Employer Mandates: No Good Choices

Yesterday I mentioned a new CMS report noting that the current health care reform proposals that have passed the House of Representatives would improve coverage, but increase costs. While that undoubtedly was the big news of the day, there was another finding that I thought was of interest:

"While some employers will offer insurance for the first time, because of new access to insurance plans, other small employers will drop coverage because paying a penalty to the government will be less expensive than actually offering coverage to their employees..."

Patricia Murphy, The Capitolist, November 16, 2009

For purposes of reference, the current employer mandate features in the House bill are that employers must provide insurance or pay a penalty of up to 8% of their total payroll. Companies with total payrolls under $500,000 are exempt, and the penalty to phased in for businesses with payrolls up to $750,000. Businesses with ten or fewer employees get tax credits to help provide coverage. (Erica Werner and Ricardo Alonso-Zaldivar, Associated Press, Novemebr 7, 2009)

I’m not a small business, but I hope I might be excused for trying, on occasion, to think like one. And if I’m a small business, my decision to offering a health care package probably depends on the type of employees I’m trying to hire and keep. If I need highly educated or technically skilled workers, employees who command higher levels of salary, I’m probably going to provide the benefit. I’ll do so simply because this is the best way to recruit the highly select staff that I need, in order to stay competitive and continue to profit, and I’ll probably continue to do so regardless of the presence or absence of any kind of government mandate.

But I would argue that it’s not these highly sought-after employees that are the focus of health care reform. The currently uninsured employees we’re really worried about are, by and large, those who are essentially unskilled or hourly workers employed by either a small business or a large corporate retailer. These are people who are relatively easy to hire and easy to replace, and there seems to be a ready supply of them. The market impetus to provide insurance for them simply does not exist. This seems especially true in the midst of a recession.

So here’s my decision point as a business owner. Let’s pretend I’ve got twenty employees and a payroll of a million dollars. The government is going to require me to either provide insurance to my employees or pay a fine. It’s uncertain if I will be required to provide a full benefit to the employee or if the employee will cost-share, if I will be required to provide single person or family coverage, or the limits of coverage included within the benefits package. So for purposes of my calculation, I’ve taken the annual cost of my own individual “real-life” family policy ($16,230, of which the employer pays roughly $9,890) as a baseline. (Granted, it’s a pretty good policy, but certainly not the equivalent of the “high-value” polices subject to taxation in the current Senate version of the health care bill.)

Let’s say my company has ten employees. For my workers, the total cost of coverage will be $98,900. This compares with a penalty of 8% of payroll, or $80,000. The disparity between the fine and the premiums get larger as the number of employees rises. For example, if I have fifteen employees my cost is 148,350, and the differential is $68,350; if I have twenty employees, the numbers are $197,800 and $117,800, respectively.

So if the two obvious choices are to pay a penalty to the government or provide health insurance to my employees, I might certainly choose the less costly option. I might be even more prone to do so if I know that there are expansions of Medicaid or other subsidies to help my lower-paid employees buy insurance on their own. But there’s a third choice as well. I could decide that health insurance is an important benefit, and make up the difference between the premiums and penalties by either tightening my worker’s wages and taking the difference out of their salaries, or by letting a few go so the remainder can have their benefit. Neither of these are good choices.

Given this analysis, why would any business actually want to provide health insurance for their employees? Some large corporations such as Wal-Mart have come out in favor of employer mandates as a way to level the playing field and eliminate the competitive advantage held by companies that do not offer insurance. One might be forgivien for wondering if this support is real or simply a response to the knowledge that the train is roaring down the tracks and it's best to be on board, but the support is there nonethless. Advocates can also point to the State of Massachusetts, where employer mandates within their 2006 overhaul of health care did extract compliance from the vast majority of affected employers. (To be fair, the employer requirements were less stringent than as proposed in the current House bill, but so too were the proposed fines.) It remains to be seen if the public spirit shown by employers in the Bay State is shared throughout the country. One hopes for the best, but has unfortunately come to expect the worst.

So what’s the solution? The goal should be for businesses to opt to provide health insurance, not be forced to do so. But if employer mandates are the way to go, it would make sense to raise the penalty to an amount equivalent to that of the health insurance itself in order to eliminate non-compliance as a cost-saving choice. But much better, I think, to either rely fully on an individual mandate with generous subsidies to truly make insurance affordable (I remain desperately troubled by the idea that a family, even with a subsidy, should be required to buy insurance instead of using the funds on other needs), or to accept that the best and most cost-efficient way to solve the problem is simply to establish a baseline level of benefit for all Americans.

(Author's Note: When I originally put this note down on paper, I was using an Associated Press article as a reference. This morning, I was flipping through the news and found another AP article by David Lieb about small businesses dropping health care coverage. This article said:

"Both the House and Senate versions would offer temporary tax credits to offset a portion of the health insurance costs for businesses with fewer than 25 employees and average wages of less than $40,000...

Legislation passed by the House would impose a tax penalty on businesses with payrolls of more than $500,000 that don't offer health insurance or fail to pay at least 72.5 percent of the premium costs for a health plan with federally mandated benefits."

Granted, the differences in the provisions may seem minor, but they are differences nonetheless. So is it any wonder that nobody really understands what's going on?)