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The shift away from employer-provided health insurance will

be vastly greater than expected and will make sense for many
companies and lower-income workers alike.

Shubham Singhal, Jeris Stueland, and Drew Ungerman

7

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 S

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A transformed employer market

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What the law says

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 =
Implications
for health insurers Group insurance, sold mostly to
companies and institutions, is the
mainstay of commercial payers. This
industry will change significantly in
the wake of the Affordable Care Act.
Competitors will emerge to serve new
needs, such as providing a seamless
transition for workers moving from
employer-sponsored insurance
(ESI) to public- or private-insurance
exchanges or other coverage options. In
response, payers must develop a better
understanding of their customers and
new capabilities to serve them. Three
themes will underpin the moves of
winning payers.
Segmenting and managing a
changing group market
The ranks of the insured in the group
market are in play. Payers must sharpen
their account-planning and execution
skills to identify the optimal benefit
strategy for each employer. They must
also develop approaches to capture
employees likely to shift from ESI to
the individual market—for instance, by
offering desirable product and price
combinations and having staff on site
to help people who lose coverage from
their employers. Our research shows
that more than 70 percent of employees
would stay with their insurer if it offers
a seamless transition and appropriate
products. Each payer also must
understand how changing employer
benefit strategies will shift the risk
profile of its membership and set prices
appropriately.
Catering to the new mix of ESI-
covered employees
For companies continuing to offer ESI,
the ability of a payer to differentiate
itself through products and services
will be more important than costs: the
insured population will shift toward
higher-income employees who will
be less price sensitive, so more
comprehensive or value-added plan
designs will be essential. In addition,
payers should consider offering a
broader suite of supplemental products
(such as life, disability, dental, and
vision insurance) and membership in
concierge or preferred-access physician
groups. Better-off customers will have
higher expectations, so payers could
differentiate themselves by offering
service levels beyond a basic call
center to answer inquiries. They could,
for example, offer services to help
consumers find the right providers,
schedule appointments, and deal with
billing issues.
Shifting to a consumer-centric
coverage model
For employers that move away from
traditional ESI health benefits, coverage
models will proliferate—for subsidized
and unsubsidized employees,
increasingly part-time workforces,
defined-contribution models, and
private exchanges. Employees will
inevitably become more involved
with their insurance choices, while
the employer’s role will change from
insurance plan sponsor to facilitator of
 >

employees’ choices. This development Payers must also reevaluate their

opens the way for consumer-focused
attackers to emerge as distribution
intermediaries.
To stay ahead, payers must not only
sell products and services that help
employers make this shift but also reach
employees more directly. Payers must,
for example, offer employees advice
about their plan choices—advice based
on a detailed understanding of each
employee’s health care options and
economics—and a seamless platform
to help employees choose the right
coverage. Products must include tools
to help consumers better understand
and use their benefits, to provide advice
and support for healthy living, and to
enable frictionless claims processing.
The further a company shifts from ESI,
the more consumer focused a payer’s
response must be.
marketing approaches and the
effectiveness of their sales force.
Employees and end-consumers should
be targeted with tailored messages—for
example, to persuade lower-income
employees to remain with the payer’s
brand (whether through ESI plans or an
individual exchange) and to convince
higher-income employees that the
payer’s customer service levels are
distinctive. As employers explore
options beyond ESI, they will rely on
a payer’s sales force to help them
design the benefit package best suited
to their own workers. To do so, the
sales force will need a comprehensive
understanding of reform’s economic
implications for a variety of employee
segments and develop more
sophisticated consultative-selling skills.

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V

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Estimating the employer impact

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Getting ready for the new world

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Explore the economics of postreform benefits

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Maximize the ROI of the benefit package

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 b
The range of coverage
options for employers Instead of completely dropping
employer-sponsored insurance (ESI),
employers could also choose, in effect,
to cover only part of their workforce,
without violating the provisions of
reform that prohibit employers from
discriminating against lower-income
employees in a health benefits offering.
One way of doing so would be to
increase the proportion of part-time
workers, for whom employers are
not required to provide coverage. In
industries with a high proportion of low-
wage employees not covered by ESI
today, such as retailing and food service,
this approach allows the employer to
avoid significant additional medical
costs while still providing coverage
to higher-income management and
corporate employees.
Another option is restructuring into two
separate companies: one comprising
management and corporate employees
who would receive ESI, the other lower-
wage employees who would not. Given
the income-indexed exchange subsidies,
both populations of employees could be
better off in this scenario.
One option likely to help most
employers economically is setting the
employee premium above 9.5 percent
of the household income of lower-
wage workers, so these employees
can opt out of ESI and receive the
same exchange subsidies they would
if their employer did not offer ESI. All
employees who opt out and receive
these subsidies will pay less out of
pocket than they would with ESI, as
the maximum any subsidized individual
spends toward an exchange policy will
be 9.5 percent of his or her household
income. If employees opt out and
receive an exchange subsidy, the
employer pays a penalty: $3,000 for
each employee who does so or $2,000
for every employee, minus the first
30—whichever is less. That will be lower
than what the employer would have
paid toward ESI for that employee. For
all employees who remain with ESI, the
employer has still shifted more of the
premium’s cost to them.
If employers could adjust premium
costs perfectly, so that every person
with a household income below 400
percent of the federal poverty level
had an ESI premium above 9.5 percent
of household income, our economic
projections show that about 60 percent
of employees could be made eligible
for subsidies. This level of premium
adjustment would be difficult in
practice. If employers set premiums
so that the bottom quartile (by income)
of their employees becomes eligible
for subsidies, however, our economic
modeling shows that over 90 percent
of employers will benefit economically.
That remains true if some employees
eligible for subsidies prefer to remain
on ESI because of the time and effort
required to switch.
!?

Even if premium sharing isn’t increased
intentionally to shift lower-income
employees to an exchange, so long
as employers’ medical costs continue
to increase faster than wages, more
employees will become eligible for
subsidies every year. Assuming that
employee ESI premiums continue to
increase at the current rate of 9 percent
for employers’ medical costs, about 15
percent of employees’ families will be
eligible for subsidies in 2014, growing to
20 percent in 2016 and to 28 percent in
2018. This will happen without a single
employer discontinuing coverage or
increasing premiums above its level of
medical-cost inflation.

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Design benefit packages for higher-income employees

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Satisfy employee health and wellness needs

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Related thinking
“Designing better employee
benefits”
“Linking employee benefits
to talent management”
“Conversations on health
care reform: John
Hammergren of McKesson”
“Conversations on health
care reform: Harvey
Fineberg of the Institute of
Medicine”
“Conversations on
health care reform: Rick
Anderson of PTV Sciences”
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."14%'0<#15(41//<3'27'51#<'4+5*1#("&'0.+*')"1/%)'(#&8.1#4"'4+E".16"9'%)"'6+E".#5"#%'
4+8/0'(#4."1&"'%)"'"5*/+<".'*"#1/%<'+.'.1(&"'%1Q"&3'M5*/+<".&'>(//'#""0'%+'!"'1>1."'+7'
14%(+#&'!<'*1.%(4(*1#%&'1%'1#<'*+(#%'1/+#6'%)"')"1/%)'41."'E1/8"'4)1(#'1#0'*."*1."'%+'101*%'
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-)"%)".'<+8.'4+5*1#<'(&'*+(&"0'%+'&)(7%'7.+5'"5*/+<".=&*+#&+."0'(#&8.1#4"'+.'>(//'
4+#%(#8"'%+'+77".'%)"'&15"'!"#"$%'*14F16"'(%'0+"&'#+>9')"1/%)'41."'."7+.5'>(//'4)1#6"'%)"'
"4+#+5(4&'+7'<+8.'>+.F7+.4"'1#0'!"#"$%&9'1&'>"//'1&')+>'<+8.'"5*/+<""&'E1/8"'4+E".16"3'
f#0".&%1#0(#6'%)"&"'4)1#6"&'1%'1'6.1#8/1.'/"E"/'>(//'"#1!/"'<+8.'4+5*1#<'%+'61(#'+.'
0"7"#0'1'4+5*"%(%(E"'10E1#%16"'(#'%)"'(#4."1&(#6/<'0<#15(4'51.F"%'7+.'%1/"#%3
The authors wish to thank Erica Hutchins Coe and Gene Kuo for their contributions to the development of this article.
Shubham Singhal is a director in McKinsey’s Detroit office, Jeris Stueland is a consultant in the New Jersey office, and
Drew Ungerman is a principal in the Dallas office. Copyright © 2011 McKinsey & Company. All rights reserved.