Structuring an employer mandate in US health insurance

In the US, health insurance has traditionally been the responsibility of the employer to provide. Since the 1980s, with a secular shift towards part time work, many employers stopped giving health benefits. Costs have risen so fast that small employers have found it particularly difficult to provide benefits - they face higher administrative costs than larger firms, and in small firms, having one or two sick employees can cause the firm's premiums to rise significantly. Low-margin employers - like Wal-Mart, which makes little money off the sale of each item and compensates by volume - have often been unwilling to provide benefits as well. In their defense, labor costs are a relatively high cost for them, and increasing labor costs will cut their margins by a large amount.

For reference, examples of high margin employers are software firms, pharmaceutical companies, and investment banks before the subprime fiasco. Examples of low margin employers include grocery stores, agriculture firms, and investment banks after the subprime crisis.

We want employer dollars on the table in health reform. We don't want them dumping their workers into the health insurance exchange(s) where the workers will get Medicaid or public subsidies - essentially passing off costs onto the taxpayer. However, we also don't want to burden smaller and less profitable firms, which are a large engine of economic growth. Large low-margin employers like Wal-Mart have less or no excuse - indeed, in response to criticisms, Wal-Mart has been extending benefits to workers.

The Center on Budget and Policy Priorities has a piece on how to properly structure an employer mandate so that it's fair to smaller firms and firms with lower margins. In short:

Protect small firms by exempting them from the requirement. Congress can, for example, subject to “play or pay” only those firms whose total payroll exceeds a certain amount. (That threshold amount should be kept at a relatively modest level, however, so that a sufficient share of firms must meet the requirement. Consideration also could be given to applying the requirement to firms whose payroll falls below the threshold but whose average wages for full-time-equivalent work are above some high level so that, for example, a 6-person law firm with high salaries does not escape the requirement.)

Base the size of employers’ required payment on the size of their payroll rather than the number or type of employees. A per-employee requirement would disadvantage firms with larger numbers of low-wage workers compared to firms with smaller numbers of highly paid workers.

Adjust the fee imposed on employers who do not meet the requirement according to the size of the employer’s payroll in order to lessen the burden on smaller employers. Different proposals would impose a fee of 3 percent to 8 percent of payroll. These fees could be graduated — for example, 1 to 3 percent on the first one or several million dollars of payroll beyond the initial exempt amount, rising gradually to higher percentages for the portion of a firm’s payroll that exceeds various multi-million-dollar threshold levels.

Phase in the employer responsibility requirement over a few years. The fee rate could be increased, and/or the exemption level for small payrolls decreased, as health care reform makes coverage more affordable for modest-size employers.

In defining the “play” requirement, base the employer’s contribution to the worker’s coverage on the cost of coverage that meets a minimum essential benefits standard.