Employers Can Minimize Their Exposure To Obamacare's Penalties By Offering Low-Cost 'Skinny' Coverage
Last week, I discussed how Obamacare’s individual and employer mandates dramatically expand the power of the Internal Revenue Service. In that piece, I highlighted the fact that the employer mandate gives employers "an incentive to offer coverage that is either ’unaffordable’ according to Obamacare or that fails to meet the law’s ’minimum essential requirements.’" Let’s delve into that further, as this aspect of Obamacare is likely to have far-reaching consequences for the way that employers offer health coverage in the future.
History of the employer mandate
Poll after poll shows that Americans who have health insurance—most through their employers—are happy with the health coverage they have. According to Gallup, around 70 percent consider their coverage to be "excellent" or "good." Democrats’ push to nationalize health care in the early 1990s, led by Hillary Clinton, failed largely because the vast majority of voters who have health insurance feared that it would be too disruptive to their existing arrangements.
That’s why President Obama, in his Obamacare pitch, repeatedly promised that "if you like your health care plan, you can keep your health care plan." And it’s why the Affordable Care Act includes an employer mandate. Because Obamacare subsidizes private coverage for the uninsured, Democrats wanted to make sure that employers didn’t have an incentive to drop coverage for workers and send them onto the new subsidized exchanges.
So they put in an employer mandate to force employers to continue covering their workers; if workers ended up accepting exchange subsidies, employers would face significant fines.
However, due to some technicalities in the way that the employer mandate works, the actual consequence of the law will be to incentivize employers to offer de minimis coverage for their workers, coverage that some workers will then reject by seeking more favorable terms on the Obamacare exchanges.
The strong penalty vs. the weak penalty
The employer mandate actually consists of two different penalties, based on two different categories of employer behavior. These originate from Section 4980H of the Affordable Care Act. Subsection (a) requires steep penalties for employers who offer no coverage at all. Subection (b) requires modest penalties for employers who offer "minimum essential coverage under an eligible employer-sponsored plan." This difference—between the strong penalty in 4980H(a) and the weak penalty in 4980H(b)—is crucial to understanding how things will play out in the future.
Under the strong penalty, in which an employer "fails to offer to its full-time employees…the opportunity to enroll in minimum essential coverage," and "at least one full-time employee" enrolls in an exchange, the employer has to pay a fine of $2,000 times the total number of full-time-equivalent employees at the firm, minus 30. (The employer mandate only applies to firms with 50 or more full-time-equivalent workers.) So if you employ 50 workers, that’s a fine of 20 * $2,000 = $40,000. And the fine isn’t tax-deductible, adding to the pain.
Under the weak penalty, in which an employer does offer "the opportunity to enroll in minimum essential coverage," but that coverage doesn’t meet Obamacare’s requirements for affordability or actuarial value, and at least one worker enrolls on an exchange instead, the fine is $3,000 times the number of workers who enroll on the exchanges. So, if you employ 50 workers, and three of them get coverage on the exchange instead, the fine is a much lower 3 * $3,000, or $9,000. (Technically, in subsection (b), employers pay the lesser of the weak penalty or the strong penalty, but this in most cases should be the weak penalty.)
So: Employers avoid the strong penalty and gain eligibility for the weak penalty by offering "minimum essential coverage." So what is "minimum essential coverage?"
’Minimum essential coverage’ is very broadly defined
The legal term "minimum essential coverage" is defined by Section 5000(A)(f) of the Internal Revenue Code. The IRC states that minimum essential coverage can consist of either (a) government-sponsored coverage, such as Medicare or Medicaid; (b) an "eligible employer-sponsored plan"; (c) a plan "offered in the individual market within a State"; (d) a "grandfathered health plan"; or (e) anything else that the Secretary of Health and Human Services deems appropriate.
So what is an "eligible employer-sponsored plan?" Paragraph 2 of Section 5000(A)(f) defines one as "a group health plan or group health insurance coverage offered by an employer to the employee which is [either a government-sponsored plan] or "any other plan or coverage offered in the small or large group market within a State."
In other words, any health insurance plan that is legally sold within a state’s boundaries counts as an "eligible employer-sponsored plan." In many states, insurers market inexpensive plans that cover a limited range of services. According to Obamacare, employers can offer these inexpensive plans to their workers and thereby avoid the employer mandate’s strong penalty.
This has significant ramifications for sectors of the economy that employ hourly-wage workers, such as restaurant chains McDonalds (NYSE:MCD); Burger King (NYSE:BKW); Dunkin Brands Group (NASDAQ:DNKN); Yum! Brands (NYSE:YUM), owners of Taco Bell, Pizza Hut, and KFC; and Darden Restaurants (NYSE:DRI), owners of Red Lobster, Olive Garden, and Capital Grille, among others.
Employers can minimize fines by offering ’skinny’ coverage
All of this is the context for an article that appeared yesterday in the Wall Street Journal, highlighting the emerging recognition of this method for avoiding the employer mandate’s strong penalty. Reporters Christopher Weaver and Anna Wilde Mathews confirmed with federal officials that this strategy is a viable one.
Nonetheless, Obamacare’s designers expressed surprise that employers would do such a thing. "Our expectation was that employers would offer high quality insurance," said Robert Kocher, a former Obama health care adviser. It wouldn’t be the first time that the law’s authors didn’t recognize how economic incentives actually work.
Weaver and Mathews of the Journal report that Bill Miller Bar-B-Q, an excellent fast-food chain in San Antonio, will offer just such a skinny plan to avoid the strong penalty. The plan will cover preventive services, doctors’ visits and generic drugs, but not surgeries nor hospital stays, and cost less than $600 a year:
“San Antonio-based Bill Miller Bar-B-Q, a 4,200-worker chain, will replace its own mini-med with a new, skinny plan in July and will aim to price the plan at less than $50 a month, about the same as the current policy, said Barbara Newman, the chain’s controller. The new plan will have no dollar limits on benefits, but will cover only preventive services, six annual doctors’ visits and generic drugs. X-rays and tests at a local urgent care chain will also be covered. It wouldn’t cover surgeries or hospital stays.
Because the coverage is limited, workers who need richer benefits can still go to the exchanges, where plans would likely be cheaper than a more robust plan Bill Miller has historically offered to management and that costs more than $200 per month. The chain plans to pay the $3,000 penalty for each worker who gets an exchange-plan subsidy.”
Pan-American Life Insurance Group, the WSJ reporters write, is developing these bare-bones plans for the California market, along with other states. It’s almost certain that nearly all large employers of hourly-wage workers will go this route, given the clear economic incentives to do so.
Skinny coverage is a welcome development
The Oregon Medicaid experiment showed us Medicaid didn’t make people healthier, but it did provide financial protection to the uninsured. The lesson to draw from this is that the Singapore model of catastrophic insurance and health savings accounts is the most cost-effective way to provide Americans with health security.
Republicans are justly scoring the President for his vain promise to avoid damaging the market for employer-sponsored health insurance. Obamacare incentivizes firms to dump their workers onto the exchanges, and to reduce the scale and scope of employer-sponsored coverage. Obamacare is, in fact, the most dramatic disruption to employer-sponsored health coverage in seventy years, and President Obama was dishonest to claim otherwise.
But if you step outside of the politics for a moment, and think about the policy, this disruption is actually a welcome development. Though Obamacare’s exchanges are poorly designed, they at least offer Americans the opportunity to shop for insurance for themselves. A widespread shift to ’skinny’ plans will do the same thing, by reducing the problem of over-insurance, and giving workers the opportunity to purchase supplemental catastrophic coverage for hospital care.
The next step in this transformation is for small businesses to press state legislatures to legalize a broader range of "skinny" health plans, so that insurers can offer the most cost-effective coverage possible.
Ultimately, Congress should repeal the employer mandate, because it makes it much costlier for employers to hire entry-level workers. And it’s entry-level workers who are already suffering the most in the Obama economy. Until then, businesses will do what they have to do to compete in the real world.
This piece originally appeared in Forbes
This piece originally appeared in Forbes