As many of you may know, the employer mandate was recently delayed by the Obama Administration. The employer mandate is a piece of the Affordable Care Act that requires employers with 50 or more employees to offer health coverage to their employees.
An important piece of this requirement is that the health coverage offered by the employer must be “affordable” for the employee This means that the employee’s contributions to their health coverage cannot exceed 9.5% of wages. If employers do not opt to cover their employees, they may face penalties up to $3,000 per person depending on the size and status of their workforce.
As you can imagine, this requirement for employers to provide coverage to their employees has caused quite an uproar. With a quick search of Google you’ll find many examples of articles proclaiming that it’s time to repeal certain portions of the Affordable Care Act, or in some cases the entire bill.
What’s the Problem with the Employer Mandate?
I recently came across an interesting article by Andrew Puzder who is the CEO of CKE Restaurants Inc. Andrew focused on his own experience as a business owner to describe why he thinks the employer mandate implementation was delayed.
Let’s cover some of the main reasons that Andrew believes the employer mandate may be experiencing a bit of troulbe.
Low Interest From Healthy Individuals
One of the key points that Andrew focused on was the fact that their is a great deal of variation in health insurance. The term “variation” refers to the fact that there are individuals in many different situations health-wise.
Some people may be young and healthy with no current need for health insurance. Others may be sick, or likely to get sick based on family history, and are more likely to opt in to health insurance coverage options offered by their employer. There is also a wide spectrum of individuals between the very healthy and very sick.
The problem that Andrew points out is that it’s going to very difficult to convince young, healthy individuals that it’s a good idea for them to sign up for health coverage. He states that adding these healthy individuals to health coverage plans is very important to the success of the ACA.
The reason that young, healthy individuals are so important to the ACA is that they provide stability to the premiums that health insurance users pay. For example, if the situation arises where only sick people are signing up for health coverage then premiums will skyrocket.
Insurance companies take on a certain amount of risk by covering sick individuals. The risk is based on the likelihood of having to pay out a claim to cover a medical bill (this is an overly simplistic explanation of insurance risk). The more risk that an insurance company takes on, the higher the premiums will be for the company’s members.
Insurance companies won’t always know how likely it is that a person will require some sort of expensive treatment. The overall goal when selling insurance is to balance the highest risk individuals with healthier individuals. The premiums of healthy individuals will help pay for the claims filed by sick patients.
You can read more on the topic of adverse selection if you’re interested in learning more about the risks posed to insurance companies.
To Pay or Not to Pay?
One additional stipulation of the ACA states that individuals who do not opt to pay for insurance will be charged a penalty starting at $95 per year and rising to $695 per year. This may seem like a lot, but this is where the problem lies.
For many individuals, the cost of having health insurance is at least equal to, if not more than, the $695 penalty that they would pay for not having insurance. In addition, the inability of insurance companies to deny individuals with preexisting conditions means that a person with no coverage who becomes sick could potentially sign up for insurance only when they need it.
This obviously poses a problem. What is the incentive for healthy individuals to sign up for health insurance if the penalty is cheaper than most premiums, and individuals may be able to sign up for insurance on an as-needed basis?
Why was The Employer Mandate Delayed?
According to Andrew’s article, the main reason for the delay of the mandate was to allow the administration to figure out how to manage the aforementioned problems.
What do you think? Will the administration beef up the penalties to entice young, healthy individuals to buy health insurance? Or will the penalty levels stay the same and potentially cause premiums to rapidly increase?
Please feel free to leave a comment below with your opinion!
More Info on the Employer Mandate