Fixing the Mandate From Hell

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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The debate over whether, and how much, Obamacare is pushing full-time workers into part-time work continues to rage. Kevin Drum sums up his take:

There's a moral to this story. Two morals, really. First, conservatives are going to trumpet every employer who announces some kind of cutback, regardless of whether they ever follow through on it. But as with most Obamacare doomsaying, it should be taken with a whole shaker of salt. Second, a lot of liberals agree that the 30-hour rule is bad policy, and should either be repealed or reformed. If conservatives were interested in making good policy, it would be pretty easy to team up with a bunch of Democrats and pass something that would improve the way the law works. But they aren't. They want horror stories, not good policy.

I'm kind of surprised to hear a lot of liberals agree that the 30-hour rule is bad policy, and even more surprised to hear that it would be easy to repeal or reform. In fact, while I opposed the law, I find it easy to see why they designed an employer mandate for all employers who worked more than 30 hours, and difficult to imagine how it could be reformed.

Let's start with the reason for the employer mandate -- two reasons, actually. The first is that President Barack Obama promised that if you like your insurance, you'll be able to keep it, and while this was not true, they wanted it to be at least kinda true. Even before Obamacare passed, the majority of U.S. citizens had insurance through either the government or their employer, and those people were satisfied with their insurance. The administration wanted to discourage employers from dumping those people onto the exchanges to take advantage of subsidized coverage, from whence they would march on Washington with pitchforks and torches, demanding the heads of the politicians who passed the stupid law that took away their employer-provided health insurance.

This hints at the second reason that the employer mandate was included in the law: to keep the cost down. Here's my colleague Ezra Klein in 2009, explaining just how big a difference the employer mandate made to the bill's cost:

The importance of this set of numbers can be understood only in terms of the catastrophe that was the last set of numbers. On June 15, the Congressional Budget Office scored an incomplete version of this bill. The office estimated that it would cost $1 trillion over 10 years and cover 16 million people. It would've cost, in other words, 70 percent more and covered 20 percent fewer people. The big question, then, is what accounts for the change? And luckily, there's a simple answer: the employer mandate.

The June 15th proposal didn't include an employer mandate. And without one, the news was grim: Employers would drop coverage for 15 million employees and send them to the Health Insurance Exchange where they would need government subsidies to afford health insurance. That meant costs exploded and coverage contracted. Health reform looked like a bum deal.

But oh, what a difference a mandate makes: The new version of the HELP bill includes an employer mandate for firms with more than 25 workers. Every full-time worker who isn't given health-care coverage triggers a penalty of $750. Every part-time employee not given coverage costs $375. Doesn't seem like very much, does it? But it's enough. In Massachusetts, the employer mandate has been a success with a piddling $295 penalty. Indeed, the evidence we have suggests that the small penalty creates a massive change in behavior.

And you see the result in CBO's latest score. The June 15 report estimated that 15 million Americans would lose their employer-based coverage under HELP's bill. Today's report estimates that a mere 150,000 will lose their coverage. That's nothing. And it means that a lot more Americans end up insured and the government spends a lot less in subsidies.

The tax subsidy that lower-wage workers now get for their employer-provided health insurance is much less valuable than the cash subsidies they'd get if they purchased on the exchanges. That turned the bill into a fiscal nightmare. Hence, the employer mandate.

But if you just enact an employer mandate for all employees, you'll get into a ridiculous situation where employing a part-time landscaper for a couple of hours a week commits you either to buying him health insurance, or paying a $2,000 fine. That would lead to a lot of black-market activity, and/or unemployment. So, said the bill's authors, we'll make it all full-time workers. But what is a full-time worker? Normal definitions are usually anyone who works more than 35 hours a week. Unfortunately, if you set the limit at 35 hours a week, it will be comparatively easy for firms to evade the law by simply having everyone work 34 hours a week. So the law's drafters sought to make it really, really inconvenient to play those sorts of games by setting the limit very low, at 30 hours a week.

This is related to a regulatory phenomenon that I think of as "building a fence around the law." I stole this concept from what people who keep kosher call "building a fence around the Torah." There are a lot of ideas wrapped up in this concept, but one of them is that you take steps to ensure that you can't break a commandment -- you enact rules that are stricter than the ones found in the commandments, so that you can't break a rule accidentally, or accidentally-on-purpose. So the rule against boiling a kid in the milk of its mother becomes a blanket ban on eating milk with dairy, and then you have separate dishes so that you can't blend the molecules, and you have to wait two hours after eating milk or meat before you can eat the other, so that they can't be blended in your stomach. Basically, you forestall the kind of creeping justifications that most dieters will be familiar with, where you have a cookie on Sunday, and then it's a cookie on the weekends, and then next thing you know, it's a bag of cookies every night.

Legislators wanted to make employers offer insurance, without suffering any loss of full-time jobs, so they tried to make it very difficult to accidentally creep into part-time status with a tiny reduction in hours (presumably made up by an hourly wage boost). But this created a different problem: Now if you can't afford to offer your employees insurance, you have to reduce their hours a lot. Reducing someone's hours from 35 to 34 can be finessed into an almost unnoticeable inconvenience. Reducing their hours by one-seventh, on the other hand, is going to be noticeable to both employer and employee.

So how do we fix this problem? Kevin thinks it will be easy, but I don't see it. Do we get rid of the employer mandate, which will be super expensive? Do we raise the limit to 35 hours a week, which would probably result in somewhat less dumping, but would still cost a bunch of money? And which program would Democrats like to cut to pay for the extra expense? Because Republicans would definitely not be on board with raising taxes for it.

This isn't just politically hard; it's actually hard. There isn't a lot of money to go around right now, and weak labor markets are going to magnify the cost of whatever decision you make. There haven't been any easy solutions in health care for decades now, and the 30-hour rule is no exception.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net