Summer Journal Club, Week 3: What happens when you force employers to offer insurance?

by Allan Joseph

Welcome to Week 3 of Project Millennial’s 2013 summer journal club. Previous posts on why people want health insurance and why employers provide it can be found here. This week, we’ll study what happens when policymakers force employers to provide health insurance to their employees, using “How do Employers React to a Pay-or-Play Mandate?”, by Carrie Colla et al., and “After the Mandates” by Jon Gabel et al (which cites other research we’ll discuss). Unfortunately, these papers are gated — if someone knows of an ungated version, please let us know and we’ll update.

Last week, we learned that employers who offer health insurance do so because it’s tax-exempt and their employees demand it — and have the bargaining power to get it. That approach, we learned, leaves millions of Americans uninsured while making employer-sponsored insurance (ESI) the core of the American insurance system. That’s why the Affordable Care Act (ACA) used an “employer mandate” as one of its tools for expanding coverage.

The ACA requires any company with at least 50 employees to offer health insurance to any employee who works at least 30 hours a week (though a bill may been introduced to change that to 40). There are two ways a company can be penalized for not offering coverage starting in 2014:

  •  If the company does not offer insurance to at least 95% of employees, and just one employee receives a subsidy (this is the “trigger” mechanism), the company must pay a fine of $2,000 per employee—all employees (technically all employees minus 30), whether or not they sought a subsidy.
  • If the company does offer insurance to 95% of employees but an employee still seeks insurance on the exchange—either because they’re in the small fraction of individuals who was not offered coverage or the plan offered by the employer is skimpy enough that individuals qualify for a subsidy—the employer must pay $3,000 per employee receiving a subsidy.

Those penalties add up quickly, but that’s only part of the story. According to the Kaiser Family Foundation, the average employer health insurance plan in 2012 cost $5,600 for a single person and over $15,000 for a family — far more than the fines for not offering health insurance.

In addition, the money raised from the fines goes to subsidize the cost of insurance for people who buy insurance individually through the ACA’s new “exchanges,” which are highly regulated and allow anyone to purchase insurance. Thus, there’s a worry that employers could drop their health insurance coverage and save a lot of money, while their employers would still have access to coverage — just not the one they have now. Whether or not this phenomenon, termed “dumping,” is actually a problem is a matter of some debate, but it is a concern for many people, especially those who want to minimize disruption in the healthcare sector.

Luckily for us, we actually have a couple good examples of how this would work on a smaller scale, which is what we’ll take a look at today. In 2006, both the city of San Francisco and the state of Massachusetts passed healthcare reform that included a “pay or play” employer mandate: employers of a certain size had to either provide health insurance (play) or pay a fine (pay). Colla et al. studied the San Francisco mandate, while Gabel et al. studied the Massachusetts mandate — and the results may surprise you.

It’s worth mentioning that San Francisco’s mandate was slightly more stringent than the ACA’s version, though it also covers a high-income city with a strong safety net. Massachusetts’ mandate was actually far more worrisome to those who worry about dumping: It covers any firm with at least 20 employees (the ACA starts at 50), and has a fine of less than $300 per employee (as opposed to the ACA’s $2,000). However, the structure of the Massachusetts market and Massachusetts reforms were much like that of the Affordable Care Act. Together, the two experiences should give us a decent window into what the ACA might bring.

In San Francisco’s case, only 25% of employers were in line with the law’s requirements before it took effect, but only 1 in 5 employers took the option to pay, while the rest played, suggesting most employers were willing to offer qualifying health insurance to their employees in order to comply with the mandate. In addition, employers were largely supportive of the mandate and didn’t identify it as a serious source of problems.

In Massachusetts, the experience was even more positive. As this figure from the paper shows, when the mandate took effect in 2008, more firms (even ones that weren’t affected) offered health insurance:


In addition, there wasn’t any noticeable increase in the number of firms who said they planned to drop coverage, corroborating evidence from other studies cited in the paper, which showed that the mandate had no effect on how many employers dropped coverage or, for the most part its generosity. The majority of employers in Massachusetts were also generally happy with the reform package.

These aren’t perfect analogies by any means (the penalties are different, and so are the options for employees whose employers don’t offer health insurance), but they do suggest that there has to be a pretty good reason employers are “playing” when it’s so much cheaper for them to simply pay. It’s hard to say what that reason is for sure, but we can speculate.

One of the reasons may be that dumping employees and paying the fine would cause a lot of discontent — people generally like what they have, and they don’t want to change their health insurance. Another big reason is that when firms competing for the same workers offer health insurance, one firm’s unilateral decision to pay instead of play will make it much harder to recruit workers, who will expect to receive ESI. Finally, Colla et al. suggest an intriguing possibility. The fines companies pay for not carrying health insurance are essentially invisible to the worker, who will then demand a corresponding increase in cash. As we learned last week, employers generally pay for health insurance by reducing wages, but workers who aren’t getting ESI won’t accept the lower wages. Thus, the employer can’t shift the cost of insurance as easily to the employee.

Regardless of the reason these reforms haven’t created as much of a stir as expected, it remains to be seen how the ACA’s employer mandate affects the market — but given the experiences in San Francisco and Massachusetts, it’s probably a good bet that it won’t be as disruptive as it might appear at first.

Next week: Now that we’ve learned quite a bit about health insurance in America, we move to perhaps a more fundamental question: Does health insurance even work?


Allan Joseph is a senior at the University of Notre Dame studying economics and pre-medical studies. You can follow him on Twitter @allanmjoseph.

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