employers

If Obamacare survives, employers may do it in

May 11, 2012: 5:00 AM ET

Whether or not the Supreme Court rules in favor of the president's health care plan, companies are going to find a way to cut costs.

By Geoff Colvin, senior editor-at-large

FORTUNE -- What Fortune 500 companies really want from U.S. health care reform is pretty basic: They want sustainable costs and healthy, productive employees. But business doesn't just want those things; it desperately needs them, and it's going to get them, one way or another. How it gets them -- the answer will depend partly on the Supreme Court's Obamacare decision in June -- could be traumatic for America's health care system.

The American health care system is almost unique in the extent to which it funnels health spending through employers. Most of the big developed nations use some type of universal single-payer system that socializes health costs across the entire economy. But about 60% of U.S. health care spending goes through employers via employer-sponsored medical insurance. That's an expense that many of those companies' competitors in the global economy don't bear.

Exacerbating the problem is America's world-topping level of health care spending -- $7,164 per person in 2008, says the World Health Organization, vs. $3,922 in Germany and $265 in China. Making the problem worse, those costs are rising much faster in America than in any other major economy and are growing more rapidly than the U.S. economy. That is an unsustainable trend: If employers' health care costs keep increasing faster than revenues, eventually 100% of revenues will be used to pay health care costs. As economist Herb Stein so wisely observed, if something can't go on forever, it will stop.

Exactly how will it stop? Pre-Obamacare, America's largest employers (banding together as the National Business Group on Healthcare) had a plan for controlling their employee health costs. Obamacare didn't give them much of what they wanted. They favored an individual mandate -- everyone must have insurance -- which Obamacare famously includes, but they wanted to let the market set premiums. They wanted the favorable tax treatment of employer-provided insurance to remain undiluted, which it won't be; so-called Cadillac plans will be slammed with a 40% excise tax.

More: 5 ways to healthier employees

How big employers now control costs will depend on two giant decisions. First is the Supreme Court's ruling on the constitutionality of the individual mandate. If the justices give it a thumbs-down, employers are in a quandary. They like a mandate because it could lower their insurance costs by forcing more people into the risk pool, and in a world where everyone is legally required to maintain insurance, employers may feel less pressure to offer it. If the mandate is upheld, then everything depends on the second big decision: the voters' choice in November. A Republican sweep would probably mean Obamacare's repeal, while a more muddled election result probably wouldn't.

Either of the two big decisions could kill Obamacare. If that happens, then another epic onslaught of lobbying will determine what comes next, with unforeseeable results. But if it survives, then employers face only a few options for controlling health care costs as they must.

One response is to stop providing coverage for employees and let them buy it on the new exchanges. As Fortune wrote in 2010, major employers, including AT&T (T) and Caterpillar (CAT), have begun considering that option; they'd have to pay a penalty and give employees raises, but they'd still save significant money. Another option for big employers that self-insure would be to maintain coverage but tweak it by raising co-pays or limiting the number of specialists in the network, thus nudging the sickest employees toward the exchanges. If many employers were to take either of those roads, Obamacare's finances wouldn't work as intended, and the program would have to be altered.

So we're looking at three major uncertainties: the Supreme Court, the election, and the behavior of major employers. That's a lot of moving parts. Just remember that today's situation is unsustainable. Employers need to get their health costs under control, and they will. For their employees and the country, much depends on how they do it.

This story is from the May 21, 2012 issue of Fortune.

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