• Heritage Action
  • Heritage Libertad
  • More

March 19, 2011

Employer Mandate Will Do Harm

By

While recent attention on The Patient Protection and Affordable Care Act has focused on its constitutional problems, Americans must not forget its damaging policy implications. Some of the most harmful and expensive components are the subsidies for Americans to purchase health insurance in newly created insurance exchanges. These generous subsidies (households of four earning up to about $90,000 would qualify) will profoundly alter people's behavior in ways that are expensive and unfair to taxpayers.

The Congressional Budget Office estimates that the subsidies, which can be used only to buy government-approved health plans, will cost about $100 billion annually. Subsidies have to be paid with tax revenues, so the tax benefits for some will be offset by tax increases for others.

The subsidies will produce enormous compensation inequities based on whether a worker has employer-sponsored insurance. Former CBO Director Douglas Holtz-Eakin has shown that people who make less than 250 percent of the federal poverty level ($50,000 for a family of four) and receive health insurance at work are at a substantial disadvantage. Similar individuals without coverage through work will qualify for subsidies through the exchange.

Will the health-care law be a "solution" for businesses dealing with rapidly rising health-care expenses? As it turns out, many businesses will likely dump employees into the subsidized exchanges, passing the cost of providing coverage from the business to the federal taxpayer. A company that does not offer health coverage will be able to increase its work force's wages, with the employees receiving generous subsidies to buy insurance in the exchanges. It is a true win-win scenario (workers get higher wages and subsidized coverage while employers get drastically reduced costs for employee health insurance) if we forget about the taxpayer.

To deal with the concern of employers dumping insurance coverage and passing bills to taxpayers, the law "encourages" employers to offer health-insurance coverage by penalizing businesses with 50 or more workers that fail to do so. The annual fine will be equal to $2,000 for every full-time employee beyond the first 30 workers. So businesses that currently do not offer health insurance will either offer a government-approved health plan - which will have a high premium from the mandated new benefits and limits on employee cost-sharing - or pay the penalty.

Even businesses that offer health insurance may face penalties under the new law. Companies that offer insurance may have workers who qualify for a subsidy to buy health insurance in an exchange. If eligible workers use this subsidy to buy coverage in the exchanges, the company gets hit with a penalty. This tax ranges from $2,000 to $3,000 per employee, after exempting the first 30 employees.

On the one hand, a low penalty allows costs for coverage to be passed to taxpayers. But, increasing the penalty raises the cost of hiring new workers. Given the current penalty size, the CBO has estimated that the law will result in 700,000 fewer jobs. Those at the greatest risk of job loss are lower-income workers. The reason: The penalty or even the cost of offering health insurance to these workers may make them unprofitable for the businesses to hire.

Another harmful side effect is the perverse incentive the tax penalty creates for employers to collect more personal information from their workers. That's because the new law can fine businesses if a worker qualifies for a subsidy in the federal exchange because of a change in personal circumstances, such as a divorce or a spouse's lost coverage.

For example, if Company A lays off the spouse of an employee working at Company B, Company B could be subject to a $3,000 fine if the couple's income falls to a point where the couple qualifies for the subsidy. Therefore, Company B will have the incentive to start requesting more detailed information from its employees about all of their sources of income and family situations.

The employer mandate and the subsidies will have damaging consequences. Replacing the current patchwork tax treatment for health insurance with a universal credit of a fixed amount would be a positive first step. The universal credit would increase the portability of coverage. And the fixed credit would likely result in more cost-conscious consumers, which would begin to address the serious concern of escalating health-care expenses.

Brian Blase is a policy analyst within the Center for Health Policy Studies at The Heritage Foundation.

First appeared in The Colombus Dispatch

Heritage's daily Morning Bell e-mail keeps you updated on the ongoing policy battles in Washington and around the country.


The subscription is free and delivers you the latest conservative policy perspectives on the news each weekday--straight from Heritage experts.


The Morning Bell is your daily wake-up call offering a fresh, conservative analysis of the news.


More than 200,000 Americans rely on Heritage's Morning Bell to stay up to date on the policy battles that affect them.


Rush Limbaugh says "The Heritage Foundation's Morning Bell is just terrific!"


Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."


Sign up to start your free subscription today!