Straight talk on health care reform: 'Employer mandate'
The decision last week to delay implementation of the Affordable Care Act's "employer mandate" has received lots of attention.
Pundits and proponents and opponents of the ACA have argued over the decision. Some pointed to the delay and said it is proof of a "train wreck" in implementing the health care law. Others said the delay won't mean much at all in the long run.
What was missing from the (mostly) political debate was a thorough explanation of the mandate, officially known as the "employer responsibility provision."
Simply put, the employer-responsibility provision will require some businesses to provide an adequate level of affordable health insurance coverage to their employees or pay a penalty.
Calling it a mandate is a bit of a misnomer, because the penalty does not apply to the vast majority of employers. It applies only to companies with more than 50 full-time-equivalent employees.
About 210,000 U.S. businesses have more than 50 employees(1), according to Mark Duggan of the Wharton School's Department of Business Economics and Public Policy. And according to the Kaiser Family Foundation, approximately 94 percent of all companies with 50 to 199 employees and 98 percent of all companies with 200 or more employees already offer health insurance coverage.(2)
Bottom line: Roughly 10,000 out of 5.7 million businesses in the U.S. (less than 1 percent of all American businesses) would be subject to the no-coverage penalty.(3)
Under that provision, large employers that do not offer coverage would be required to pay a penalty of $2,000 per employee, with the first 30 employees exempted. If a company with 60 employees is subject to the penalty, its annual liability would be $60,000 (60 employees – 30 employees x $2,000 = $60,000), an amount that will likely be less than the cost of purchasing insurance.
However, that penalty is triggered only if an employee subsequently receives a federal subsidy to purchase insurance through the new health insurance exchange. Employees with incomes over 400 percent of the federal poverty level (in 2013, an individual with an annual salary of more than $45,960) are not eligible for a subsidy and cannot trigger the no-coverage penalty. In addition, if the employee has an income under 400 percent of FPL and chooses to pay the individual mandate tax penalty instead of buying insurance, the employer would not be required to pay the no-coverage penalty. Finally, employers do not have to provide coverage for part-time employees (less than 30 hours per week) or seasonal employees (less than 120 days per calendar year). The penalty is not triggered even if those employees receive a federal subsidy.
The employer-responsibility provision also includes a penalty that takes effect if an employer does not offer sufficient coverage that is affordable for all of its workers. If an employer does not offer coverage that pays at least 60 percent of the cost of the employee's health care, meets the essential-benefits requirements of the Affordable Care Act or costs more than 9.5 percent of the individual employee's annual income, then it will be subject to a financial penalty – $3,000 for each employee that receives a federal subsidy. In most cases, this penalty would apply only to those employees that actually receive a federal subsidy.
So, why did Congress include the employer-responsibility provision in the Affordable Care Act? As with the ACA in general, the goal is to encourage, entice or require the maximum number of people to participate in the system. That's how costs will be controlled.
Currently, 49 percent of Americans get health insurance as part of their job.(4) Employers clearly make a significant financial contribution to health care coverage, and from a systemwide point of view, that contribution is critical to funding our current health care payment system.
If that contribution were reduced, the difference would have to be made up by employees, other consumers and taxpayers.
Congress was concerned that, with the individual mandate requiring insurance coverage and subsidies available for lower-income people, some businesses might have an incentive to drop or not offer coverage to their employees. Congress was also concerned that if employers offered only limited-benefit insurance plans or coverage that was not affordable to their lower-income employees, taxpayers would once again be called on to pick up the financial slack.
Enter the employer-responsibility provision, which Congress at the time referred to as the "free rider" penalty. This idea was to discourage larger businesses from dropping or offering substandard coverage and forcing employees to take a "free ride" at taxpayer expense. In addition, the no-coverage penalty would help reimburse taxpayers for the cost of subsidizing a company's lower-wage employees if that company decided not offer them coverage. The affordable-coverage penalty would help ensure that employers would offer affordable and comprehensive coverage.
There are pros and cons with respect to this provision. On the pro side, it may encourage more employers to cover their workers, or at least keep the coverage that is offered. It may also create minimum standards for coverage that will curb the use of limited-benefit plans that restrict or cap benefits, which means more of the employees' health care costs will be covered.
Finally, requiring employers to report details on insurance coverage and benefits will give employees a better sense of their plan options and allow them to compare their coverage with that available on an exchange or in the open market.
On the con side, employer administrative overhead will increase due to the new federal reporting requirements. In response, employers may drop coverage for their employees and elect to pay the penalty. However, in Massachusetts, which has had an employer penalty in place for several years, the number of employers offering coverage has increased by 1 percent between 2005 and 2011. In comparison, employer coverage nationally has dropped by almost 6 percent.(5)
Employers may also be less inclined to hire lower-wage workers who are more likely to qualify for subsidies.
Finally, it may encourage employers to hire part-time instead of full-time employees, since part-time employees do not trigger the penalty. In the worst-case scenario, some businesses may convert full-time low-wage workers into part-time employees in order to evade the penalty.
So, perhaps the question about the delay is less important than whether the employer responsibility provision is the best approach to meet the law's objectives. Employer reporting could be less onerous. The law could be modified to base the penalty on the percentage of payroll that a business spends on health care instead of a threshold based on full-time employees.
That kind of discussion would require both sides to recognize the benefit of working together to improve the law for both employers and employees. Given the politically polarized Congress, that seems unlikely.
That topic, in fact, is a completely different debate.
– Bob Semro
1) Klein, Ezra, Everything you know about employers and Obamacare is wrong, The Washington Post, May 24, 2013.
2) Kaiser Family Foundation, 2012 Employer Health Benefits Survey, Sept. 11, 2012.
3) Klein, Ezra, Everything you know about employers and Obamacare is wrong, The Washington Post, May 24, 2013.
4) Kaiser Family Foundation, State Health Facts, Health Insurance Coverage of the Total Population, accessed July 9, 2013.
5) PricewaterhouseCoopers, Health Research Institute, The Massachusetts Experience, Employer-sponsored health insurance post reform, May 13, 2013.
Article posted on July 10, 2013