Empoyer burden by Shutterstock.com
It may be hard to believe, but even progressive blogger Ezra Klein agrees with me that "the employer mandate should be eliminated." Thus, the administration decision to delay this mandate for a year is good news, although an announcement to repeal the provision entirely might have been even better.
Avik Roy already has weighed in with his take on some of the implications of this decision and readers are encouraged to read his post first for some of the nuts and bolts of how the employer mandate is supposed to work and the first order implications of its delay. In this post, I want to address two issues that he omitted. If delay of the employer mandate is a good idea, why not delay the individual mandate as well? Second, what does this development tell us about the politics of repeal and replace? Let's begin with a quick review of why the employer mandate was always a bad idea.
Why the Employer Mandate is Bad Policy
Like the "Cadillac tax," the employer mandate was a misguided effort to raise additional revenues to help cover the anticipated ~$1 trillion 10-year cost of Obamacare. The employer mandate raises both efficiency and equity concerns.
The Mandate Will Increase Unemployment. From the standpoint of efficiency, the mandate essentially is a tax on labor that will have predictable adverse effects on employment. Most employer-based coverage is self-financed by workers in the form of lower cash wages than they would otherwise earn (a view adopted by even the non-partisan Congressional Budget Office). But because one third of uninsured workers earn within $3 of the minimum wage (meaning there are limits on the ability of employers to pass the cost of coverage onto such workers), such low-wage workers are disproportionately vulnerable to becoming unemployed as a consequence of a mandate. The average employer contributed $4,508 towards single coverage in 2011-an amount that likely will have arisen to $5,100 by 2014-i.e., more than $2.50 hourly for a full-time worker, or $3.40 an hour for workers working 30 hours a week (the threshold for determining which workers are required to be covered under Obamacare). Of course, unemployment does not have to take the form of entirely losing one's job. The many workers who already have found their weekly hours involuntarily cut to below 30 by employers seeking to avoid the mandate are one illustration of the perverse unintended consequences of trying to micromanage employer decisions from Washington, D.C.
The Mandate Will Lead to Workforce Dislocations. Of course, cutting work hours or refusing to hire are not the only strategies facing employers. The mandate creates a huge tax on hiring new workers. For example, it adds $40,000 in costs for a 49-person firm to add one new worker. This creates perverse incentives for small firms to remain small rather than grow and prosper. The mandate likewise will create incentives for large firms to shed their lowest paid workers (e.g., housekeeping staff) and instead contract with small firms that can provide the identical services without facing a mandate that increases their labor costs. This may sound like a simple substitution-no big deal-but in reality, it will add unnecessary overhead costs to the labor market as arrangements originally handled within a single firm instead become the subject of negotiation between firms each with its own overhead structure. Think of it this way: if sub-contracting for such services were the most efficient arrangement, this already would have happened even without a mandate. This may seem like nickels and dimes, but even a 1% add-on to business costs can be crippling in an economy where the economy-wide rate of return on invested capital has plummeted to just over 1.3%.
How Many Workers Would be Adversely Affected by the Employer Mandate? The CBO estimates that Obamacare, on balance, will reduce the amount of labor used in the economy by a small amount-roughly half a percent-which is equivalent to roughly 700,000 workers. CBO did not report how much of this would be attributable to the adverse effects of the mandate, simply asserting the job losses would "primarily" result from reductions in the amount of labor that workers choose to supply. However, two well-respected health economists have calculated more precisely that "1.4 percent of uninsured full-time workers [i.e., roughly .2 percent of all full-time workers] would lose their jobs because of a health insurance mandate." This is similar in magnitude to the estimated 300,000 workers who would lose their jobs due to a 70 cent increase in the minimum wage.
The Most Vulnerable Workers Will Be Adversely Affected. In an economy with 143 million workers, this may seem like a trivial impact. But tell that to the vulnerable workers affected by loss of a job or steep reductions in the working hours. The health mandate study reports: "Workers who would lose their jobs are disproportionately likely to be high school dropouts, minority, and female." Similarly, a systematic review of more than 100 different minimum wage studies revealed "overwhelming" evidence that those most likely to experience unemployment as a consequence of higher minimum wages are those with the lowest skills and teens. Study after study shows that these adverse effects are concentrated among Black and Hispanic teens. And the effects are long-lasting. Stanford researchers have found that those who do not work as teenagers have lower long-term wages and employability even after 10 years.
But the unfairness does not stop there. The mandate means that low-wage workers will be considerably worse off than their counterparts in small firms not subject to the mandate even if they retain their jobs and work the same number of hours. And this conclusion is completely independent of how their employer elect to deal with the mandate. Consider:
- If their employer retains coverage, they will receive a subsidy through the tax exclusion (roughly 15%) that is far small than the subsidy their counterparts will receive by purchasing coverage through the exchange (which could exceed 90%).
- If their employer retains coverage but the employee elects to obtain highly subsidized coverage on the exchange because the employer's plan is found to be "unaffordable," the employer will pay a penalty of $3,000-an amount that will be largely borne by the low-wage worker in the form of lower compensation.
- Likewise, if their employer drops coverage, the worker would then be eligible to obtain subsidized coverage through the exchange, but would end up bearing the cost of the $2,000 per worker penalty-i.e., would essentially lose $1 in hourly compensation relative to the equivalent worker employed at a small firm.
In short, delaying this odious requirement for a year surely is good news for employers but also is especially good news for the most vulnerable workers currently employed by large firms.
If Big Employers Get a Break, Shouldn't Individuals Too?
In recent weeks, a tsunami of studies have demonstrated that those in the individual and small group market are likely to be greeted by "rate shock" when they begin to purchase coverage through the exchanges. Avik Roy has done a commendable job teasing out the magnitude of the premium increases that might be expected and explaining how much of these increases can be attributed to the requirement that insurers take all comers, the share attributable to modified community rating restrictions and the residual that results from forcing nearly all Americans to have richer health benefits than they otherwise would choose on their own. Most recently, the Wall Street Journal has confirmed that for the healthiest consumers in the exchanges, premiums could double or triple compared to current levels.
Among health policy wonks, there's a fierce debate over whether such premium increases were "expected" back in 2010 when Obamacare was enacted. It's fair to say that any health policy analyst willing to follow the evidence should have known what was coming especially since PricewaterhouseCoopers reported in October 2009 (before either the House or Senate had voted on a plan) that the plan would cause premiums to increase 49% in the nongroup market, 28% in the small group market (firms under 50 employees), 11% for large employers with insured coverage and 9% for large employers who were self-insured. But in light of policymakers such as President Obama insisting in 2008 that his plan would "save a typical American family up to $2,500 every year on medical expenses" and former House Speaker Nancy Pelosi assuring us in 2012 that "everybody will have lower rates," the average American might be forgiven for having no inkling that the "Affordable" Care Act would result in such massive increases in health insurance premiums.
Which leads to the obvious question: if employers need one extra year to "adjust" to the added burden imposed by Obamacare, why shouldn't the average American family be given the same relief? At a minimum, if the employer mandate is viewed as too onerous, then how could the individual mandate be any more palatable to the disproportionately low income families who will confront it next January?
The Politics of Repeal and Replace
Some conservatives have long argued for a delay, repeal and replace strategy. I myself have argued for delaying the entire law for at least a year. Delaying the employer mandate without delaying the individual mandate is going to have predictable chaotic effects. It surely will increase the number of individuals who end up on the exchanges, for example, thereby increasing the federal cost of the generous subsidies provided there. As Avik Roy has pointed out, unraveling employer-based coverage and creating a sizable, healthy non-group market for health insurance is not necessarily a bad prospect. Nevertheless, had Congress realized that so many millions (or tens of millions) more would end up on the exchanges, lawmakers might have made very different decisions about the size and scope of subsidies available there. For example, subsidies might have been phased out at 300% of poverty (as they are in Massachusetts, despite having the 2nd highest per capita income among all states) instead of 400% of poverty.
The decision to delay the employer mandate is shocking in political terms. Just a few months ago, conservatives thought "Obama will never willingly sign anything that delays the implementation of his namesake." So one can only imagine the political pressures that were brought to bear behind the scenes to lead to this new announcement. Going forward, such pressures will only increase as individuals bump up against the "new normal" in health insurance premiums as they begin seeking coverage through the exchanges. Yes, the impact will be softened for some due to subsidies, but the reality has finally begun to strike home that many individuals will end up paying higher premiums than they do today even after taking into account the subsidies they receive. If it made political sense to delay the employer mandate 1 year to get safely past the 2014 elections, imagine how tempting it will be to a growing number of vulnerable Democrats to make the identical calculation regarding the individual mandate in the months ahead.
But without the individual mandate, the requirement to take all comers regardless of pre-existing conditions and the modified community rating restrictions that limit how much premiums can vary based on health status, age and gender will not be workable. As states that adopted such insurance reforms without an individual mandate discovered, the upshot might well be the elimination (or substantial shrinkage) of the non-group market as health insurance companies flee for greener pastures. Thus, the most sensible course of action might be to delay all of the 2014 provisions of the law by 1 year while Congress sorts out how to proceed. This not only gives federal and state bureaucrats a welcome chance to get implementation of the exchanges back on track, but it also allows ample time for the residual court cases against Obamacare to play out; this would resolve, for example, the linchpin issue of whether federal subsidies can be distributed in federally-run exchanges. Given that such a delay is more likely to benefit Democrats than Republicans in the 2014 elections, one can even imagine more Democrats than Republicans voting in favor of this proposal. At minimum, it likely would be a decidedly bipartisan vote-a very welcome development on an issue that has been plagued too long with partisan division.
Health policy wonks will recall that the Medicare Catastrophic Coverage Act of 1988 took 16 months to get repealed, but it actually happened very quickly once seniors finally became aware in concrete dollars and sense terms how much more their premiums would be to bankroll the enhanced benefits provided to them by the new law. Their fury over having to pay more easily overwhelmed any rational calculation of whether the added costs were worth the added benefits. And in fact, senior intuition was correct: "The Congressional Budget Office estimated that the average Medicare beneficiary would pay the Government $145 this year for benefits available on the market for $62." This should be a cautionary tale to progressives who are convinced Americans won't mind being forced, in essence, to buy "Cadillac" coverage while getting only a "Chevy" ride.
Will angry Americans swarm their members of Congress as seniors did in 1989? It's hard to say. But what we can say with more certainty is that whatever anger they feel is going to be amplified be the perception that as usual, policymakers have responded to the influence of big business while ignoring the concerns of the average American. If Democrats wish to avert MCCA Repeal 2.0, a 1 year delay of all of Obamacare might well be the most sensible course of action.
Update 1: July 3, 2013
Chris Jacobs explains why this decision may dramatically increase the amount that the federal government has to pay for exchange subsidies.
Jim Capretta explains why the 1-year delay may turn into a self-fulfilling prophecy to repeal the employer mandate entirely; he also cogently explains the political problems that have been created by this decision. The odds of repeal are higher now than when July began.
 This assumes that the employer share grows at the same rate between 2011 and 2014 as occurred between 2008 (when employers paid $3,983) and 2011; this is probably a conservative estimate given the temporary slow-down in health spending that occurred during the recession and because it does not account for any increase in premiums resulting from the enhanced benefits required by Obamacare.