The Practical Relevance of the Employer Mandate Delay

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Richard Evans / Scott Hinds / Ryan Baum

SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

203.901.1631 /.1632 / .1627

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@SecSovHealth

July 8, 2013

The Practical Relevance of the Employer Mandate Delay

  • At most, the employer mandate would produce a roughly 40 bp gain in total national health spending. In reality the effect is likely to be even smaller. Less well compensated employees at smaller firms may continue to refuse coverage, and/or purchase coverage that is substantially less generous than purchased by employees at larger firms, mitigating the mandate’s demand effects
  • The mandate seems to have negatively affected hiring and job quality at a critical point in the economic and political cycles, which would seem to have more to do with its delay than with the reasons offered (need for more time to clarify reporting requirements)
  • Anecdotal evidence of rate-shock in small group markets, and of key underwriters declining to participate in (or choosing to exit) certain markets, raises the question of whether insurer participation has been sufficient to produce well-functioning SHOP exchanges in all states. If not, this implies a need for significant structural change. This issue becomes increasingly clear in the coming weeks as data on plans and premiums emerges in most states
  • We’re unconcerned by the effect of the delay on overall demand, and continue to recommend US-focused / volume-levered names as a core element of healthcare portfolios

On July 2nd, the Administration announced a one-year delay in the effective date of the Affordable Care Act’s (ACA) employer mandate, under which employers are required to either provide affordable health insurance or pay a fine

Estimate of immediate demand effect

Most larger employers currently offer employer-sponsored insurance (ESI), thus the effect of the mandate on overall demand presumably will be to raise ESI offer rates among smaller employers[1] (Exhibit 1). For argument’s sake, if we assume the mandate causes ESI enrollment (i.e. offer times acceptance) rates in smaller employers subject to the mandate (greater than 50 full-time equivalents) to eventually match those of larger employers, we would expect approximately 800,000 additional (1.3 pct increase) employees to fall under ESI. To estimate an upper bound on changes to national demand, ignoring any effects on average generosity of coverage, and assuming the previously uninsured that move into ESI were consuming at one-third the rate of those covered under ESI, we would expect demand among all persons insured under ESI after the mandate to be roughly 85 bp higher than it was for these persons in the year preceding the mandate. Finally, assuming ESI covers roughly 43 pct of insured payments, we would expect total national spending to rise by roughly 40 bp as a result of the employer mandate

In reality, demand effects are probably even lower. Persons currently not covered under ESI will in many cases have chosen not to forego wages for health coverage, and many are likely to continue making this choice in the presence of the individual mandate – particularly in light of the fact that wages offered by smaller employers are well below the national average (Exhibit 2). And, rather than enrolling in plans at the prevailing average level of ESI generosity, we would expect employees in smaller firms (and eventually in firms of all sizes) to opt for less expensive coverage[2]

Why is this happening?

The official line of having delayed the mandate to allow a more orderly implementation of required reporting has some limited merit, but is almost certainly incomplete. The Republican-controlled House has effectively limited key agencies’ (in this case, IRS) access to funds for ACA implementation, thus it’s reasonable to suspect IRS is in fact unprepared to administer their elements of the employer mandate. However if this is in fact the (or even an) underlying cause, it begs the question of whether IRS is prepared to administer its share of the far more complex subsidies for households purchasing individual coverage on the exchanges

Other causal rule-outs include:

  1. easing effects of the mandate on employment growth;
  2. too-limited underwriter participation and/or too-high average premium levels on the state-based exchanges;
  3. shifting implementation of a controversial provision until after the midterm election; and/or
  4. an administrative lack of readiness at the level of state-based exchanges

All four of these causes are at least ‘in-play’, though to varying extents. The mandate has clearly become an issue in average job quality; employers are more reluctant to move workers from part-time to full-time status because of the looming requirement to offer creditable health coverage. This is of particular relevance because of the tendency of smaller employers to lead in job creation, and also the tendency of early-cycle job growth to consist of lower average quality jobs. We believe the pending mandate was in fact having an adverse effect on job formation, and at obviously critical points in both the economic and political cycles

Given that we’re at the time of year when insurers typically show plan designs and pricing to sponsors, that high profile underwriters have chosen to sit out exchange participation and even to exit certain markets, and that anecdotal reports of small group rate-shock have been common, we openly wonder whether underwriter participation has been broadly sufficient for a sufficient number of SHOP exchanges to be functional. Of all the possible causes this would be the most permanently impactful; if insurer participation is insufficient (and/or overpriced) this implies a potential need to restructure the rules under which insurers participate in these markets. Premiums and insurer participation are beginning to come into focus state by state, and should make clear whether or not insurer participation is sufficient

Shifting the mandate until after the election may have played a role, but because so many other elements of reform will be tangible to voters before the election, (apart from employment effects) we’re relatively unconvinced timing of the mandate relative to the midterms played a critical role

Finally, earlier this year the Administration delayed a key provision of the SHOP (small employer) exchanges (the platforms enabling employees to choose from multiple plans), in an apparent move to reduce the complexity of these exchanges in their first year of operation. This clearly suggests exchange implementation is sufficiently complex and time-pressured to raise real risks of delay, and that the scale and pace of exchange rollout may have played some role in delaying the employer mandate. What makes this less convincing as a reason for delaying the employer mandate is that the ‘basic format’ SHOP exchanges still have to be operational for whatever employers choose to make use of them in 2014, thus delaying the mandate only serves to reduce the number of employers using the exchange (capacity), but does not change the due date for the exchanges’ core functionalities

Investment relevance

At most, delaying the employer mandate delays an extremely modest gain in national health care consumption by one year. Accordingly delaying the employer mandate does nothing to change our recommendation that healthcare portfolios include significant exposure to US-focused, volume-levered names[3]

Longer-term, investment relevance turns on whether the employer mandate delay is a signal of deeper structural problems with the exchanges, particularly with respect to rates of participation and premium levels. Whether insurer participation is broadly sufficient should become clear in the coming weeks

  1. Technically, the mandate only applies to employers with 50 or more full-time equivalents. Because the ACA calculation of full time workers rolls up part-time hours into full time equivalents, the number of employers with 50 or more employees (for purposes of the employer mandate) is probably greater than shown in Exhibit 1
  2. The current average actuarial value (pct of allowed claims paid by the plan) for ESI is roughly 82, we expect the ESI average to fall toward 65 as employees are given a broader choice of plan ‘generosities’
  3. For our portfolios, please see: “SSR Healthcare Quarterly”, SSR Health LLC, June 26, 2013
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