A new study published by Truven Health Analytics has found that employers opting to drop their health care plans in 2014 and pay the penalty imposed by the Affordable Care Act (ACA) instead of maintaining coverage for their employees will not benefit economically in the short- or long-term. Beginning in 2014, employers with 50 or more full-time employees will be required to provide “minimum essential” health care coverage for their full-time employees or pay an annual penalty of $2,000 per employee (excluding the first 30 employees). The study – Modeling the Impact of “Pay or Play Strategies on Employer Health Costs – analyzes four separate benefit design scenarios in which employers eliminate their group health coverage to determine how employers fare under this “pay or play” system.

The report includes the following key findings:

  • Employers will not experience immediate or long-term cost advantages if they choose to eliminate group health benefits.
  • It will be more costly for employers to “make employees whole” when shifting their benefits to a health insurance exchange (“Exchange”) than to continue existing group health plans.
  • Dropping employer-provided coverage will result in a significant reduction in overall employee compensation, as the incremental costs of benefits will shift to the employees.

The study concludes that:

Employers must provide market value — in benefits and compensation — to retain skilled workers and will not be able to unilaterally cut benefits and expect employees to absorb the projected inefficiency of Exchanged-based coverage. The potential penalties for dropping group plans, as well as the net gain most employees would need to receive in their compensation packages to make up for not receiving health benefits, should be enough to discourage most companies from discontinuing such services to their workers.

The report emphasized that the economics of the pay or play model will necessarily depend on how efficiently and effectively the future Exchanges function, and will therefore require further study once the law is fully implemented.

The study emphasizes that:

What is clear is that employers should not see the existence of an option not to cover their employees as a “slam dunk” cost-saving measure. An employer’s cost calculations to pay or play are much more complex than simply balancing their current group health costs against the nominal penalties under PPACA. Whether the true cost is felt by the employer or the employee, the impact is the same. Not only is eliminating group health coverage not cost efficient, it may potentially have a large impact on an employer’s competitive market position for retaining and recruiting talent.

A copy of the complete report can be downloaded here.