MA vs. US: Round 2: Employer Penalties

Sorry, It’s been awhile.

Although the MA reform was considered bi-partisan.  There were a few elements that Governor Romney vetoed when the bill was signed.  The employer “fee” was one important one.   Employer requirements or fees don’t make sense for a number of reasons.   There is an on-going myth that the employer’s money and the employee’s money are two separate things.  And, by requiring an employer to offer insurance or pay a fee will result in added benefits to the employee.  In reality, there’s really no evidence that this occurs.  Instead, employers respond by reducing their full-time workforce, or increasing the price of their goods (if that’s possible) both having a potentially negative impact on the economy.

How do MA and the Federal Bill differ with respect to these features?  First Massachusetts:

Under the legislation, employers with more than 11 full-time equivalent employees must facilitate pre-tax availability of health insurance coverage to their employees. That’s the innovative part of the mandate that makes sense.  It doesn’t cost the employer anything (well, maybe some paperwork) and it encourages employees to purchase insurance.  In addition, the law requires employers with 11 or more full time equivalent employees that do not make a “fair and reasonable” contribution toward employee health insurance premiums to pay an annual per employee fee of $295 (or $73.75 quarterly). An employer is considered offering a “fair and reasonable contribution” if 25% of his full-time employees are enrolled in the employer’s group plan or he contributes at least 33% of the individual premium. Employers with 50 or more employees must fulfill both tests unless 75% of employees are enrolled, then the 33% contribution level does not apply (fulfilling both tests was added by the Patrick Administration).

And, the Federal requirement?

While more employers are exempt (<50), the penalties are higher per person (depending on offering status, $2000 or $3000 per person) but the first 30 employees are exempt.  I guess the It may be a wash depending on the size of the employer.  The Federal law also has this quirky, difficult to implement feature called the “voucher.”   Employers must facilitate a voucher system for employees with low incomes when employer coverage is too expensive. In general, I really like the idea of a voucher system but in this context I can’t imagine that this will amount to anything other than an administrative nightmare.   Finally, the federal law requires employers to auto-enroll employees if 200+, employees can, of course, opt-out of coverage.   This makes sense to me and should not be difficult for employers to implement.

So, what will this mean?

What is not known is how employers will respond to these “incentives.”  In Massachusetts, most employers have not dropped coverage.  However, I don’t believe Massachusetts is a model for how the nation’s employers will respond for a few reasons. First, the penalties for not offering apply to many fewer employers.  Second, the individual mandate is difficult to enforce on a national level.  This will dampen the demand for insurance and employers won’t feel the pressure to offer as they do in Massachusetts.  In addition, employer offer rates in other states are much lower and there’s no evidence that employers who don’t offer now will begin to offer if given small tax credits (which the bill provides).  Finally, there’s no commitment from businesses (as there was in Massachusetts) to making this reform work.

Instead, what I believe will happen is that smaller employers may just drop coverage altogether and send their employees to the state exchanges.  If enough employers do this, we might actually gain a functional individual market allowing individuals to purchase the insurance that best meets their fiscal, health, and risk profiles.   We might end up with a market-based health care system after all.  If state exchanges are established with this possibility in mind, they might actually offer consumers one stop shopping with the needed transparency and administrative functionality akin to purchasing an airline ticket.   I know that’s wishful thinking on my part, but I don’t think it’s crazy.  Do you?