November 30 2011

ObamaCare: Bad News for Sick Workers

Hadley Heath

The employer mandates and many regulations in ObamaCare were sold as protections for the American worker - and especially sick and underinsured workers.  But instead, as a new study shows, employers will face strong incentives to offer cheaper coverage options that appeal to young, healthy employees, while they ask their sicker, older employees to voluntarily go to statewide exchanges.  From the abstract:

This Article argues that federal health care reform may induce employers to redesign their health plans so that low-risk employees retain employer-sponsored insurance (“ESI”) but high-risk employees opt out of ESI in favor of insurance available on the individual market. It shows that such a strategy would shift health care expenses for high-risk employees from employers and their low-risk employees to the public at large. Not only would this undermine the spirit of health care reform, but it would jeopardize the sustainability of the insurance exchanges that are designed to organize individual insurance markets starting in 2014. In particular, it would expose these exchanges to adverse selection caused by the entrance of a disproportionately high-risk segment of the population into the insured pool. This, in turn, would increase the cost to the federal government of subsidizing coverage for qualified individuals and exempt more people from complying with the so-called individual mandate, thus producing further adverse selection. 

The authors of the study, Amy Monahan and David Schwarcz, seem to blame employers for this "targeted dumping" or "undermining" of health reform, when really employers are simply reacting to the new rules of the game that the ACA puts in place.  

Today, 48 percent of even the smallest businesses (3-9 workers) offer health insurance coverage as a part of their benefit package (and 71 percent of firms with 10-24 workers, and 85 percent of firms with 15-49 workers).  But none of them has to do so.  (I'm not suggesting they are charitable; I'm suggesting that they offer health benefits to make employment at their firm more attractive, and they want to take advantage of the tax break that they get for employer-sponsored insurance.)  

Although ObamaCare includes an employer mandate for firms with 51 or more workers, there is no such mandate for small companines, and as health benefits become more and more expensive (and because competition for jobs is high anyway during this economic slump), many employers are considering dropping coverage completely.

Moreover, in companies with 51 or more workers, employers won't face any penalty if their workers voluntarily turn down their employer's coverage and opt for the statewide exchanges.  Since the exchanges are subsidized with taxpayer money, it won't take long for both employer and employee to figure out that, for sick or high-risk workers, they are better off restructuring compensation away from health care benefits.

Another consequence of high health insurance costs for workers - especially amidst the uncertainty of ObamaCare's fate - is that employers may be tempted to discriminate in hiring or in lay-offs.  As I wrote in a policy paper last year:

Not only does the health reform discourage hiring in general because of the higher costs of providing “essential” health insurance coverage, but the peculiarities of the law mean that employers will face greater exposure depending on who they hire, creating the potential for discrimination and unfair treatment in the hiring process and employment. 

The expected insurance cost to an employer of a childless 26-year-old is much lower than the expected cost of a single parent (with dependents) because of the mandates that might allow the former to stay on his or her parents’ policy but might similarly require that the employer provide insurance to the children of the latter. This becomes a consideration not only during the hiring process but if downsizing takes place. Because of the greater costs  involved in providing health care, employers will be faced with an incentive to evaluate and lay off workers based on their health insurance and income status.

First of all - lest we forget - the administration still hasn't made it clear if employers are required to offer "affordable" coverage to just their workers (as individuals) or to their workers and dependents (as families).  But the consequence of the latter will result in... wait for it... even more people than expected going to the subsidized statewide exchanges.  

Like all government regulations, the employer mandates in the ACA create winners and losers.  It's likely that, as authors Monahan and Schwarcz suggest, the Department of Health and Human Services will try to prevent this kind of behavior among employers by publishing even more regulations and essentially outlawing any variety in the kind of health insurance policies on the market.  

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