One Good Thing About the Obamacare Employer Mandate

by Reihan Salam

Josh Barro and Jed Graham both address the Obamacare employer mandate. Jed’s basic concern is that the employer mandate might harm the interests of workers in low-wage sectors in which firms have tight profit margins and limited pricing power. Josh replies that even if this effect is real, its impact is relatively small, and it must be weighed against the benefits of expanding coverage. He draws on Hawaii’s experience to get a sense of what the impact might be:

Employers still have 15 months left before the penalties come into effect, so we may see bigger effects in 2014 and 2015. We already have a test case for this: Hawaii has had a version of the employer penalty since the 1970s, and economists at the Federal Reserve Bank of San Francisco found it led to about a 1.4% rise in part-time employment compared to states without the policy.

If Hawaii’s effects went national, we’d expect the employer mandate to eventually push about 400,000 Americans from full-time work to part-time work.

And so Josh concludes that the employer mandate penalty should be repealed, as doing so would make Obamacare more progressive:

Absent the employer mandate, many firms like Trader Joe’s in industries that rely on low-wage, low-skill labor would probably make the same decision to end coverage for their full-time workers, sending them to the exchanges. Instead of creating a small new problem in the labor market, Obamacare would relieve employers of one of the main costs of hiring and actually encourage more job creation. And since, in the long run, the cost of employee benefits is borne by workers, the government taking over responsibility for health coverage should lead to a rise in the wages of low-skill workers who have been hit especially hard by recent years’ economic dysfunction.

The main drawback of eliminating the employer mandate would be fiscal: The government would lose out on about $110 billion in revenue over 10 years, and more people would draw expensive exchange subsidies. That cost would have to be financed with debt in the short term and taxes in the long term. But the ultimate tax source used to cover that gap could be both more progressive and less economically damaging than the employer mandate itself.

But there is another drawback of eliminating the employer mandate, as suggested by the Christensen Institute’s “Seize the ACA” report. The Affordable Care Act actually establishes two penalties — a “heavy penalty” and a “light penalty.” Firms with 50 full-time-equivalent employees or more are subject to the heavy penalty if they don’t offer health insurance and any employee enrolls in an exchange; but firms that do offer coverage, even if it is not deemed “affordable,” are subject to the light penalty. This makes an enormous difference, as the heavy penalty is a fee for all employees (minus 30), whether or not they enroll in the exchanges; and the light penalty is a fee that applies only to each full-time-equivalent employee enrolled in the exchanges. So the employer mandate creates a strong incentive for employers to create new insurance options that are attractive enough to workers to keep them off of the exchanges. Wanamaker and Bean write:

If an employer provides “minimum essential coverage,” then the business will only be fined for employees who actually enroll in an exchange.* This creates an environment where the employer is incentivized to offer a plan that is low-cost to the employer but good enough for the employees that they do not desire the more expensive and comprehensive coverage offered through the exchange. This kind of “good enough” innovation that fits, but does not overshoot, customer needs is exactly the type of innovation that can disrupt higher cost insurance and care practices.

Two types of health care coverage may fit this bill. The first is high-deductible insurance (HDI) coupled with a health savings account (HSA). This type of arrangement addresses one of the fundamental problems with today’s insurance companies: they conflate insurance and reimbursement models.

The second type of coverage the authors identify is less familiar yet potentially just as promising:

The second type of plan that qualifies as “minimum essential coverage” is employer-integrated health care. Under this type of plan, the employer provides on-site clinics or similar services that cover primary care needs and then contracts directly with health care providers for catastrophic care. For example, Quad/Graphics in Milwaukee is one of America’s largest printing companies. They set up their first in-house primary care clinic in 1990 and contracted directly with local hospitals and specialists for advanced care, saving thousands of dollars per employee. They now operate QuadMed, a company that contracts with employers to provide primary care onsite. Other large employers could follow suit in order to fill the minimum essential coverage requirement.

Because employers have a vested interest in keeping their employees healthy, they are better situated than the government, insurance companies, or doctors to take action to maximize individual wellbeing. Employees will perceive that coverage provided by their employers through on-site clinics is often better and much more convenient than that offered through traditional insurance plans. When this happens, employer integrated care will be well on its way to disrupting traditional health insurance, thanks in part to the incentives introduced by the ACA.

These new models won’t emerge spontaneously. They require enforcement of the employer mandate. Under the scenario Josh prefers, employees who might be offered low-cost coverage via their employers under the employer mandate will instead flock to the exchanges, where they will only have access to highly-regulated, relatively expensive products, albeit it at heavily subsidized net prices. Jed, meanwhile, considers the low-cost coverage employers will offer to minimize their penalties– the kind of coverage Wanamaker and Bean identify as potentially disruptive (in a good way) – quite unattractive. He contrasts a low-cost employer-provided “skinny plan” with the net price of the cheapest bronze plan to a 21-year-old earning 250 percent of the poverty level ($28,725). 

Workers offered a skinny plan might have this choice: Pay $600 a year for a plan that provides immediate benefits or nearly three times for a plan that has a $5,000 deductible.

While skinny plans don’t come close to matching the comprehensive protections offered by exchange plans — hospitalization and surgery wouldn’t be covered — they will allow employers and employees to dodge ObamaCare’s tax penalties.

Employers who don’t offer coverage will face automatic fines under ObamaCare of $2,000 for every full-time-equivalent worker (minus 30 workers). But those who do offer coverage — even of the skinny kind — will only face fines of $3,000 per worker who receives ObamaCare subsidies.

While it’s far from clear how broad skinny-plan adoption will be, the plans may be attractive to large employers in the retail, restaurant and accommodation industries. Such primarily modest-wage sectors in the past offered hourly wage employees mini-med plans, which don’t comply with ObamaCare regulations because they put a cap on benefits. The good news is that skinny plans may mean employers cut fewer workers to part-time status to reduce ObamaCare fines than they would otherwise. The bad news for workers is that they won’t have real insurance in an emergency. The bad news for ObamaCare is that many young and healthy people will opt out. But even apart from the employer mandate and skinny alternative, there are design flaws that will deter the young and healthy from signing up.

It is important to keep in mind, however, that if skinny plans prove really unattractive, workers won’t embrace them and employers will have to return to the drawing board as the burden of even the light penalty increases. Skinny plans can be understood as part of a trial-and-error process that will eventually yield plans that will be both cheap and attractive.

So though I understand the case against the employer mandate, it actually strikes me as more attractive than the individual mandate, as it is more likely to spur the kind of innovations that will make medical care cheaper and more accessible. The individual mandate makes sense in theory as a way to forestall an insurance death spiral, yet it also seems less effective and more coercive than creating low-cost default options to protect people against catastrophic medical expenditures. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.