Millions of Americans who need to buy health insurance are eligible for federal subsidies. But the government may have underfunded the expense by billions of dollars, according to Stanford researchers.
In a recent article published in Health Affairs, the researchers expose the remarkable control employers will soon have on federal revenue. Employers will soon decide whether to continue providing health insurance to their employees, cut their coverage or increase premiums that workers pay.
These choices will in part determine whether it will be financially beneficial for workers to buy insurance through the government’s new health insurance exchanges, rather than be insured through their employers. And such decisions could change government expenditures by billions of dollars– a potential spending increase that the federal government has likely not accounted for.
"There’s going to be a lot more federal money required for insurance subsidies than people are ready for," said Jay Bhattacharya, an associate professor of medicine at Stanford and a core faculty member of Stanford Health Policy, a center at the university’s Freeman Spogli Institute for International Studies. Bhattacharya co-authored the study with medical students Daniel Austin, Anna Luan and Louise Wang from Stanford.
Because a lot of employers and employees are going to realize that employer-provided coverage isn’t worth it – that it makes more economic sense for their employees to get health insurance through the exchanges,” Bhattacharya said.
As of Oct. 1, millions of Americans began receiving federal subsidies to buy health insurance under the Affordable Care Act. People are eligible for a subsidy if they earn between 133 and 400 percent of the poverty level. For individuals, that’s between $14,404 and $43,320. And for a family of four, the range is between $29,326 and $88,200. The subsidies from the government amount to $9,247 for a family of four living on $56,604 a year.
The new health care law assumes that workers who already have affordable insurance through their employers will not use the exchanges, though no mechanism is in place to check that a person using a subsidy isn’t already insured. And while there is a penalty – about $3,000 per employee after the first 50 employees – to large employers who stop offering health insurance, it is often cheaper for an organization to pay the fine. Providing insurance to cover an employee’s family could cost a business $16,000 or more to cover an employee’s family.
Bhattacharya was interested in understanding the financial implications for the federal government should an employer decide to keep or end its health insurance coverage for employees eligible for subsidies. So he and his colleagues modeled how much the federal government would have to provide in subsidies if an employer stopped providing health insurance to workers, and those employees then used the federal subsidies to buy themselves insurance on the exchanges.
“These decisions that employers are making about whether or not to provide their employees health insurance has a huge effect on federal government spending,” Bhattacharya said.
According to the researchers’ calculations, if everyone who would benefit financially from receiving health insurance through the exchanges rather than from their employer chose to buy insurance on the exchanges, the federal government would be on the hook for $132 billion per year to pay for the subsidized insurance. While not everyone who benefits financially from dropping employer-based coverage will do so, Bhattacharya estimates that federal costs would climb by nearly $7 billion if employers raise health insurance premiums by even just $100 because it would induce millions of employees to switch to exchange-based coverage.
In many instances, Bhattacharya pointed out, companies can still ensure their employees have benefits and make more money by cutting their workers’ health insurance if they’re eligible for subsidies, paying their employees a slightly higher salary and encouraging them to receive the federal subsidies and buy their own policies. But doing so puts a heavier financial burden on the government.
On the flip side, if more employers decide to offer health insurance – perhaps wanting to avoid the small penalty or because of the appearance of not offering a basic benefit – the government could end up spending a lot less on subsidies. But Bhattacharya expects that is unlikely.
The study used data from the Medical Expenditure Panel Survey Household Component – a national survey of household health care use, insurance status, and health expenses, as well as demographic and socioeconomic information – to construct a model. The model revealed that as employees’ health insurance contributions rise (when their insurance is provided by an employer), employees are increasingly enticed to drop their employer coverage and buy insurance through the exchange. Among workers who qualify for a subsidy and see an increase of $100 in their employer-based premium contribution levels, 2.25 million individuals would choose to instead buy insurance on the exchanges – increasing federal spending for subsidies by $6.7 billion.
“In the model we assume that if there’s a $1 benefit, employees will drop their employer-sponsored coverage. In reality there’s a lot of inertia and you most likely won’t get that $1 increase,” Bhattacharya said. “On the other hand, in the medium run, employers might say ‘employees will benefit if I drop coverage. I can raise their wages, and they’ll get better coverage on the exchanges.’”
Teal Pennebaker is a Washgington, D.C.-based freelance writer and former information editor and external relations coorinator at Stanford Health Policy.
FSI researchers work to understand continuity and change in societies as they confront their problems and opportunities. This includes the implications of 
