On Monday, I mused about whether employers would risk-rate their health insurance offers if they could. I concluded that the answer was “no” due to path dependency (status quo bias). Employer-sponsored plans are community rated, just as will be those offered in the remade individual market. Yet, this is a somewhat controversial aspect of the new marketplaces, even though it’s not controversial for employer-sponsored plans.
That’s odd, and it got me thinking about another novel element of the law that’s controversial: the individual mandate. If we need such a mandate now, why didn’t we perceive a need for one for employer plans before? That is, why don’t employers require employees to take up insurance? That they don’t and that employer-sponsored health insurance — or the large-group market, really — basically works should make us think: Do we need a mandate?
One purpose of the individual mandate is to prevent adverse selection (too many sick people signing up) to an extent severe enough to destabilize the market. Though there have been adverse selection problems among plans offered by employers, it’s not a rampant problem for employers in general, at least not those with large enough risk pools (large group). Almost all large employers offer coverage. It’s stable (PDF, see p. 25). Why?
First, employer-sponsored plans are highly subsidized. They’re subsidized through the tax exclusion of premiums. People also perceive that they’re subsidized to the extent that employers appear to pay part of the premiums. Yes, employees really pay the employer share through reductions in wages. However, it’s not as if each individual can immediately recoup those wages in full for himself or herself by declining coverage. In the short-term, you really are giving up the employer contribution if you refuse coverage. So, this certainly feels like a subsidy.
Second, the sickest employees are forced to stop working due to poor health. They then drop out of the employer-organized risk pool. The fact that you have to be healthy enough to work to get into the risk pool acts as a bulwark against adverse selection. Note that this does not readily extend to dependents. An unhealthy dependent might remain in the pool so long as the policyholder continues to work.
Third, workers, by definition, have income. In general, those with income are better able to afford health insurance, relative to those with no income. This makes it more likely that even the healthy will take up coverage. Again, this is a direct result of tying insurance to work.
A few other ideas were offered on Twitter: It’s “habit” or “culture” to get health insurance with your job. Maybe a lot of people just do it by default, without thinking much about the cost. Another point is that there is an open enrollment period. If workers miss it, they’re at risk for health care costs for a full year, until the next open enrollment period. Of course this will be true in the new individual marketplaces too, so it’s not helpful in explaining why an individual mandate is necessary for them but not for employer sponsored plans.
Looking these reasons over, I am most impressed by the size of the subsidy, both real and perceived. If one’s employer pays about 75% of the premium (which is typical) and one-third of one’s contribution is a tax subsidy (roughly the average), then it seems like one is only paying 16.5% of the premium. That’s a huge subsidy, or perception thereof.
Honestly, I’m with candidate Obama on this one. If we subsidized insurance to this extent for everyone, we’d have no need for an individual mandate. Basically, if it’s cheap enough, you don’t have to make people buy it. They’ll just want it. And that’s what happens with employer-sponsored plans, though other features I mentioned play a role in its viability too.
It’s my bet that we could remove the individual mandate from the law, but that wouldn’t work without making it dramatically more expensive through much higher subsidies.* Is there a bill-passing coalition for that?
* An alternative is to make insurance dramatically cheaper through, say, higher deductibles. But this doesn’t entirely avoid greater subsidization since not everyone can afford higher deductibles.
