• Why don’t employers impose an individual mandate?

    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.

    @afrakt

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    • >>why don’t employers require employees to take up insurance?>>

      My company requires every employee to have insurance, either through them or somewhere else.

      I take it from the quote that this is unusual?

      • It is not unusual for an employer to require employees to enroll in the plan or show proof of coverage elsewhere. Their insurer has made certain assumptions about who will join the group plan. Group contracts typically require a certain percentage of the whole group to be enrolled, setting aside people who have coverage from their spouse (or military, etc.)

        That is why your employer asks for proof of coverage elsewhere. It helps them meet their enrollment target with the insurer.

        In this sense, there is a weak “mandate” from the employer’s plan though they can allow people to go uninsured.

        • I would love some evidence on how common this is and the legal basis. Know of any? If so, please email me (see left sidebar, the mail icon by my name). Of course, feel free to drop resources in a comment here too.

          • Anecdote:

            I seem to remember it was a near all or none requirement of our group. I wouldn’t think it a matter of law rather an actuarial recognition by the insurer that adverse selection could lead to a faulty risk adjustment. Their choice.

            Let me add as a non expert. Insurers use metrics that work not necessarily the metrics others might believe make more sense. They even use zip codes.

          • The legal basis is that state insurance departments allow participation guidelines for insurers to provide employer-sponsored insurance. The rate is generally around 75%, in order to avoid adverse selection.
            Curiously, many insurers are allowed to not recognize individual insurance as coverage that can help fulfill the 75% obligaton. Gioup insurers, in effect, believe individual policies, regardless of their coverage, is tantamount to having no coverage at all.
            The SHOP guidelines for small employer group insurance requires 70% participation.
            Don Levit

          • This article was posted in John Goodman’s column.

            The requirement to have coverage or confirm that coverage is in place elsewhere is very prevalent – if the smaller employer (under say 300 lives), wants to avoid a rate adjustment for anti-selection. I’m surprised you don’t know about the market reforms/guarantees “guaranteed issue” and “guaranteed renewal”.

            Those PPACA guarantees are somewhat limited at this point, however, they are intended to relieve insurers from “minimum participation” and “minimum employer financial support” requirements.

            That is, insurance companies will make either the offer of coverage (or the offer of coverage at group rates) subject to a minimum enrollment, or a minimum level of employer financial support. Where such enrollment or financial support is not present, the insurance companies reserve the right to re-rate the plan, or not to offer coverage at all.

    • I oppose tying health care to employment because I believe it’s a drag on employment (among other disadvantages), but I will acknowledge the advantages, including those listed by Frakt. An advantage not mentioned but the most important if you have the misfortune of actually needing the insurance is the advocate, the HR department that helps with plan design/benefits and provides support when questions arise regarding treatments and benefits if an employee suffers an injury or illness. In the individual policy market, the insured has no advocate, not other than the staff of the physician who might, might advocate for the patient if the insurer resists or denies coverage. For the consumer in the individual policy market, the difficulties start with plan selection. I’ve commented that the proliferation of plans within the four categories may induce consumer paralysis and exacerbate the adverse selection problem. In my state, Florida, insurers are offering many plans within each category, with differences that are opaque. Sure, some differences are obvious, vision and dental coverage for example, but most are not. I spent hours on the Blue Cross Blue Shield web site reviewing the details of the different plans being offered by BCBS on the exchange (BCBS offers the most for Florida residents) and I couldn’t make a decision as to which plan would be best for me. Unlike the head of HR, I have no expertise in plan design/selection. And unlike the “navigator”, the head of HR knows her employees and their histories. [An aside, the BCBS web site has been improved enormously now that we are in the open enrollment period, and I suspect that's the case for other insurers too. The significance, in terms of fixing the "technical glitches" on the federal exchange, can't be overstated.]

      • The regulations provide subsidies based on the second lowest cost silver benchmark plan in each state. It seems to me this would incentivize insurers to provide plans at the silver benchmark premium, in order to maximize subsidies and provide affordable coverage. I am curious in your state if many insurers are offering higher cost silver plans, and what the take-up rate would be on gold and platinum plans. It seems to me they would be ripe for adverse selection.
        Lastly, what incentives do insurers have to provide lower cost islver plans below the benchmark premium, for less coverage, equal coverage, or even more coverage than the benchmark plan?
        Don Levit

    • ” Basically, if it’s cheap enough, you don’t have to make people buy it. ”

      Wouldn’t it be more appropriate to say if people perceive value equal to or greater than the cost they will buy it as long as there is nothing else that gives them better perceived value? Doesn’t that point out the problem of funding the program on the backs of the young by raising their rates which reduces their value of carrying insurance?

      We don’t need a plan that simply taxes people on the back end to provide subsidies on the front end. We need a plan that efficiently reduces costs. One of your alternatives, high deductibles, might require subsidies, but if done correctly the skin in the game will push costs down. I think studies of HSA’s has shown that to be true.

    • I’m not sure whether my current employer requires it but in the past I have worked for organizations which automatically enrolled employees in the health insurance program unless the employee could certify that they were insured elsewhere (i.e. by a spouse’s plan like Senator Cruz uses). Those who DID have other insurance had the cost of the individual coverage added to (rather than subtracted from) their paychecks. And while that organization DID go bankrupt, I don’t think that the health insurance was nearly as significant a factor as the accounting irregularities were.

    • My personal experience in the individual market suggests that past $1,000, high deductible don’t lower costs that much, as Aaron pointed out in his post of 3/2/12. http://theincidentaleconomist.com/wordpress/why-im-skeptical-that-increased-cost-sharing-will-work-to-reduce-spending-part-1/

      As Aaron says: “The people in the lowest 50% of spenders spend about $236 per year. Let’s say we can “incentivize” them to spend half that (which, by the way, is WAY more than most think would be saved with increased cost sharing). We’ll save – what – $120 per person,. . . Chump change.

      What we need to focus on are the people {in the} top 5% of spenders, who account for about half of all personal health spending, blow through more than $40,600 per person. That’s WAY more than they’d put in a health savings account. There’s no hope of them keeping any money in it. So they won’t care, and they won’t try. The effect some are hoping for won’t be felt in those who need to feel it most.”

      • You make some excellent points on providing coverage for the healthy and the sick.
        The insurer we are forming which, initially will provide plans for self insured, large employers, will provide community-rated premiums for the group for all, initially. If one has high claims, he will continue paying the community-rated premium, which is a fair cost based on his medical benefits received.
        To incentivize the lower users to use even less, we provide, for a fair cost, a paid-up benefits patented rider which continues to grow if claims are not filed.
        Claims could be paid OUT OF POCKET BY THE EMPLOYEE, THERE COULD BE COST SHARING BETWEEN EMPLOYER AND EMPLOYEE, OR THE EMPLOYER COULD PAY ALL CLAIMS UP TO A CERTAINN LEVEL – such as $6,000 per family per year.
        Doing so allows the paid up rider to grow for each family member.
        While the savings is a molehill above $1,0000, for each $1,000 of larger deductible, it transforms to a mountain of savings at $25,000 – 60% off of the original premium. This can be accomplished each month, with the savings of 60% accruing after 36 months.
        Don Levit

    • By not compensating those who decline the employer sponsored health plan, don’t the employers end up placing what would be an equivalent of “penalty” for those not adhering to individual mandate in ACA?

    • In my experience employer provided health insurance has always required an “opt out” decision. I’ve never worked outside of California, so it may be different in other states, but when I got married and wanted to waive coverage from my own employer, I had to sign forms with HR every year.

      • I’d love to know how common this is. It sounds anecdotal, but if you have additional information, please let me know. (Best to email me, left sidebar, mail icon by my name.)

    • This is an important post. I have a few points to add. First, I don’t think most employees have any idea of the value of the insurance subsidy they get. They almost certainly don’t know about the 75% the employer pays (the ACA includes a provision to change this), and they rarely know about the tax-preferred status of their 25%. I counsel thousands of people every year, and am the main author of “CHECKBOOK’s Guide to Health Plans for Federal Employees”, which steers those who use it to low cost and high value plans. There are even a number of plans open to feds where the values of an HSA or HRA account roughly equals or sometimes exceeds the tax-preferred employee share of premium. But there are huge numbers (by some estimates over 100,000) of Federal employees who don’t get the word and go “bare”. While some private employers may operate differently, the Federal government makes essentially zero effort to get these people to sign up. (Of interest, while they will increase overall costs they will lower the average cost of the pool.)

      Second, I don’t think the subsidy has to be “dramatically more expensive through much higher subsidies” to get voluntary enrollment. For large employers, it could be as simple as the Sunstein and Thaler “nudge”, such as automatic signup unless the employee opts out. There is a substantial argument that had the ACA drafters been willing to touch the current $300 billion a year set of tax subsidies for employment-related insurance and extend them to all persons, there could have been more generous subsidies at no net taxpayer cost. (Of high current interest: a simple “one size fits all” refundable tax credit–adjusted for family size–would have made administration of the program a cakewalk rather than a “third world experience.”)

    • Embedded in your post are couple of good reasons for Government to discourage employers from providing health insurance. I.e. when you get to sick to work you lose your insurance. That makes employer plans not great insurance plans (BTW: not that different from the mini-meds). I.e. people do not even really know how much of the their income is devoted to healthcare.

      But this doesn’t entirely avoid greater subsidization since not everyone can afford higher deductibles.

      The above quote is no where near concrete enough to car meaning! How many people cannot afford higher deductibles? Define cannot afford. Otherwise you said nothing and it is not debatable.

      If we subsidized insurance to this extent for everyone, we’d have no need for an individual mandate.

      I see a pattern in healthcare and schooling where it looks like administration absorbs most of the subsidies. Other countries get around this by controlling prices through other means like price controls or complete Gov. provision.

    • “Yes, employees really pay the employer share through reductions in wages” –I think this confuses individual-level incentives and aggregate outcomes. It is true that if we, say, outlawed employer plans, then wages would rise at the market level as firms compete for workers. But that does not factor at all into the individual’s decision process: all they see is that if they decline their employer’s plan, they will not receive the employer’s contributions to the premiums at all. If they want a higher wage they have no option but to quit and find a firm willing to pay more.

      I know people who are doing this. A side effect of allowing kids to stay on parent’s plans until 26 is that it is sometimes cheaper to stay on their parent’s plan, pocket what he would have contributed to his own employer-sponsored coverage, and sacrifice the employer’s contribution.

      • If the employee refuses the employer plan, and the plan is affordable, according to the ACA, he is not eligible for subsidies in the individual market. Affordability is based on the employee’s cost of insurance, not his dependents.
        Don Levit