Saturday, December 22, 2012

The Individual Mandate and Employer Health Insurance Coverage

The CBO, RAND, and others claim that the ACA's individual mandate BY ITSELF increases the prevalence of employer-sponsored health insurance (ESI). That is, there would be more ESI with the actual ACA than there would be with a hypothetical ACA that did not have the individual mandate.

I agree that an insurance mandate would increase insurance participation.  It also seems natural that participation would increase in all of its forms, including the ESI form.  But I wonder whether the latter conclusion survives economic reasoning.

One issue is whether we're looking at the fraction of employees with ESI or the fraction of employees who are offered ESI (the difference is the fraction of employees who are offered ESI by their employer but turn it down). For the moment, let's focus on the latter: more specifically an employer's decision to offer ESI under the actual ACA and a hypothetical ACA without the individual mandate.

One reason that employers might like ESI better WITHOUT the individual mandate is that they can make ESI optional to their employees. Assuming that employees prefer options to coercion, optional ESI is more employee-friendly than coerced ESI and therefore optional ESI competes better against the third alternative of no ESI.

It's like having a company softball team: the average employee may like it better if softball is an optional activity rather than a required one. If for some reason the government required softball-haters to participate in their company softball games, the company might well consider eliminating the team and recommending the softball-loving employees to play their softball away from work.

It's conceivable that the individual mandate could make ESI more efficient by increasing ESI takeup among the employees. But the opposite is also conceivable: just like company softball might be less pleasant if softball-haters were forced onto the field.

More discussed surrounding the ACA is that the individual mandate by itself makes NONGROUP coverage (that is, non-ESI health insurance) more efficient. E.g., the aforementioned RAND study claims this. If true, the individual mandate reduces the employers' COMPARATIVE advantage in offering health insurance, so fewer employers may offer it.

My guess is that the individual mandate BY ITSELF reduces the number of employers offering ESI. Among those who offer ESI, I agree that the individual mandate increases ESI takeup among their employees. But the net result could still be that the individual mandate reduces the economy-wide fraction of employees with ESI.


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