Put yourself in the position of an employer that’s looking to save money on the health coverage you offer your workers. Wouldn’t it be great if your costliest employees declined that coverage and instead bought insurance on an exchange?
Heck, you’d be willing to pay your sickest employees to refuse coverage. On average, your share of a family’s health plan comes to almost $12,000. Your costliest employees are even more expensive to cover. What if you offered those employees a $6,000 bump in wages if they declined coverage? You’d still come out ahead—and, now that the ACA is up and running, your employees might be better off, too. They could buy comparable health insurance through an exchange and, if the tax credits are rich enough, even pocket some of the $6,000. You win, your employees win. Only the federal government, which pays for the tax credits, loses.
Now, for most employers, the math won’t add up this neatly. Workers are only eligible for tax credits if their employers don’t offer affordable, comprehensive coverage. Employers that offer such coverage (and most do) would have to pay workers who can’t get tax credits a whole lot more to tempt them onto the exchanges. Large employers that don’t offer such coverage, however, are subject to a tax penalty, starting in 2015. Buying out sick workers and paying a penalty might not be worth it.
But here’s the key: small employers don’t face a penalty for failing to offer affordable, comprehensive health coverage. So if you’re a small employer that offers costly or skimpy coverage, it may make financial sense for you to “buy out” your sickest employees. Tempting, right? So tempting, according to a recent story in Bloomberg Businessweek, that some small, self-insured employers are already toying with the idea. There’s a catch, though: “Such a practice may be illegal, and it might leave business owners open to employment discrimination claims.”
I don’t think the legal concerns are warranted. Although the ACA forbids employers from dumping employees with preexisting conditions into high-risk pools, the same prohibition doesn’t extend to exchange plans. Nor does the federal law that governs employee-benefit plans—ERISA—tell employers that they can’t offer sick workers money in exchange for declining health coverage. ERISA was amended in 1996 to prohibit employers from discriminating among workers based on their health status, but only when it comes to eligibility rules and premiums. So long as a chronically ill worker is allowed to participate in the health plan on an equal basis with her colleagues, offering her cash to decline coverage wouldn’t seem to run afoul of the prohibition.
The Americans with Disabilities Act (ADA) also doesn’t appear to present a problem. True, many chronically ill employees are disabled within the meaning of the ADA, and buying out only those employees would draw a distinction between the disabled and the non-disabled. The ADA, however, only prohibits (as relevant here) “classifying” disabled workers in a way “that adversely affects the[ir] opportunities or status.” It’s hard—maybe not impossible, but hard—to see how an offer of cash could “adversely affect” a disabled employee. After all, the offer would only be accepted if the employee believed it made her better off.
Nor do other federal nondiscrimination laws bar the practice. Employers can’t discriminate against older employees or in favor of highly compensated employees, for example. But those prohibitions don’t speak to a policy directed at the sickest workers, whatever their age and however richly compensated.
Now, it’s possible that some states have laws on the books that would prohibit a buy-out policy. I can’t rule that out. It’s also possible that I’m missing something—the law of employee benefits can be maddeningly complex. (I’m indebted to a benefits expert and TIE reader who helped me think this through.) But I haven’t seen anything yet that casts doubt on the legality of paying high-cost employees to decline coverage.
Still, even if it’s legal, the buy-out option may not tempt many employers. It won’t make financial sense for most; others could balk at an approach that might tick off employees. If the practice were to become common, however, it would pose a big problem. Shunting workers to the exchanges would increase the federal government’s tab for tax credits. Worse, risk pools on the exchanges would deteriorate, which would drive up premiums. The ACA probably wouldn’t unravel as a result; reports of death spirals tend to be greatly exaggerated. There’s no question, however, that the widespread adoption of buy-out policies would be an unhappy development for health-care reform.