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.
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.
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.