ACA Mandate Penalties May Not Be Necessary, After All

Getting rid of the Patient Protection and Affordable Care Act’s (ACA) employer mandate would have little effect on Americans’ health coverage, and would eliminate labor market distortions and lessen employer opposition to the ACA, according to a brief recently issued by the Urban Institute. The downside would come with a loss of federal revenue that is currently expected from employer penalties.

Minimal effect of eliminating mandate. Obviously, some employers are opposed to the ACA’s employer mandate because they must provide new health coverage to employees or pay a penalty, especially if their workers obtain a premium subsidy when purchasing coverage through the health insurance marketplace. However, the Urban Institute points out that employees working 30 to 39 hours per week who also are eligible for subsidies comprise only 1.8 percent of the workforce, or 2.3 million people.

Not only that, but the Urban Institute’s calculations imply that employers with 50 or more workers that did not offer health coverage prior to the enactment of the ACA will be the same employers that are not likely to offer it in the future, anyway. These tend to be smaller employers with primarily low-wage workers. Data that the Urban Institute used from a medical expenditure panel survey in 2012 shows that 35.9 percent of low-wage employers with 50 to 99 workers did not offer their employees health insurance, compared to 7.6 percent for higher-wage employers with 50 to 99 workers, 0.8 percent of lower-wage employers with 1,000 or more workers and 0.3 percent of higher-wage employers with 1,000 or more workers. And because penalties imposed on employers will most likely be passed back to workers in the form of reduced wages, it is the low-wage employees who will bear the brunt of the ACA’s employer mandate penalties if they are not eliminated, the Urban Institute theorized.

Mandate’s effect on full-time status. Although the employer mandate requirements have been delayed for employers with 50 to 99 workers until 2016, and for larger employers until 2015, some employers have already reduced hours for part-time workers to less than 30 per week in anticipation of ACA penalties (such as Land’s End, Regal Entertainment, Wendy’s, and Sea World), and other have stopped providing health coverage to part-time workers (such as Trader Joe’s and Target).

However, the Urban Institute emphasizes some disincentives to reducing hours and/or avoiding increasing the number of workers beyond 49. For example, employers thinking of moving to a more part-time workforce to avoid either penalties or having to provide health insurance should keep in mind that hiring more workers to do the same jobs leads to increased costs from administrative expenses and non-health benefits, along with lost efficiency. Furthermore, workers unhappy with their reduced hours could increase turnover rates, which add to the costs of hiring more workers. Finally, the decision regarding whether or not to increase a workforce depends upon many more factors than just increased health care costs. Expansion of production capacity is one of those.

Less incentive to offer health coverage to low-wage workers. The Urban Institute also postulates that, if the employer mandate were eliminated, most employers would not drop coverage, especially since about two-thirds of American workers are offered employer health coverage, even though there is no mandate in effect at the moment to do so. Aside from increasing employee loyalty, employers have an incentive to offer coverage, says the Urban Institute, because employees can receive tax benefits from it. Employer health insurance contributions are, in essence, a form of nontaxable compensation that employers can provide employees in lieu of higher salaries. Because tax benefits for employer health insurance contributions increase as incomes increase, there is more incentive for employers with a higher paid workforce to offer coverage than there is for employers with primarily low-wage workers.

The value of the premium subsidies available to low-wage workers might very well exceed the value of tax credits for employer health insurance contributions, and that value may exceed the ACA’s employer mandate penalty amounts, anyway, meaning that fewer costs would be passed on to workers if the employer did not offer insurance. The Urban Institute also recommended that employers with very low-wage workers in states with expanded Medicaid eligibility also could save money by having their employees enroll in Medicaid, especially since employee enrollment in Medicaid does not trigger penalties.

The brief is based on the Urban Institute’s Health Insurance Policy Simulation Model (HIPSM) data, to determine how many employers currently offering health coverage would drop it if the employer mandate were completely eliminated, and compared their results to those of the Congressional Budget Office’s (CBO) estimates of the effect of a one-year delay in the mandate. According to the HIPSM, the number of employees with employer coverage would fall by 500,000, or by 0.3 percent. The CBO estimate for a one-year delay is a drop in coverage for 1,000,000 employees, or 0.6 percent. CBO had suggested, but did not have data to show, that employer coverage would drop even more if the mandate were completely eliminated. The Urban Institute estimates that the loss of revenue that would result from eliminating the employer mandate penalty would be just under four billion dollars for 2016. Approximately $46 billion would be lost between 2014 and 2023, they predict. The CBO estimates are higher, about $130 billion for the same time period.

For more information, visit http://www.rwjf.org/content/dam/farm/reports/issue_briefs/2014/rwjf413248.

Visit our News Library to read more news stories.