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The Affordable Care Act's employer mandate was created to help heal the U.S. health care system. But it's complexity makes it a tough pill to swallow.
The Affordable Care Act (ACA) is achieving many of its goals: According to recent reports, the proportion of Americans who are uninsured has been reduced dramatically, health insurance coverage is becoming more affordable for low- and moderate-income Americans, and health care cost increases are at record lows.
Nevertheless, the law is far from perfect, and negative views of it continue to outweigh positive ones (46 percent vs. 41 percent) among the public, according to the March 2015 Kaiser Health Tracking Poll. Surveys also show that most Americans want Congress to fix the law rather than repeal it. And with a largely Republican Congress pitted against a president certain to veto repeal legislation, that appears to be the most viable option.
How the Mandate Works
The employer mandate portion of the legislation is a key target for repair. The ACA really contains two “employer responsibility requirements,” both of which apply only to “large employers,” defined as those with more than 50 full-time or full-time-equivalent employees as of 2016 or 100 or more for 2015. One provision requires large employers to offer “minimum essential coverage” to 95 percent of full-time employees and their children as of 2016 (70 percent in 2015) or pay a penalty of $2,084 for each full-time employee beyond the first 30 employees in 2016 (80 in 2015) if any employee receives premium tax credits through the public exchange.
A second requirement imposes a $3,126 penalty on large employers for each employee who receives premium tax credits because the employer fails to offer affordable and adequate coverage, up to a limit of $2,084 for each full-time employee beyond the first 30 in 2016 or 80 this year. Coverage is considered affordable if an individual employee can purchase it for 9.56 percent or less of his or her gross income. It is adequate if it offers “minimum value”—that is, 60 percent or better actuarial value.
The mandate serves a useful purpose. Ninety percent of privately insured Americans are covered through their employer, and most are receiving coverage that they are satisfied with. The mandate discourages employers from dumping employees into the individual market, where their coverage would be more costly and less comprehensive. In addition, low- and moderate-income employees who lose coverage would be eligible for tax credits to cover part of their costs, increasing federal expenditures.
Problems with the Mandate
But the mandate is terribly complex. To begin with, counting workers to determine whether an employer reaches the 50-employee threshold is often difficult. Hours of seasonal workers, for example, are not usually included. And affiliated employers may be treated as a single employer for determining size.
Moreover, employers are only required to cover full-time employees, defined as those who work 30 hours a week. But workers’ hours often fluctuate, and counting hours for salaried workers isn’t always straightforward. For example, think of adjunct faculty, airline pilots and high school coaches and how much their workload can change from week to week.
The mandate partially addresses that issue by not requiring employers to determine upfront whether variable-hour employees are full time or part time; rather, employers can track the hours over a period of time to determine workers’ status. However, the rules governing the retroactive determination of employment status are so complex that they impose a considerable record-keeping burden.
What’s more, the employer mandate has led to some unintended consequences in the labor market. Some small employers approaching the 50-employee threshold have cut back on hiring. Others have reduced the weekly hours of part-time employees to below 30 to avoid having to offer them coverage.
Finally, it’s not clear that the employer mandate will actually result in decent coverage for many Americans. To avoid the $2,084 penalty, employers need simply offer “bare-bones” coverage that includes preventive services and does not violate other provisions of the law. Employers that offer adequate and affordable coverage escape all penalties, even if no employee enrolls in the coverage.
Employees who are offered “affordable” individual coverage are barred from enrolling their families in marketplace coverage with premium tax credits, even if the employer-sponsored family coverage is clearly not affordable. In addition, the ACA prevents individuals who enroll in employer coverage—however inadequate—from qualifying for premium tax credits.
What’s the Solution?
Repealing the mandate is not the answer. Many employees would likely lose coverage they value, and employers that do not currently offer health insurance would be less likely to offer it in the future. In addition, the financial burden on the federal government would increase, both directly through the loss of the penalties employers would pay under the mandate and indirectly through the higher premium tax credits that would be paid for individuals getting coverage via that option.
Merely redefining full-time employment as 40 hours rather than 30 does not help either, since most people work close to 40 hours a week and thus more employees would potentially face a reduction in hours and loss of coverage.
But there is a better way. Congress could return to earlier reform proposals, such as the law that was adopted by Maryland in 2006. (It was later invalidated as pre-empted by the then-federal law.) That legislation required very large employers to spend at least 8 percent of their payroll on employee health insurance or pay the difference between what they actually spent and 8 percent of the payroll as a tax. Adopting this method would dramatically reduce the complexity of the current approach. Employers would need to know only two numbers: the amount of their payroll and what they spent on health benefits. The percentage could be adjusted for smaller employers.
This method would need to be accompanied by vigorous enforcement of current prohibitions against benefit discrimination in favor of highly compensated employees to discourage employers from spending the required amount only on favored employees. An amended law could include provisions that would penalize employers for dumping high-risk workers into the marketplace, similar to the provisions that applied to the pre-existing condition high-risk pool program in place from 2010 to 2013.
Of course, this method would lack the precision and comprehensiveness of the current approach. Some employees who would receive coverage under the current rules would lose it, although they could get exchange coverage. But the benefits lost would be more than offset by the reduction in complexity, dead-weight administrative costs and unintended labor market effects of the current approach. It just might be the right prescription for what ails the ACA.
Timothy Jost is a professor at the Washington and Lee University School of Law in Lexington, Va.
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