Is Your Health Insurance Plan Safe?

Peter Santiago is the sort of American President Obama pledged to help with his signature health care law. In 2009, Santiago needed emergency abdominal surgery. Because his coverage had lapsed, the operation left the then 21-year-old saddled with $118,000 in medical debt that eventually forced him to declare personal bankruptcy. Due to a pre-existing heart condition, Santiago was also unable to buy affordable insurance on the open market. So last year he took a part-time job at Trader Joe’s that offered him coverage. “Trader Joe’s was a godsend,” he says.

Now Santiago’s employer has informed him that his insurance may soon be canceled. The Monrovia, Calif.–based grocer announced earlier this year that it would discontinue health coverage for employees who work fewer than 30 hours per week, citing the Affordable Care Act (ACA) as the reason. “I voted for Obama the last two times,” says Santiago, a Southern California native. “After thinking Obamacare was going to be something great, it’s a huge letdown. The things changing to make Obamacare work are so twisted.”

Since the launch of HealthCare.gov on Oct. 1, most of the media focus has been on the website’s problems and on people who bought policies individually and may be facing cancellations. But beyond all that, a more profound disruption looms. Policy experts, economists and employers say work-sponsored health coverage–the foundation of the U.S. private-insurance system–is shifting. A decade from now, if you work for a large corporation, you may find that your weight, blood pressure and how many times you hit the treadmill each week determine how big a bite health care takes out of your salary. If you have insurance through a part-time job or a small business, that coverage could disappear completely. And no matter what you do for a living, you will increasingly be forced to think about health care the way you might think about getting a new car or television–as an engaged consumer, not a passive beneficiary.

Health benefits have been a defining feature of the U.S. labor market for more than half a century. Some 150 million Americans depend on employers for their health plans, more than are covered by all other insurance systems combined. But job-based insurance has been eroding as health care costs have risen and wages have stagnated. “We’ve seen a fairly continuous decline in employer-sponsored insurance over the past 15 or 20 years,” says MIT professor Jonathan Gruber, who worked as a paid government consultant to help craft the ACA. Administration officials say the law’s new regulations will shore up the employer-based insurance system, but the Congressional Budget Office predicts that by 2018, 7 million fewer people will be covered through work than if the law had never existed in the first place.

Shifts in the employer-based system that had been happening gradually–and often unnoticed by workers year over year–are beginning to accelerate. Home Depot, which offered a limited-liability policy to part-timers, recently announced it will end the plan in 2014. UPS said earlier this year that it would cancel coverage for some employees’ spouses. Petco, Walgreen’s, Sears, IBM and Time Warner, TIME’s parent company, have recently turned to private insurance exchanges in place of traditional company health plans for some active and retired workers.

Not all these changes are driven by Obamacare–nothing in the law requires Trader Joe’s to end its coverage for part-time workers, for instance. And yet the law has provided an excuse for some companies to make significant changes to their benefit packages. The ACA’s new regulations and fees could also increase costs for employers and force some to alter health benefits. “Inevitably, as the years roll on, more and more people will be affected by these provisions,” says Paul Ginsburg, an economist with the nonpartisan Center for Studying Health System Change.

For proponents of the law, such changes are a small price to pay for the greater good of insuring tens of millions more Americans and attempting to contain exploding health care spending. “Think of the employer insurance system as a crumbling building,” explains Gruber. “It’s been crumbling over time, and people have been getting thrown off the building with nowhere to go.” The Affordable Care Act, he argues, is creating a net to catch these people. “But in doing so, a few more people are going to fall off the building.”

Unintended Consequences

It’s an accident of history that so many Americans depend on employers for their health insurance. During World War II, the federal government froze private-sector wages but allowed firms to attract and retain workers by offering fringe benefits, including health insurance. Health coverage and employment have been linked ever since. Job-based coverage reduces employee and employer tax liabilities to the tune of about $250 billion a year, the largest single exemption in the federal tax code.

The cost of employer-sponsored health coverage has historically grown at a rate far outpacing inflation, in part because of this tax break. But generous workplace plans have a downside. Economists say they encourage overuse of the health care system and insulate workers from understanding the true costs. Why not go to the doctor at the sign of every sniffle if all it costs is a $10 co-pay? “Most experts agree that having an unlimited tax break for employer contributions to health plans does not necessarily promote efficiency,” says Jeanne Lambrew, deputy assistant to the President for health policy. The ACA imposes a hefty fee, known as a “Cadillac tax,” on high-priced insurance premiums beginning in 2018. To avoid this tax, some employers are likely to scale back plans by narrowing doctor networks and raising deductibles and co-pays.

Since 2010, health-insurance premiums have grown more slowly, which Administration officials attribute to the ACA. To be sure, some of the law’s provisions–like limits on insurers’ profits–have helped curb cost growth. But the U.S. economy has also been stuck in neutral, causing a slowdown in spending of all types. If the economy picks up, so could health care costs. “What is today’s Chevy will be tomorrow’s Cadillac, just by pure trend,” says Tresia Franklin, human-resources director for Hallmark, which provides coverage for some 8,000 employees.

Even if companies don’t alter the plans they offer, many are trying to cut costs by launching wellness programs that reward workers for improving their health–or penalize those who don’t. Such programs have already become more popular under Obamacare. “If I as an employer am going to offer you benefits, I expect you as an employee to take care of yourself,” says Larry Boress, president of Midwest Business Group on Health, a nonprofit coalition of large corporations.

A recent survey by Aon Hewitt, a benefits consulting firm, found that 58% of employers offered monetary and nonmonetary awards in 2012 to employees who made measurable “lifestyle modifications” like quitting smoking, losing weight or better managing cholesterol and blood pressure. Some of the country’s large employers, like BP and Toyota, have also recently opened on-site clinics to make access to care easier and to reduce workers’ time off the job. Mercer, another benefits consulting firm, reported that 37% of companies with more than 5,000 employees operated on-site clinics in 2012, up from 32% in 2011.

Who’s In, Who’s Out

The Affordable Care Act’s strategy to protect the employer health-insurance system depends on fining companies that don’t provide affordable coverage to workers. But at $2,000 per employee, the fines are far lower than the cost of providing health insurance and may not be large enough to keep employers in the health-benefits game forever. There’s also no penalty for denying coverage to workers like Santiago who log fewer than 30 hours per week on the job. And companies with fewer than 50 workers are exempt altogether. Those who work for businesses with three to 49 employees account for about 20% of all Americans covered by job-sponsored insurance. Coverage for these workers has been eroding even faster.

Cynthia Kay, who owns a communications company in Grand Rapids, Mich., has offered comprehensive health insurance to her seven-person staff since she started the firm 26 years ago. Until a few years ago, she paid the entire premium for each employee health policy. “When I tell people this, they are astounded,” says Kay. Offering high-quality coverage at no cost to her workers helped her compete for talent with larger firms, she adds.

But in 2010, when the price of the two plans offered through her small-group policy went up 24% and 19%, she started requiring her employees to help cover the cost. Kay and her employees have paid more every year since. One plan Kay was offered for 2014 by her insurer, Humana, costs 47% more than what she’s paying now, primarily because insurers are required under the ACA to set prices irrespective of health. (Kay’s employees are younger and healthier than the average small-group pool, so she had been able to pay less for her coverage before the law.) To Kay’s relief, Humana has allowed her to avoid Obamacare’s regulations for another year through a loophole. “That’s going to buy me some time,” she says. And after that? “We might have to look at raising employees’ salaries and getting out of the business of providing insurance.”

Obama aides say this may not be a bad thing. “While the law helps to strengthen employer-based coverage, there are some people for whom employer-based coverage is not the right solution,” says Lambrew. The health care law creates new insurance exchanges for individuals, allowing them to buy into stable group coverage previously accessible only through workplace plans. Tax credits to help subsidize coverage are also available to those earning up to about $46,000 in 2014. (Trader Joe’s says 70% of part-time workers affected by its benefit change will pay less for coverage through Obamacare, in part because of the subsidies.) If the technical problems are ironed out, Obamacare could also make it less frightening for American workers to leave large employers to start their own businesses. “The Affordable Care Act completely changed the playing field,” says Paul Fronstin, an economist at the Employee Benefit Research Institute. “It provides an alternative to employer-based coverage that never existed before.”

How the employer-based system and the exchanges will mesh is unclear. “In the long term, there are going to be frictions between these two systems,” says economist Ginsburg. Faced with this uncertainty, some companies have recently turned to insurance marketplaces free of government control. Walgreens said it is moving some 160,000 workers into a private exchange run by Aon Hewitt. The pharmacy chain will provide subsidies to workers that can be used for the purchase of health plans; it joins Sears, which moved employees to Aon Hewitt’s exchange last year.

Ken Sperling, the head of private-exchange development for Aon Hewitt, likens employer contributions in private exchanges to “gift cards” and says the marketplaces increase transparency and competition. Says Sperling: “Writing a blank check and letting people access health care wherever and however they want, no matter what the price, is not sustainable.”

Touching the Untouchables

On Nov. 14, Obama offered a more detailed explanation of what he meant when he said Americans could keep their health plans under Obamacare. He said he was not referring to the individual market, where policies have been canceled by the millions this fall. “When I said you can keep your health care, you know, I’m looking at folks who’ve got employer-based health care,” he said. “I’m looking at folks who’ve got Medicare and Medicaid. And that accounts for the vast majority of Americans.”

But in the long run, Obama’s promise may ring hollow for those with employer-based coverage as well. Obamacare allows workplace insurance that existed before it became law to avoid regulations through a grandfathering provision, but only if such plans remain largely unchanged. “The purpose of the grandfather regulation is to help people keep existing health plans that are working for them,” federal officials wrote in a 2010 statement announcing the rule. But according to an analysis by the Kaiser Family Foundation, just 36% of those with workplace health benefits were enrolled in grandfathered plans in 2013. The rest have coverage that will need to comply with new ACA regulations–including 100% coverage for preventive services–beginning in 2014. This could impact the design and cost of job-sponsored plans.

Administration officials have pointed out that after Massachusetts implemented an Obamacare-like version of health reform in 2007, the percentage of employers offering coverage to workers increased. In addition, they say, much of the coverage Americans will lose under the ACA is low-quality insurance that does not protect consumers from financial ruin. Indeed, the plans Home Depot is canceling offered coverage capped at $10,000 or $20,000 per year, far short of what would protect workers from bankruptcy if they faced a serious health problem like cancer. But this was not the case with Trader Joe’s. The chain’s health plan for part-time workers was traditional coverage similar to that offered by midsize and large firms to full-time workers nationwide. “It’s the best of the best,” says Santiago. “That’s why it really hurts now.”

Santiago is devastated that he may lose his coverage next year. He has looked at plans for sale through California’s new insurance exchange but says he can’t find an affordable plan with a network that includes his heart doctors. He also says the deductibles are too high. Trader Joe’s has said it will give part-time employees working at least 15 hours a week $500 to help pay for a new individual plan. “What is the $500 going to do for me,” he asks, “if my deductible is five grand?”

For now, Santiago is focused on getting his weekly hours above the new 30-hour minimum needed for coverage under the ACA. He says he tries to show up ahead of time for his shifts, hoping to clock in early, and calls his store on his days off asking managers if they can use extra help. But time is running out. Trader Joe’s will begin its new coverage-eligibility system in January. Says Santiago: “The last I heard, 27.81 hours was my average.”