Obamacare’s Employer Mandate Deserves to Disappear

The Obama administration has given employers a reprieve from the mandate that they offer their workers insurance at low employee premiums or pay a penalty.  As things now stand, enforcement is postponed until 2016.  But should the mandate ever come back?

Even strong supporters of the Affordable Care Act are divided.  David Blumenthal of the Commonwealth Fund thinks the mandate on employers is needed to compel them to honor their "shared responsibility" to pay their workers' premiums.  Tim Jost, a professor at Washington and Lee University and a leading backer and interpreter of the complex ACA rules, thinks the mandate has too many adverse side effects and should be "repealed and replaced" by something else.  Commonsense Americans may wonder why, if we can get by without the employer mandate for next two years, we ever need it.

In the short-run, the mandate may not do much for the uninsured or for workers.  But in the longer run, not having it might do much harm to the federal budget.  As we economists see it, the answer is not to bring back the mandate but rather to replace it with a more efficient and equitable system.  Much of the rationale here turns on a radically different view of employer premium contributions—we think workers pay for all of their health benefits, regardless of what their employer contributes.  Workers may not pay all of the premiums directly, but they earn lower wages in return for their employer's contribution.

In the short run, the numbers on the mandate do not add up to much of an impact. It only affects firms with more than 100 full-time workers, and very few of these workers are either uninsured or stuck with premium contributions that are unaffordable as defined by the law.  Only about 5 million uninsured people under age 65 (when they become eligible for Medicare) are associated with workers for large firms, and an even smaller number must pay a premium that is higher than what the law considers affordable. Estimates are that the employer mandate would at most only cut the ranks of the uninsured by one half of one percent.

The mandate will boost federal coffers with fines from companies that do not offer coverage, but the contribution to the federal budget of these fines is estimated at only $5 billion a year - a tiny fraction of Obamacare's cost. The downside of retaining the mandate is a serious burden for the great majority of large employers that will have to prove they are in compliance.  It also creates an incentive to distort hiring practices to emphasize more part-timers and an incentive for firms to shrink rather than grow to stay small enough to avoid having to provide coverage altogether. These effects combined with the miniscule impact on the uninsured and a righteous employer outcry against bureaucratic paperwork requirements have deflated enthusiasm among many people for proceeding with the mandate's implementation.

David  Blumenthal thinks, nevertheless, that these enduring defects would be worth it to maintain employers' "shared responsibility."  However, many economists see "shared responsibility" as a myth.  The small number of workers "helped" by employer premium contributions will also be harmed by lower raises as their employers seek to recover the cost of this benefit.  Moreover, workers facing these wage cuts (relative to what they would have gotten had their employer not provided health coverage) cannot simply quit to seek higher pay at other companies.  All large employers will reduce wages to cover the costs of required benefits.  There will be no better place to go.

Why then did the ACA include a health insurance mandate for larger employers, and why might dropping it eventually cause the government problems?  In a study of the mandate that I conducted with my colleague Adam Leive, we estimated that before reform, nearly 50 million insured people were associated with low-wage workers in large firms   The ACA's drafters used the employer mandate to keep these workers in employer plans and out of the insurance exchanges, where they could claim large government subsidies to help pay the premiums.   They did not want the government to have to provide subsidies to low-wage workers who were already privately insured, and the mother lode of this population was at large firms.

While there are reasons to be concerned that this difference in subsidies will eventually destabilize the labor market, the solution is not to bring back the employer mandate.  For one thing, the inequity of subsidizing some low-income people who obtain coverage on an exchange and not others who are insured by their employers will soon become apparent.  (In fact, some unions that arrange insurance for their members are already wondering why these members are not eligible for subsidies on the exchanges.)  For another, this variation in subsidy eligibility creates a strong incentive to move low-wage workers into smaller low-wage firms that are not mandated to provide coverage (for example, by contracting out the janitorial services), even if that is an inefficient way to organize work.

In my view, we should skip the employer mandate and instead offer the same premium subsidies to all low-wage workers, regardless of the size of the company for which they work and where they get their insurance.   The rest of us may have to pay higher taxes to avoid the "employer share" shell game, but in my opinion this is a price worth paying to avoid the inequity and inefficiency the mandate creates.  But the conversation about higher taxes will open a new can of worms.

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Editor's Note: Cross-posted on the Voices@LDI blog of the Leonard Davis Institute of Health Economics of the University of Pennsylvania.

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