Is There an Employer Mandate Loophole in Obamacare?

pillsIn the last few weeks, a number of articles have been published on a possible way for employers to game Obamacare. (The most influential one was Employers Eye Bare-Bones Health Plans Under New Law, in the WSJ.) Here’s the basic strategy: Offer a minimal health benefit plan (called a “skinny” plan), which doesn’t meet the essential benefits requirements. Then, pay the secondary penalty under the employer mandate if any employee wants more comprehensive coverage, gets it through a state exchange, and is eligible for a tax subsidy based on income.

Surprised? Me too, although not that employers are trying to avoid costs. What surprised me was that, based on reporting so far, it sounds like the Obama administration isn’t coming out loudly to say this won’t work. (Much more information is still needed here before anyone can say definitively whether employers can get away with this.)

The first step is to get a plan that offers “minimal essential coverage.” If you think that means it has to cover the ten categories of “essential benefits” we keep hearing about, like mental health services, prescription drugs, and hospitalization, you are not alone. But you are wrong. Those rules apply to individuals and small businesses, but not to the larger businesses that are subject to the employer mandate. For these employers, nearly any plan will do, as long as it covers certain preventive services without an annual or a lifetime limit (according to the WSJ article). It doesn’t have to provide coverage for surgery or hospitalization. As long as the plan offered meets this very low bar, the employer can avoid the primary penalty under the employer mandate: $2,000 per employee, not counting the first 30 employees.

The second step is to be ready to pay the secondary penalty under the mandate, for having inadequate coverage. Employers must pay $3,000 per employee for this penalty, which is imposed on employers whose plans don’t offer minimum value or are not affordable to their employees. If you’re wondering why an employer would want to pay a $3,000 penalty to avoid a $2,000 penalty, the answer is that this penalty is imposed only per employee who buys insurance through a state exchange and is eligible for a tax subsidy. Some employers are clearly betting that this won’t add up to many employees. For example, low-wage workers might not be able to afford comprehensive coverage, even with subsidies. High-income workers likely won’t be eligible for a tax subsidy if they want more comprehensive coverage. And, there are places to buy insurance outside of the exchanges, which eliminates the penalty.

Is this going to work? It’s unclear: Because it so obviously skirts the intent of the law, this strategy comes with plenty of legal risk. And who came up with the idea of letting the larger employers who provide so much health coverage in this country somehow skirt the “ten essential benefits” requirements? The WSJ article quoted a former White House adviser saying, “Our expectation was that employers would offer high quality insurance.” Which kind of makes it sound like this was a surprise to them, too.