A lot of ink has been spilled discussing the individual mandate in the Patient Protection and Affordable Care Act, more commonly known as ObamaCare. But there is another mandate contained in PPACA that creates its own incentives for business: the employer mandate. According to a report from the Congressional Research Service:
“PPACA does not explicitly mandate an employer to offer employees acceptable health insurance. However, certain employers with at least 50 full-time equivalent employees will face penalties, beginning in 2014, if one or more of their full-time employees obtains a premium credit through an exchange... An individual may be eligible for a premium credit either because the employer does not offer coverage or the employer offers coverage that is either not “affordable” or does not provide “minimum value.”
Monthly Employer Penalty = $78,333 (500 employees)
I want to focus on the amount of those penalties and the likely actions of businesses based on these new economic incentives. The penalty amount is calculated as equal to the number of employees minus 30, multiplied by one-twelfth of $2,000, assessed monthly. Using an example of a business with 500 employees, the total monthly penalty would be (500 - 30) x ($2,000 / 12) = $78,333.
Clearly this is a significant penalty to any business that doesn’t offer health insurance to its employees, particularly when you consider this penalty is assessed every month. But is this penalty significant enough to prevent businesses from dumping employees into the public health exchanges? For that, we need to understand the costs per employee to provide health insurance today.
Penalty Per Employee = $157
For a business with 500 employees, that $78,333 penalty breaks down to $157 per employee per month. Any company that spends more than $157 per employee per month to provide health insurance will have an incentive to drop their employer-paid health insurance plans.
Many people don’t realize how much a company pays towards their employees’ health insurance plans. When you choose your benefits during the annual enrollment period, you often look at the weekly or bi-weekly deduction from your paycheck, but you rarely see the additional premium payment that your company makes on your behalf. Some companies pay 100%, most pay around 50%, and others pay something in between.
My employer produces an annual “Personal Portfolio Report” summarizing my total compensation, including what was paid on my behalf for health insurance. For example, in 2011 I paid $3,375 in paycheck deductions towards my Medical & Dental insurance, while my company paid $13,784.
Drop Insurance and Save $992 Per Employee Per Month
If we use my employer’s costs as a proxy, the typical business is paying $1,149 per employee per month to provide health insurance as a benefit. Therefore, the PPACA employer mandate creates a choice for employers: Pay $1,149 per employee to offer health insurance or pay $157 in penalties for not offering health insurance.
Clearly the economic incentives created by the employer mandate will drive businesses to drop health insurance benefits regardless of the penalties involved. By dropping coverage, our example 500-employee company would save almost $1,000 per employee per month by dropping their health insurance benefit.
My Plan: Drop the Insurance and Give Everyone a Raise
If I were a business owner, here is the way I would handle the new world of ObamaCare starting in 2014. I would explain to my employees exactly what ObamaCare means for them and the company they work for. I would explain how much the company pays today to offer health insurance and explain that the government is offering me, as the owner, an incentive to get out of the health care business.
Next, I would explain that instead of paying $1,100 per employee per month for their health insurance – something that they can’t take with them if they quit – I am going to pay the $157 penalty and give every single employee a raise to help them pay for their own health insurance. The company will save $992 per employee per month, and I’m going to split that savings with my employees.
Many companies will make their own choices on how much to split this savings with employees, and many will probably pocket the difference and let it fall straight to the bottom line. In other words, ObamaCare has just given American businesses a new profit incentive related to health insurance – I suspect this is just one more unintended consequence of the law.
If I were a business owner, I would split the savings with my employees, 75% for them and 25% to be reinvested in growing my business. Beginning January 1, 2014, every one of my employees would receive a raise of $750 per month, or $9,000 per year. If they make $40,000 in 2013, they’ll make $49,000 in 2014. That is cash in their pocket that they can choose to spend any way they want. They can find health insurance on the public exchanges, or they can pocket that money and pay their own penalty to the IRS.
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By toying with the health insurance market, the Obama administration and loyal Democrats have created new economic incentives and a plethora of unintended consequences. The employer mandate is but one example by providing every business owner in the country an incentive to drop their health insurance plans and let employees find their own way through the public exchanges.
Ultimately, employees will be harmed because the employer-paid portion of their insurance was tax free and benefits paid directly out of pocket are not. If the business owner chooses to give everyone a raise, the additional income will be taxed, and the net income is unlikely to cover the full cost of a new plan bought through an exchange. Not exactly what the president promised.
Addendum
After drafting the post above, I ran across a related article from the Heritage Foundation: What Are the Odds Your Employer Will Drop Health Coverage? Given the economic incentives documented above, obviously I think the odds are very high. The Heritage article includes the following graphic estimating the number of individuals who will lose their coverage as a result of ObamaCare.
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| Click to enlarge |
... all of which are problems solved by a single-payer system.
ReplyDeleteI wanted to point out that you've neglected the payroll tax, which will change the numbers in your analysis but not your main point.
ReplyDeleteIf the employer puts the $992 of savings totally to the employee, then the employee will receive (after tax) only $880.
If the employer keeps 25%, he'll keep $248, while the worker will get $660.
Thanks for the additions, Chris.
ReplyDeleteGreat post. Of course, businesses that do not offer health insurance will potentially be at a competitive disadvantage in terms of attracting and retaining employees. They will have to weigh that cost (however real it is) against the benefit of keeping more money.
ReplyDeleteThanks Ryan, it's always good to hear from you.
ReplyDeleteI've tried to think about the competitive disadvantage from my own perspective (granted, a small sample). Initially that will be true, no doubt. If I leave my company today and interview with a company that doesn't offer insurance, I'll see that as a loss.
If the new company explicitly offers me more pay -- for example, I negotiate a $65k salary and they pay me $75k -- I may feel like cash in my pocket is more valuable. There are plenty of economic studies to support me choosing the cash over a possible future service that I may not need.
But in ten years -- assuming Republicans don't repeal the ACA -- the competitive disadvantage may evaporate. If I purchase my own individual health plan in 2014, am happy with the company, the coverage, and the annual costs, I probably wouldn't even consider health insurance offered by the employer when I change jobs in 2022.
At that point, I'll consider it a benefit I don't use. Like when they brag about their workout facilities in the basement, which I'll never use. Now I'm wishing my salary was a little higher because I don't take advantage of all the benefits they offer.
In the long run, I think a competitive health insurance market is needed, and that means taking employers out of the picture. I would like it if everyone bought their own insurance the way they do car insurance. When I quit my job, I don't have to wonder if my car insurance will continue.
I just think the ACA is the wrong way to go about fixing health insurance. The employer mandate looks like one giant unintended consequence.
"There are plenty of economic studies to support me choosing the cash over a possible future service that I may not need."
Delete"Like when they brag about their workout facilities in the basement, which I'll never use."
I hope that we can agree that health insurance is not really comparable to a basement workout facility. I wonder if the studies show that people would choose the money over the health insurance. We generally recommend for good reasons that people choose the insurance.
"In the long run, I think a competitive health insurance market is needed, and that means taking employers out of the picture."
Could you elaborate on this point and explain what changes we would be likely to see if we did take employers out of the picture? There must be a good reason to toss out the "group rate" advantage of getting insurance through an employer, assuming that you believe that the advantage is real.
"I just think the ACA is the wrong way to go about fixing health insurance."
If everything in this post is true, then you are correct. I wonder why this issue is not brought up more often.
"The employer mandate looks like one giant unintended consequence."
It is very difficult for me to believe that this is unintended. It would have been easy enough to adjust the numbers so that the mandate here would really be a mandate: either provide insurance or pay a fine of greater value. One must wonder, then, what the goal is.
The penalty will be $992 less than the coverage in 2014. But now the savings for not providing coverage is the full $1,149. Why is not that an incentive currently? I mean, I'm not a big fan of this plan, either, but I'm not entirely certain if this is the most compelling argument against it (I would instead point to the tax on Cadillac plans and medical devices).
ReplyDeleteI've read multiple reports that "Obamacare" is expected to force as many as one-third of those with employer-based healthcare to lose their coverage.
ReplyDeleteBret said: "all of which are problems solved by a single-payer system."
But that creates a lot of other problems, when you take health care away from the people and put all decisions in the hands of the ruling elites. Single-payer is the fascist solution, and does not belong in a free society.
From the definition of fascism: "a governmental system led by a dictator having complete power, forcibly suppressing opposition and criticism, regimenting all industry, commerce, etc. and emphasizing an aggressive nationalism and often racism."
i have highlighted the part of the definition which perfectly fits 'single payer'.
We need decentralization. We need more payers, not a single one. The ruling elite have absolutely no business controlling this.
@Ryan
ReplyDelete"I hope that we can agree that health insurance is not really comparable to a basement workout facility."
It depends on how specific we want to be. In the sense that a company offers an employee benefit, they are related. But I did not mean to suggest they are directly comparable.
In the context I provided, they are benefits offered, and as an employee, I value the benefits differently. If I use one, it has value; if I don't it is an unnecessary benefit.
"I wonder if the studies show that people would choose the money over the health insurance. We generally recommend for good reasons that people choose the insurance."
I don't know and I would agree that the desire is for people to get insurance. Let me offer another comparison. My son moved out and found himself unable to pay all of his bills. Did he stop buying cigarettes or beer? Of course not! The first thing he dropped was his car insurance payment.
He knew it was theoretically good to be insured, but in reality he hadn't used his insurance and he didn't expect to be in an accident any time soon, so he valued the cash he saved from the payment more than the insurance he wasn't using.
"Could you elaborate on this point and explain what changes we would be likely to see if we did take employers out of the picture? There must be a good reason to toss out the "group rate" advantage of getting insurance through an employer, assuming that you believe that the advantage is real."
That's an entire post (or three) in itself. Employers serve as a middle man and disguise the consumer cost of health care services. They get a group rate because they bring a large group of employees to the insurer. Professional organizations are able to form similar groups made up of members instead of employees, so the "employer" is not the only reason for group rates.
The other thing employers bring to the table is cash. They pay a significant portion of health care premiums. I learned this after getting laid off and I had to pay 100% of the premium. All this time I thought I was paying the full premium, only to learn how much the benefit was really worth to me.
For an identical policy, I went from paying $125 per paycheck to $750 per month. I didn't know it at the time, but my employer had been covering the difference. I started to pay attention after that.
Anyway, back to competitiveness, price transparency is the biggest factor. Since consumers don't know actual health care costs, they overuse the system. Doctors can charge more to insurance companies for the same reason, and insurance companies can pass the costs on to employers. No one knows how much a service actually costs, especially not the consumer of the service.
I would also like to see actual insurance to prevent financial catastrophe (like car insurance) and not just a payment plan that spreads health care costs over time. I should pay for routine doctor visits the way I pay for an oil change.
"The employer mandate looks like one giant unintended consequence." "It is very difficult for me to believe that this is unintended."
This is me trying to be generous. I try not to assume peoples' motives, so I can't know if Democrats intended this result. Fans of single payer believe this was intended in order to bring about single payer in the near future.
I don't know if it was intended. I give the benefit of the doubt that the law is what was intended, that Obama doesn't want employers to drop coverage, and that he wants more people insured. I think the ACA will encourage dropping insurance by both employers and individuals.
Sorry for the delay.
Delete"He knew it was theoretically good to be insured, but in reality he hadn't used his insurance and he didn't expect to be in an accident any time soon, so he valued the cash he saved from the payment more than the insurance he wasn't using."
Any discussion of choice in a free market needs to take into account how we perceive different products and services. Your son acknowledges that it is "theoretically good to be insured," but chose to spend his money elsewhere because he wasn't "using" the insurance. But that's a problem of perception: we don't get to choose when we need (and therefore use) insurance. That's pretty much the point of it. So, paying for insurance is quite different from paying for an apple or a boat--not that you have suggested otherwise.
I assume that your son doesn't actually value cigarettes and beer more than his health; rather, in his naivete, he perceives no need for insurance. In other words: since there is no clear or immediate threat to his health, it feels like there is no incentive to pay for insurance. We can understand something on an intellectual level without it really sinking in.
So, just as I think that it is good for (the government to force) us all to pay taxes for needed police and military services even when we don't "use" them, I think that it is good for us to all have insurance. Freedom of choice--like the choice between cigarettes and insurance--is less valuable here. However, I am not sure how to make that happen and I am not convinced that Obamacare is the solution.
As for the issue of middlemen, I follow you. I understand that disguised costs tend to lead to overuse* and thus a rise in costs. But is it not also the case that middlemen help us to pay for "naturally" expensive procedures, such that taking them out of the picture would make it impossible for many people to have them even if the costs were lowered? Also, if these third (and fourth) parties arise naturally out of the free market and costs rise naturally as a result, how would you deal with them without compromising your free market principles? Your previous health care posts seemed a little light on that issue--or at least it was unclear to me.
"I try not to assume peoples' motives, so I can't know if Democrats intended this result."
Well, there aren't many plausible alternatives. Perhaps they didn't think that this would be a problem, which remains to be seen.
*If we raised people to have the right values, perhaps it would not have to be this way. That could be idealistic, but it seems better to me than our current approach, which seems to encourage the behavior. For example: blaming the government when people take advantage of its subsidies for personal gain.
Heathen said: "Fans of single payer believe this was intended in order to bring about single payer in the near future."
ReplyDeleteObama himself said that he would rather have an unaccountable government monopoly taking away healthcare decisions from us and forcing decisions on us (single payer). So yes it is reasonable to wonder if this doomsday scenario is the intended .result. After all, Obama has stated his very ill intent.
And here's an oddity, unless I have misunderstood something...say you have COBRA and decide against allowing that coverage to continue at whatever rate being offered...the way this 'healthcare plan' was explained to me (and yes, I have spent some time trying to read it) is that you then have to be uninsured for 6 months before being allowed enrollment through the government option, during which time you are liable for the tax - no - fee - no - penalty - no...what have they decided to call it this week? that the uninsured incurs...unless that loophole has been closed and I didn't get the memo? Please correct me if I'm wrong.
ReplyDeletehttp://www.huffingtonpost.com/2011/07/28/pcip-uninsured-health-care-coverage_n_908866.html
Name, I can't claim expert knowledge of the ACA, but what you describe sounds about right. Our all-knowing government policy makers would think of something like that, saying that if you have access to COBRA you must take it.
ReplyDelete