A federal appeals court has heard oral arguments in which a group of 26 states, led by Florida, is asking a judge to uphold a ruling by federal district Judge Roger Vinson that struck the individual mandate in the federal health reform package, and brought the rest of the law down with it.

Today’s hearing — the latest battle in the case the Wall Street Journal calls the biggest challenge to the health law — has rekindled the debate over just how much the health insurance market will change once the Patient Protection and Affordable Care Act takes full effect.

A survey published in this month’s edition of McKinsey Quarterly suggests those changes may be greater than expected, and that as companies come to grips with the new law, their insurance offerings to employees will change. “Most employers, however, will find value-creating options between the extremes of completely dropping employee health coverage and making no changes to the current offering”:

Health care reform fundamentally alters the social contract inherent in employer-sponsored medical benefits and how employees value health insurance as a form of compensation. The new law guarantees the right to health insurance regardless of an individual’s medical status. In doing so, it minimizes the moral obligation employers may feel to cover the sickest employees, who would otherwise be denied coverage in today’s individual health insurance market. Reform preserves the corporate tax advantages associated with offering health benefits—except for high-premium “Cadillac” insurance plans.

Starting in 2014, people who are not offered affordable health insurance coverage by their employers will receive income-indexed premium and out-of-pocket cost-sharing subsidies. The highest subsidies will be offered to the lowest-income workers. That reduces the social-equity advantage of employer-sponsored insurance, by enabling these workers to obtain coverage they could not afford on today’s individual market. It also significantly increases the availability of substitutes for employer coverage. As a result, whether to offer ESI after 2014 becomes mostly a business decision. Employers will have to balance the need to remain attractive to talented workers with the net economics of providing benefits—taking into consideration all the penalties and tax advantages of offering or not offering any given level of coverage.

Repeal advocate Grace-Marie Turner takes to the Wall Street Journal editorial page, using those findings to argue that more companies will decide to drop coverage.  Ezra Klein, a Washington Post columnist who has followed the reform movement closely and has generally supported it, isn’t so sure, noting that since similar reforms were enacted in one state — Massachusetts — the number of employees covered by their companies actually increased.

Whatever the law’s ultimate effect on employer-sponsored health insurance, the reform package has moving parts that need each other to achieve their intended effect of slowing the growth of health care costs and reducing the number of people without insurance. Experts have noted that the reforms need the individual mandate, or something quite like it, in order to function, which was part of Vinson’s reasoning behind his decision to strike the entire law (three other judges, all Democrats, have upheld the law).

Meanwhile, the St. Petersburg Times notes that unlike other states challenging the law, Florida is declining federal funds designed to help implement it.

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