Employer Mandate: Theory, practice and those pesky federal deficits . . .

The Urban Institute (UI) recently released a new analysis of the Affordable Care Act’s (ACA) employer mandate (Why Not Just Eliminate the Employer Mandate?) and what the impact would be if the employer mandate were eliminated.

UI concludes that:

“. . . eliminating the employer mandate will not reduce insurance coverage significantly, contrary to its supporters’ expectations. Eliminating it will remove labor market distortions that have troubled employer groups and which would harm some workers. However, new revenue sources will be required to replace that anticipated to be raised by the employer mandate”

While the conclusion notes that new revenue sources would be required to replace the anticipated revenue from enforcing the mandate that’s not the whole story.

First, let’s review the issue.  The ACA was designed to work as much as possible within the existing system.  Since at the time approximately 97% of employers with 50 or more employees were offering coverage to most of their full-time employees, the ACA used that as a threshold, mandating all such employers to provide health insurance to full-time employees. It established fines for companies that fail to comply, creating revenues to help fund the ACA.

In practice, three sticking points emerged:

1. The ACA defines “full-time” as 30 hours, rather than 40. This requires many employers to increase the number of employees they cover, thus increasing their expenses;
2. While most 50+ employee companies offered coverage, the ones that did not –many local small businesses -were vocal in their objections;
3. The mandate also created a “cliff effect” with unintended consequences. Because the mandate kicked in if an employer moved from 49 employees to 50, or an employee’s weekly hours increased from 29 to 30 hours, some employers sought to keep from “falling off the cliff,” and facing paying either for an employee’s health insurance or fines for failing to do so.

These problems led to delays in the employer mandate. First the Obama Administration delayed the entire requirement from 2014 to 2015.  It later delayed the requirement for employers with 50-99 employees another year (to 2016) and lowered the coverage requirement for larger employers (100+ employees) from 95% of employees working more than 30 hours to 70% or more of employees working those hours.

These delays have fueled the calls for eliminating the employer mandate completely.  What if we did?

Beyond losing the revenue tied to the employer mandate, additional revenue would be needed for those employees not offered coverage at work and now eligible for financial assistance in the individual market. Absent the mandate, employees of employers that drop health coverage would also lose the considerable tax benefit that comes from paying group premiums with pre-tax dollars.  Instead, they would have to purchase individual coverage on the ACA Marketplace which is not tax-deductible.

The focus in Washington on the federal deficit (whether warranted or not) makes it extremely difficult to fix these problems. The tax treatment of employer-sponsored coverage is already the single largest tax expenditure in the budget.[i] Extending that tax treatment to individuals would be incredibly expensive. Conversely, taking the tax benefit away from employees would result in a massive tax hike.

When discussing the employer mandate and group vs. individual health coverage, the impact of this tax treatment cannot be overstated. Individuals moving from the group market to the individual market must account for both the additional costs and the tax implications. Some of these individuals may benefit from premium subsidies through the health insurance exchanges, but without the employer mandate we lose a key source of revenue to pay for these subsidies while the individuals not eligible for subsidies (and some who are eligible) are paying more out of their pocket.

While eliminating the employer mandate may seem politically expedient, we just don’t fully understand the consequences, especially as the ACA implementation still is unfolding. Right now employers have incentives other than the mandate to keep offering health coverage – namely, it helps them attract and retain the best employees. But will this be strong enough to maintain the current system without a mandate?  Absent more clarity, policymakers should wait before removing one of the critical components of an increasingly successful national reform.

No one is saying the law as currently written is perfect.  There are changes that can and should be made to help improve it. But while it is probably true that removing the employer mandate from the Affordable Care Act will not have an immediate impact on the number of insured we need to exercise caution. Assuming the revenue can be found and the change can be implemented without jeopardizing other elements of the law (specifically the need for the individual mandate), we need to understand the long-term impact of such a change on the willingness of employers to offer coverage before proceeding.