A new report by the market research firm S&P Capital IQ concludes that S&P 500 companies could potentially save up to $700 billion through 2025 from the Affordable Care Act (ACA) – a figure the analysts say represents about 4 percent of the total current value of S&P 500 stock.
Furthermore, the report concludes, total savings for all U.S. companies with 50 or more employees could amount to as much as $3.25 trillion through 2025. “By shifting insurance responsibility to the employee,” the analysis finds, “the ACA presents an opportunity for U.S. companies to radically redefine the role they play in the health care system”:
Over the long run, the ACA may eventually come to be historically recognized as the starting point of the reconstruction of the U.S. health care benefit industry and a catalyst for how companies provide health care insurance for their employees. In this regard, the ACA is akin to the creation of the Individual Retirement Account (IRA) as a byproduct of Congress first passing the Employee Retirement Security Act (ERISA) in 1974. The ERISA legislation was primarily designed to enable, protect, enhance, and thus modernize the accumulation of retirement benefits over the course of an individual’s working career. This legislation ushered in an evolutionary process, which for close to the last half century has seen employers gradually and consistently migrate away from the defined benefit pension structure in favor of the defined contribution approach, including IRAs, Keogh plans, and 401k plans.
By extension, the implementation of the ACA is the start of a process that will transform the health care industry. If efforts to amend the law are crafted carefully, the evolution of the health care benefit market through a partnership of government oversight and an enforcement of minimum coverage standards, combined with nationwide private sector competition among the insurers, could custom tailor benefits to the needs of the individual consumer while simultaneously increasing affordability.
This report is among the first to envision the long-term impacts of the Affordable Care Act from the perspective of U.S. companies. We spoke to lead author Michael Thompson, Managing Director of S&P Capital IQ Global Markets Intelligence, for some insights behind these conclusions.
R3.0: You say that once companies start departing from the old model of employer coverage, there’s going to be a tipping point and everyone’s going to follow suit. What would prompt those early adopters to start making a switch, and how soon do you see that happening?
Thompson: This is an estimate we made based on information we gathered from various sources. There is no definitive answer. First of all, there’s still so much left to be determined in terms of the clarity of the ACA. It would be a competitive disadvantage for corporations to take the risk of dislocating their employees right now. If a corporation told its employees today that it would be going to an exchange, that probably wouldn’t be very good news for the employees at this stage of the game.
Thompson: We did not, but there are some other potential savings. For example, lots of corporate plans cover retirees. You can assume that retirees would be part of any transition, and that would be big savings. We also didn’t include [cost savings by] religious institutions, universities and foundations. Our target audience is particularly interested in the impact on the S&P 500 because that’s a proxy for the wealth of U.S. equity stock. In a lot of ways, we were actually pretty conservative on that point. On the other hand, this is just gross savings. This is not net savings. That’s important. To calculate net savings, you’d have to calculate effective tax rates, and that fluctuates from year to year.
R3.0: There might be some assumptions people could make about what companies would do with these cost savings, but from your conversations with companies, if this money that companies are not spending on health care costs is freed up, what are the alternative ways this money could be spent?
Thompson: Cash is not a problem for American companies. There’s no shortage of cash – well above $1 trillion – and there’s no shortage of attractive debt opportunities in the global market. This is another potentially significant way of streamlining or creating efficiencies at the expense of somebody else. It’s a transfer of expense to the government.
R3.0: Investors have become much more intertwined in the policy world, and you can affect so much of what’s happening to companies through policy. The analogy that you raised to the creation of Individual Retirement Accounts (IRAs) raises all sorts of policy questions about what companies will have to deal with in the future. What will companies have to grapple with?
Thompson: In the post World War II era, there are three components to the employer-employee compact – cash compensation, retirement and health care. We thought [IRAs] was a good analogy because of the transitions that have to be made.
What I take away from this is that there’s a problem that needs to be solved, and you have to have the framework by which to address it. [The analogy to IRAs] may not be exact, but this is how we approached it for purposes of creating some perspective and transparency for an institutional investor who makes decisions based on what they think the opportunities are for wealth creation for U.S. equity stock.
Read the full report here: