May 23, 2013

Health Care Law Mandates Force Employers’ Hands

The President’s health care law contains a mandate requiring employers with 50 or more employees to offer government-approved insurance or pay a tax. Employers that do not offer health coverage will pay a $2,000 tax per worker. Employers that offer health insurance deemed unaffordable (the cost is more than 9.5 percent of the employee’s family income) will pay a $3,000 tax for every full-time worker who gets a subsidy in the exchange.

The Congressional Budget Office estimates the employer mandate will cost job creators $140 billion in tax penalties over 10 years (2014-2023).  Experts confirm this tax will raise the cost to hire new workers. To avoid being hit by the employer mandate tax, businesses plan to limit employee hours and decrease employee wages. It leaves them with three bad options:

  • Offer government approved health insurance at high cost; 
  • Pay the tax penalty, because it is less expensive than offering health insurance – dumping workers into government exchanges;
  • Keep the number of full time employees below the tax threshold of 50 by laying off workers, moving to more part-time employees, or not hiring.


So it should come as no surprise that employers keep searching for ways to get out from under the law’s onerous mandates. This isn’t because employers don’t want to offer health insurance to their workers -- many just can’t afford it. The health care law’s mandates only exacerbate the problem. A recent poll found that half of all small business owners believe the health care law will increase their health care costs and reduce quality. Employers are not villains; the health care law is simply forcing their hand.

According to the Wall Street Journal, certain benefits advisers and insurance brokers are pitching limited benefit health plans to qualifying employers in an effort to avoid the health care law’s mandate tax. The article says these plans “cover minimal requirements such as preventive services, but often little more. Some of the plans wouldn’t cover surgery, X-rays or prenatal care at all. Others will be paired with limited packages to cover additional services, for instance, $100 a day for a hospital visit.” The article confirms “[f]ederal officials say this type of plan, in concept, would appear to qualify as acceptable minimum coverage under the law … the idea that such plans would be allowable under the law has emerged only recently.”

At issue is the way the health care law heavily regulates the fully insured market versus its more hands-off approach in the self-insured market. With a fully insured health plan, an employer buys coverage from a state licensed insurance carrier. The insurer assumes all the risk to provide benefits to enrolled employees. This is the market where 87 percent of small businesses and people buying coverage on their own get their health insurance today. 

Self-insured businesses, however, do not buy health coverage from insurance companies. Employers set aside money and pay for health benefits directly. In this scenario, the business alone bears the risk to cover employee medical expenses. Self-insured plans are regulated by the federal government through the Employee Retirement Income Security Act (ERISA). Companies that insure their own employees can steer clear of many of the market reforms included in the health care law.

So the self-insured employer could avoid the $2,000 tax penalty by offering its employees a limited benefit plan. As long as the plan was “affordable,” the employer would also not have to pay the $3,000 penalty for any of its workers who decide not to accept the plan. The worker would be allowed to go to the exchange and buy his or her insurance, but would not be eligible for a subsidy. The worker will have to buy more expensive insurance.  

It appears a drafting error in the law opened this door for limited benefit plans to meet the health care law’s minimum coverage standards. Most large pieces of legislation have contained drafting errors at one stage during the bill’s development. This is one of the main reasons major bills are written and negotiated in an open and transparent manner. Doing so helps Members of Congress minimize mistakes, uncover any unintentional consequences, and fix problems. This is accomplished through rigorous committee and floor debate as well as a House-Senate conference process. Unfortunately, the largest health care law ever enacted did not undergo an open, transparent, or bipartisan process. As a result, we can expect to see many more glitches and bumps as the Administration struggles to implement its health care law.

Health Care Headlines

The Washington Examiner: “Low-Skilled Workers Get Raw Deal Under Obamacare” Would you like to have a ‘skinny’ health insurance policy? Probably not. But if you’re employed by a large company, you may get one, thanks to Obamacare.

The New York Times: “Overruns Forcing Lower Payments to Some Providers in Stopgap Health Program” The Obama Administration said Monday that it was cutting payments to doctors and hospitals after finding that cost overruns are threatening to use up the money in a health insurance program for people with cancer, heart disease, and other serious illnesses.

Employee Benefit Research Institute: “Trends in Health Coverage for Part-Time Workers” Employers may respond to the health care law’s mandates by cutting back on health coverage for part-time workers or by increasing the proportion of part-time workers. 

The Congressional Budget Office: “How CBO Prepares Long-Term Projections of Federal Spending for Social Security and Major Health Care Programs” CBO posted a slide deck explaining how it derived its 10-year budget projections for Social Security and major health care programs.

The New England Journal of Medicine: Victor R. Fuchs: “The Gross Domestic Product and Health Care Spending” A prominent health care economist warns that the recent slowdown in health spending is more likely tied to the recession than to any other systemic changes. Fuchs cautions that if health care costs keep outpacing the rest of the economy it “would have catastrophic consequences for the federal government and the U.S. economy.”

Issue Tag: Health Care