Overview of Employer Mandate

Require Employers to Offer Health Insurance Coverage

What is it?

According to the Census Bureau's Current Population Survey, as of 2006, almost 60 percent of individuals obtained health insurance through their employer (DeNavas-Walt, Proctor, and Smith, 2007). However, the employer based system is eroding, and at the same time the number of uninsured individuals is increasing. Of the 38 million individuals (age 18 to 64) without insurance in 2006, almost three-quarters worked during the year, most of them in full time positions.

Employer mandates are intended to decrease the number of uninsured individuals by building on the existing employer sponsored group health insurance system. Mandating employers to provide health insurance is a frequently discussed approach to decreasing the size of the uninsured population. Under an employer mandate, all or some subset of employers would be required by law to offer health insurance to all or some subset of their employees. Employer mandate proposals often include a "pay-or-play" provision—which means that employers may choose to offer health insurance to their employees (the "play" option) or pay a fee or tax into a public fund that is used to cover uninsured workers. Employer mandates are often seen as attractive because they build on the existing employer based health insurance system in the United States and because Americans are accustomed to receiving their health insurance through their employer (Lambrew and Gruber, 2006/2007).

How would it work?

Employer mandate proposals vary a great deal in design details and are often combined with other policy options (such as individual mandates and purchasing pools). The following are among the critical design details:

1. Which firms they target. Some mandate proposals exempt small or very small firms, (like Massachusetts' 1988 law that applied only to firms with more than five employees). The common choices are to set minimum firm sizes at 5, 10, or 25 employees. Many recent bills at the state level focus on only very large firms (such as a bill passed in Maryland in 2005 that specifically targeted Wal-Mart).
2. Which employees they target. Employer mandates may exempt certain workers from inclusion, such as temporary or part time workers, or they may allow employers to require a minimum length of employment prior to enrollment. Employer mandates may allow employers not to offer coverage to dependents.
3. The generosity of the coverage and employer contribution levels. Employer mandates may establish a minimum acceptable benefit package (this was done in Massachusetts) and may specify an amount (as a percentage or in dollars) of the subsidy that must be contributed by the employer toward the premium cost.
4. Whether the mandate includes a pay-or-play provision. This design element serves both as an enforcement mechanism (a penalty clause) and as a means of generating revenue for employees whose firms do not offer coverage. A pay-or-play mechanism can be structured in different ways. In some versions, like a bill introduced in New York in 2006, all firms are taxed a flat rate per labor hour, which can be offset by a credit if the firm provides insurance for employees (Burkhauser and Simon, 2007). In other versions, firms pay a fee only if they do not provide insurance. In addition, pay-or-play mandates vary in how the taxes collected are used and to whom these expenditures are targeted. The tax can be limited to a certain portion of employees' wages, as in the 1988 Massachusetts law, which required employers to pay a 12 percent tax on each worker's first $14,000 of wages. Also, the tax rate can depend on the number of employees in the firm. Under the 1993 Washington law, the tax rate ranged from 6 percent for firms with fewer than 20 employees to 12 percent for firms with 1,000 employees or more.

Depending on its design, an employer mandate could be costly. These costs would come from administration and enforcement of the mandate, subsidies, and lost tax revenue from the change in the distribution of worker compensation from wages to insurance. It has also been argued that employer mandates could be associated to some degree with increasing levels of unemployment.

Has it been tried before?

Until recently, Hawaii was the only state that had enacted an employer mandate. Hawaii's law, which was adopted in 1974, requires employers to offer health insurance to all employees working 20 hours per week or more. Employers in Hawaii are required to offer either a generous single plan (covering the employee only) or a less generous plan (if they agree to cover at least 50 percent of the premium for both the employee and dependents).

Beginning in the 1980s, employer mandates were enacted in other states (including Massachusetts, Oregon, Washington, and California), but they were either not implemented or repealed. For example, the employer mandate in the 1988 Health Security Act in Massachusetts was enacted during the term of Governor Dukakis, but it was not scheduled to take effect until January of 1992—after his term had ended. His successor, Governor Weld, opposed it, and it was subsequently repealed by the legislature in 1996. The employer mandate in Washington was enacted in the 1993 Health Services Act, but it was repealed in 1995 because of declining support within the state. The employer mandate in Oregon expired before it was implemented because Congress failed to approve an exemption from the Employee Retirement and Income Security Act (ERISA) of 1974 (Oliver, 2004; Hewitt Associates, 2007). The California employer mandate was enacted by the legislature in 2003 but subsequently repealed by the voters in a referendum (Proposition 72).

However, in 2006, Massachusetts passed a comprehensive health reform bill aimed at providing universal coverage for residents of the state. The law combines a number of policy options, including an employer mandate, an individual mandate, Medicaid expansions, and the creation of a state sponsored purchasing pool. The reform also includes employer provisions that may be considered a mandate. Employers with more than ten employees must either make a "fair and reasonable" contribution to their employees' insurance or pay a fee called a "fair share contribution." (This provision is not called "pay or play" but resembles such a provision). Under the law, firms must also give their employees the opportunity to use pretax dollars to buy coverage through the state sponsored risk pool called the "Commonwealth Connector" or the firm will pay a "free rider surcharge" (McDonough et al., 2006). The law took effect on July 1, 2007.