. The reason more and more small employers are no longer offering coverage is because many of them have been "purged" by their insurance carriers. Insurers routinely "purge" employer customers they believe have become too much of a risk to profits. All it takes is one employee of a small business -- or the spouse or child of one employee -- to get critically ill for the company's insurer to jack up rates so high that the business owner has no choice but to drop coverage for everyone.

A survey conducted last month, by Crain's Detroit Business of 300 small businesses in Michigan found that 24 percent considered canceling their health care coverage this year, primarily because of premium increases demanded by their insurance carriers.

Behind all these numbers are real people. In the coming weeks, to take us from the abstract world of figures to the real world of American-style health insurance, I will be writing about the experiences of several small business owners who say they want to continue offering health care benefits to their employees but are finding it increasingly difficult to do so.