Employer Mandate, Not Excise Tax, Is The Most Important Funding Mechanism

A lot of the focus about how to fund health care reform has directed at the two largest taxes in the House and Senate bill. The House bill contains a so-called millionaire's tax (raises $460 billion) while the Senate bill contains an excise tax on employer-provided health insurance benefits (raises $149 billion). While a lot of attention has been paid to the excise tax, it is the employer mandate which is an even more important funding mechanism.

The House bill's employer mandate would raise $135 billion, while the Senate’s weaker “free rider” provision would bring in only $28 billion. So, the real employer mandate directly raises $107 billion more than the free rider provision. More importantly, the amount directly raised from employers who choose to pay the penalty instead of providing health insurance is only a small part of the employer mandates effect on the overall cost of the bill.

The real employer mandate in the House bill would cause net increase in the number of people with employer-provided health insurance by roughly 6-7 million compared to current law. The Senate's free rider provision combined with other aspects of the bill would result in a net decrease in the number of people with employer-provided health insurance by 4 million. All told, that is a 10-11 million difference in the number of people with employer-provided coverage between the two bills.

From the perspective of the CBO score, it is much cheaper to have people covered by their employer than through the new exchange. Having individuals gain coverage through their employer costs the bill nothing, but if they get coverage through the exchange (or Medicaid), and they make less than 400% FPL, the government needs to provide them with tax credits. Every person who gains coverage not through their employer adds to the overall cost of the bill.

While the House bill technically costs more, it is, in fact, much more cost effective. It increases coverage for a longer time period, and covers 5 million more people in 2019 than the Senate bill. Much of the House bill's cost effectiveness comes from the employer mandate.

If the House bill was changed to simply replace its employer mandate with the Senate free rider provision is would dramatically increase the cost of the bill. It would remove roughly a $100 billion in funding and probably increase the net cost by roughly another $100 billion. That increase in cost would be the result of millions of people now getting government assistance to get health insurance, who were previously projected to get coverage from their employer.

While much the debate about how to pay for the bill will be focused on the excise tax and the millionaire's tax, this ignores the other critical funding component, the employer mandate. If Democrats really want to increase affordability tax credits, not increase direct “taxes,” and keep the overall CBO price tag low, they have few other choices but to go with a strong employer mandate. Of course, most business groups are opposed to a real employer mandate so the more likely out come is that middle class families will end up getting less help affording the private insurance they are forced to buy. Keep an eye on how the final bill handles the employer mandate, it is the funding sleeper in the current debate.