The Effects of the Affordable Care Act on Employment-Based Health Insurance

March 15, 2012

CBO and the staff of the Joint Committee on Taxation (JCT) continue to expect that the Affordable Care Act (ACA)—the health care legislation enacted in March 2010—will lead to a small reduction in the number of people receiving employment-based health insurance. Some observers have expressed surprise that CBO and JCT have not expected a much larger reduction given the expanded eligibility for Medicaid and the subsidies for insurance coverage purchased through health insurance “exchanges” that will result from the ACA. CBO and JCT’s estimates take account of those factors, but they also recognize that the legislation leaves in place some financial incentives and also creates new financial incentives for firms to offer and for many people to obtain health insurance coverage through their employers.

Despite the care and effort that CBO and JCT have devoted to modeling the health insurance system and the provisions of the ACA, there is clearly a tremendous amount of uncertainty about how employers and employees will respond to the set of opportunities and incentives under that legislation. In response to questions from Members of Congress, CBO and JCT have prepared an analysis showing how the effects of the ACA on health insurance coverage would differ under alternative assumptions about the behavior of employers.

CBO and JCT’s Key Findings

  • CBO and JCT continue to expect that the ACA will lead to a small reduction in employment-based health insurance. That projection arises from the agencies’ modeling of the many changes in opportunities and incentives facing employers and employees under the ACA, and it is consistent with the findings of other analysts who have carefully modeled the nation’s health insurance system.
  • Significant changes in some of the key assumptions underlying the estimates lead to somewhat higher or lower projections of the change in employment-based health insurance and the budgetary impact of the ACA. However, differences in the projected change in employment-based health insurance tend to have limited effects on the projected budgetary impact of the law because changes in the availability and take-up of such insurance affect the federal budget through several channels that are partly offsetting. Indeed, one scenario examined here shows that larger reductions in employment-based health insurance than expected by CBO and JCT might lower rather than raise the cost of the insurance coverage provisions of the ACA.
  • In CBO and JCT’s judgment, a sharp decline in employment-based health insurance as a result of the ACA is unlikely and, if it occurred, would not dramatically increase the cost of the ACA.

CBO and JCT Estimate that About 3 Million to 5 Million Fewer People Will Obtain Employer-Based Coverage

Employers’ decisions about offering employment-based health insurance under the ACA will be influenced heavily by the subsidies available to some people through insurance exchanges and Medicaid and CHIP and by the tax treatment of employment-based insurance. CBO and JCT have estimated that many workers and their families will not be eligible for Medicaid, the Children’s Health Insurance Program (CHIP), or substantial subsidies for the purchase of health insurance through the exchanges, and that most employers will continue to have an economic incentive to offer health insurance to their employees.

In the original analysis of the impact of the legislation, CBO and JCT estimated that, on balance, the number of people obtaining coverage through their employer would be about 3 million lower in 2019 under the legislation than under prior law. As reflected in CBO’s latest baseline projections, the two agencies now anticipate that, because of the ACA, about 3 million to 5 million fewer people, on net, will obtain coverage through their employer each year from 2019 through 2022 than would have been the case under prior law.

Other analysts who have carefully modeled the nation’s existing health insurance system and the changes in incentives for employers to offer insurance coverage created by the ACA have reached conclusions similar to those of CBO and JCT or have predicted smaller declines (or even gains) in employment-based coverage owing to the law. Surveys of employers regarding their plans for offering health insurance coverage in the future have uncertain value and offer conflicting findings. One piece of evidence that may be relevant is the experience in Massachusetts, where employment-based health insurance coverage appears to have increased since that state’s reforms, which are similar but not identical to those in the ACA, were implemented.

Under Alternative Assumptions about Employers’ Behavior, the Effects of the ACA on Both Insurance Coverage and the Federal Budget Differ from Those in the Baseline

If a firm chose not to offer insurance coverage under the ACA, some of its workers and their families might enroll in Medicaid or CHIP or be eligible to receive subsidies through the insurance exchanges; as a result, the cost of those programs would increase. At the same time, the reduction in that firm’s compensation to workers that was provided in the form of health benefits would generally be offset by an increase in the compensation it provided in the form of wages and salaries. Because health benefits are generally not taxed but wages and salaries are, that shift in the composition of compensation would raise federal revenues. In addition, the federal government would generally receive penalty payments from the employer and from any employees who ended up without health insurance.

With those cross currents, the net effect of a larger reduction in employment-based insurance coverage on the budgetary impact of the ACA depends crucially on the share of the workers and their families losing such coverage who are eligible for Medicaid, CHIP, or exchange subsidies and on the tax rates those workers pay. If an additional firm with a large share of low-income workers chose not to offer insurance coverage, the net effect would tend to be an increase in the federal budgetary cost of the ACA’s coverage provisions; if an additional firm with a small share of low-income workers chose not to offer insurance coverage, the net effect would tend to be a decrease in the federal budgetary cost of the ACA’s coverage provisions.

In the four alternative scenarios examined, the ACA changes the number of people who will obtain health insurance coverage through their employer in 2019 by an amount that ranges from a reduction of 20 million to a gain of 3 million relative to what would have occurred otherwise. Compared with the March 2012 baseline projections for that year, the estimates under those alternative scenarios range from an additional decline of 14 million to a gain of 8 million people with employment-based coverage. In the scenario with the greatest additional reduction in employment-based coverage owing to the ACA (14 million), the number of enrollees who purchase health insurance through insurance exchanges is 9 million higher, the number of enrollees in Medicaid and CHIP is 2 million higher, and the number of uninsured is 2 million higher, than in the baseline projections.

In the March 2012 baseline projections, the insurance coverage provisions of the ACA have an estimated net cost to the federal government of $1,252 billion over the eleven-year period from 2012 through 2022. Under the four alternative scenarios examined here, that projected net cost ranges from $1,170 billion to $1,297 billion, representing differences relative to the baseline projections that range from a decrease of $82 billion (or 7 percent) to an increase of $45 billion (or 4 percent). The scenarios with the larger estimated costs are the ones in which additional reductions in employment-based coverage relative to the baseline projections are concentrated among low-income workers.

In contrast, the scenario with the largest reduction in employment-based coverage actually lowers the cost of the ACA to the federal government relative to the baseline projections because the extra costs for Medicaid and exchange subsidies are more than offset by the increased revenues resulting from higher taxable compensation among workers who receive higher wages in lieu of health benefits.

Jessica Banthin and Paul Jacobs of CBO’s Health and Human Resources Division prepared this report, which draws on the work of many analysts at CBO and JCT.