What the Delay of the ACA's Employer Mandate Means for the Budget

Yesterday, the Obama administration announced the one-year delay of a key provision of the Affordable Care Act that requires coverage reporting and penalizes large employers who do not offer health insurance. The so-called shared responsibility or employer mandate provision would have required employers with 50 or more full time workers to pay $2,000 to $3,000 per employee if any of their workers (exempting the first 30) obtained subsidized health insurance coverage through a health insurance exchange. The goals of this provision were to incent employers from free riding and dumping their employees into the exchanges, and to provide revenue to help offset spending in the legislation.

In a Treasury blog, the administration said its decision to delay the employer requirements would give them greater time to simplify the new reporting requirements, adapt health coverage and reporting systems, and extend transition relief to the employer shared responsibility penalty. Part of this transition relief is the hope that some businesses around the 50-employee threshold will not reduce full-time employee hours and jobs to avoid paying the penalty, at least for one more year.

As for what kind of budgetary effect this delay might have, we looked at CBO’s past and current estimates for the employer penalty. CBO’s last estimate of a repeal of the ACA from July 2012 estimated that repealing the employer penalty would mean a loss of $4 billion in 2014 and $9 billion in 2015. In the most recent May baseline, however, CBO estimated the penalty would yield nothing in 2014, but $10 billion in revenue in 2015 (when most businesses would be filling their taxes and paying the penalty for 2014). It’s unclear whether CBO’s latest estimate was made under the assumption that the penalty would be delayed or at least not fully implemented, but the comparison below of CBO’s past estimates of 2014 revenue between $3-5 billion would suggest their 2014 assumptions did change.

^{Source: CBO}

There remain a number of questions on how this regulatory change will affect the deficit. It’s unclear exactly how many businesses will drop plans to provide new health benefits in 2014. Some employees who would have received employer coverage due to the employer mandate, but will not in 2014 with the delay, will stay uninsured and potentially pay the individual mandate penalty. Other employees might seek private health insurance in the exchanges, which they will now have access to, and potentially qualify for a subsidy. These decisions will also affect dependents of employees who employers would have had to expand coverage to under the mandate, meaning more children may qualify for CHIP, Medicaid, or a subsidy in the exchanges.

Changes in the price of employer coverage, how individual penalties exert pressure on firms to offer coverage, and the relative cost of offering employer benefits compared to the exchange or Medicaid will all play a role in determining employers’ decisions to begin to offer coverage without the employer mandate. CBO has previously said the individual mandate appears to be the largest deterrent to incentives to not offer coverage. The declining generosity of exchange subsidies for higher-income individuals will prevent many employers from not offering benefits as well. This may mean the one-year delay in the employer mandate may not have as large of an effect on coverage as some commentators have suggested.

Another issue the regulations will need to specify is how exchanges and the IRS will verify whether an employer’s coverage is inadequate or unaffordable without the reporting requirements in place in 2014. Under the law, subsidies in the exchanges are only available to individuals who are either not offered health insurance or have employer coverage that costs more than 9.5 percent of household income or covers less than 60 percent of health care costs. Also, the individual mandate penalty applies if an employee does not accept coverage from their employer that meets the minimum value requirement and costs 8 percent or less of household income. The lack of reporting requirements in 2014 might mean more individuals will access exchange subsidies and fewer individuals will pay the individual mandate penalty. Hopefully, these issues will be addressed when the administration releases the proposed rules later this summer.

Although much is still uncertain about how this will play out and we cannot fully measure all of the interactions, we can make a vague estimate using a 2011 CBO analysis of the employer penalty. The 2011 analysis assumed the employer mandate had the effect of increasing employer-based coverage by 0.5 to 1 million people (note: this estimate is for 2019 and was projected prior to last summer’s Supreme Court ruling). Using this estimate along with the (large) assumption that these individuals would cost the same as average exchange enrollees at $5,300 per person in 2014, we can very roughly estimate an additional $2.65-$5.3 billion in spending could result from a one-year delay. This would come on top of any revenue loss from the employer mandate.

If the employer penalty is permanently repealed, as some commentators have called for, then that would have more significant fiscal implications. By our (again, very rough) estimates a permanent repeal could increase spending by roughly $31 to $63 billion over ten years, and decrease revenues by roughly $140 billion. The administration did not indicate plans to extend the delay, and in fact strongly encouraged employers to voluntarily implement the reporting requirements in 2014 in preparation for full implementation in 2015. However, if the administration does decide to delay these provisions beyond 2014 or lawmakers in Congress enact a repeal, then that will have a much larger effect on increasing the deficit and should be offset.