Category Archives: Employer mandate

The Cons of the ACA

Recently, I was honored to speak before the PIAA, a group of insurance professionals, at the organization’s annual conference in Las Vegas.  The idea was that I would speak on the problems with the ACA and Ardis Hoven, M.D., past president of the the AMA, would speak on positives about the ACA.  I thought the format worked well and I appreciated the high level of discussion and civility of Dr. Hoven.

Here’s what I had to say. Since you can’t use footnotes or hyperlinks in a speech, I’ve provided a few additional annotations here to show the source of some of the information.

The Speech

I’m here to talk about the architecture of the ACA and its problems.

The ACA takes a bold risk.  It places our economy and our health on an metaphorical aircraft whose ability to fly is challenged by history. It proceeds on the assumption that, whereas almost all community rating systems in health insurance have crashed in ugly adverse selection death spirals, the craft engineered by the Obama administration and its consultants is so sophisticated that it will avoid such a fate.  Many will tout what they see as the success of the ACA thus far in reducing the number of uninsured and the absence of many catastrophic failures as evidence that the ACA flies.  But we have not seen turbulence. It is an open question whether, long term, the ACA can survive in its present form.

Let us now talk about how the ACA flies.  It uses a variety of mechanisms to keep it aloft.  The problem is that almost every one of them has the potential for being undermined.

Individual Subsidies

The ACA depends desperately and in perpetuity on taxpayer funded policy subsidies provided directly to the insured. There is a premium subsidy based on household income. And there is another effective premium subsidy achieved through what is termed a “cost sharing reduction program” but this really amounts to people getting gold, platinum or diamond — my term — policies but only having to pay the silver price.  These subsidies have been crucial to the touted success of the ACA.  They have brought low risk individuals into the pool. Without the subsidies, the insurance market would need to depend solely on risk aversion to achieve price stability and escape the death spiral.  Prior experiments relying only on risk aversion alone have been notoriously unsuccessful.

For better or worse, the subsidy has had an immense effect. A recent study conducting by Avalere shows that 83% of Exchange enrollees have incomes at 250% or less of the federal poverty level for their households. The take up rate among those eligible for ACA exchange policies falls from 76% for those earning 100-150% of FPL down to just 16% for those earning 300-400% of FPL. Take up then plummets to 2% for those earning more than 400% of FPL and who are thus ineligible for subsidies.

This elasticity in the demand for health insurance is precisely why the forthcoming Supreme Court decision in King v. Burwell is of such great importance.  If the Supreme Court issues a square holding that the federal government lacks authority to pay the premiums where the state itself has not directly established an Exchange, and neither Congress nor the states does anything to fix the matter, expect insurers in those states rapidly to stop offering individual health insurance on the Exchanges. Indeed, clause IVB in the contracts those insurers negotiated with the federal government precisely in anticipation of King v. Burwell would permit those insurers not just to exit the market next year but to cancel existing policies midstream.

A side point, but one that might trouble this audience.  Every insurer that I know of is accepting payments from the federal government for cost sharing reductions.   But those payments are almost certainly illegal. Congress never appropriated any money for Cost Sharing Reductions.  So, under the law as written, insurers who want to play in the Exchanges are really supposed pay for cost sharing reductions themselves.

Of course, to my knowledge, that’s not happening. The money now landing in insurer’s bank accounts is coming from a fund set up for tax refunds that is, by law, dedicated exclusively to that purpose.  That, I believe is unlawful and, should another party ever control the Executive branch and want to look for a villain or want to extort various favors from someone whom they have over a barrel, might it not chase insurers for receipt of diverted funds?  There is a 1938 Supreme Court decision saying the Government can recover funds paid illegally and a 1990 Supreme Court decision saying that a claim of estoppel can not lie against the federal government.   So, before insurers become accessories or before they count as money on their balance sheets that they might have to pay back, they might want to look at these cases.

Reinsurance subsidies

There are also less visible features of the ACA that are designed to improve the probability of the airplane staying aloft. The ability of the ACA to fly also depends substantially for 2014, 2015 and 2016 on premiums subsidized by free specific stop loss reinsurance given to insurers who agree to risk their capital in untested Exchange markets.  It is, however, a form of support that is going to flame out after 2016.

How much support does it provide? If you use the data from the 2016 draft actuarial value calculator produced by CMS, you can compute that the subsidy will still be about 3% of premiums for 2016.  It was higher in 2014 and 2015. How will the ACA continue when prices increase at least 3% more just due to the elimination of this single subsidy.  The naive might think that 3% is not all that much.  And, without taking adverse selection into account, I would expect the market to shrink only by about an equal percentage.  But if history and economics tells us anything — and it does — because of adverse selection, the actual price increase will be greater and the resulting decline in enrollment will be greater.

I would not expect Congress to do any sort of mid-flight refueling of reinsurance subsidies, to continue my airplane metaphor. The policy justification for specific reinsurance subsidies seems rather thin.  If reducing the overall risk to insurers was the issue, aggregate stop loss, perhaps available at an actuarially fair price, rather than free specific stop loss reinsurance would make more sense.  And if the government, and, derivatively, the insurance industry, was fearful of there being no market for reinsurance where the risk involved was so untested, Congress could have made a guess and established a fair price and reinsurance facility itself. Moreover, if uncoupling household income from the ability to obtain medical care was a primary goal of the ACA,  why would Congress not just increase individual premium subsidies instead of sending that money to enrich, sorry guys, insurance companies?  This form of corporate welfare helps people at 350% of federal poverty level or even people at 1000% of FPL buying unsubsidized policies on the Exchange as much as it helps the person earning 150% of FPL who might desperately need more assistance. If one accepts major premises of the ACA, one might seriously question why such is the case.

Risk Corridors: The Free Derivative

The ACA depends somewhat for 2014, 2015 and 2016 on another form of subsidies for the insurance industry.  It indirectly subsidizes premiums by providing insurers with a free financial derivative: risk corridors that reduce the amount of capital prudent insurers might otherwise need to stockpile or aggressive state regulators might require them to stockpile. This reduction occurs because Risk Corridors reduces the probability of insurers losing substantial amounts of money via participation in the Exchanges. To use a finance term, Risk Corridors reduces Value at Risk, which is a decent estimate of the amount of money participating insurers need to keep in more liquid and probably less lucrative investments.

If you run the computations — ask me how — it looks as if Risk Corridors reduces the amount insurers need to charge for Exchange policies by a little less than 1%.  Again, you might say, in what I suspect would be a deprecating tone, big deal. And, I agree that, taken by itself, the ACA is unlikely to crash based on a 1% increase standing alone.  But it’s all cumulative and the problem with death spirals is that once you find yourself in their clutches they are a bit like a black hole, very difficult to escape.

Insurers may not have to wait until 2017 for Risk Corridors to disappear.  They are already in grave trouble.  Congress also never appropriated any money for Risk Corridors. And this wasn’t an accident. The statute, as written, depends on assessments on insurers based on a formula to magically equal payments out to insurers based on a formula over the 3-year span of the program.  We are already seeing, as many predicted, however that such an assumption was unwarranted.  Due perhaps to loss leader pricing and the predictable propensity of consumers to pick precisely those plans that were charging too little relative to actuarial risk, it appears that, on balance, at least after what I would hope would be clever but lawful accounting, that few insurers are making enough money under Obamacare policies to provide any funding to the many insurers who gained volume at the expense of profitability. So, when the Obama administration suggested it might lawlessly raid other government accounts to fund Risk Corridor deficits, Congress responded in section 227 of the Cromnibus bill by walling off the plump Medicare Parts A and B trust funds and CMS operating accounts as a source to repay obligations created by the Risk Corridor program.

Might deficits in early years of Risk Corridors be funded out of profits in later years as the Obama administration has suggested? The omens aren’t good. According to a review of 2014 industry filings by Standard & Poors, Risk Corridors will likely collect less than 10 percent of what industry is expecting to be reimbursed. 14% of insurers will likely pay into Risk Corridors.  56% expect money out. The absence of Risk Corridor money will be fatal to some insurers.

Already, we are seeing the death and near death of some less well capitalized insurers, particularly the co-ops capitalized, I might add, not so much by private investors but by $2.4 billion from the taxpayers in a less well publicized cost of Obamacare. Low premiums are not of terribly great value if they end up bankrupting private insurers on whom the success of Obamacare depends.

Individual Punishment

Thus far, I have spoken of the carrots to get even people of low risk to participate in the Exchange marketplaces.  Obamacare is fueled, however, not just by subsidies but by punishment. Obamacare chose a different punishment model than for programs such as Medicare Part B or Medigap.  In those programs, and in some Republican proposals for Obamacare reform, if you don’t select insurance when you are first eligible, you just pay a lot more for insurance if you elect coverage later.  No commerce clause problems, no tax. Obamacare, by contrast, increases administrative costs by potentially assessing  a penalty each year if you don’t have coverage. The ability of this punishment to stem a death spiral depends on the size of the punishment and the number of people who are subject to it.  And what I now wish to suggest is that even without its formal repeal, the Individual Mandate was weak to begin with and has been further enfeebled by administrative moves taken in response to political uproar.

Consider, for example, a slightly fictionalized version of one typical American. According to the Kaiser Foundation Calculator, a 45 year old non-smoking person making $48,000 per year would expect to pay $3,742 on average for a Silver Policy.  Suppose, however, that the individual considers themselves to be only 30 in health years. The individual thus considers its average expenses that would be covered by insurance to be $2,941.  Would the $746 difference in tax created by the mandate be sufficient to get that person to purchase an Exchange policy.  Not if that person was risk neutral.  $746 in tax is less than the $801 excess in medical expenses.

Alternatively, eliminate $3,000 from the person’s income. Now, because the premium the individual would have to pay is more than 8% of household income, the individual is exempt from the individual mandate. There are a significant number of uninsured people thus exempted from the mandate on grounds that they are simply too poor to purchase Obamacare.

But there’s more to make sure, as the CBO recently confirmed, that only one in six of the uninsured will actually be subject to the mandate.  There is the absurdly expanded hardship exemption. There’s the health sharing ministry exception mostly for evangelical Christians. And there’s the peculiar 3 months off exemption (26 USC § 5000A(e)(4)).

In short, one of the reasons Obamacare will have difficulty flying is that we are afraid of our inability accurately to determine whether people can really afford insurance and at what price.  For now, though, if one wants to rely on sticks, the stick is actually too weak and hits too few people.

The Employer Mandate

Another key component of the ACA has been the employer mandate.  Or, at least it was supposed to be a key component.  In fact, in what a lot of people, including me, think is a very dangerous precedent that will, one day, bite ACA proponents in the proverbial behind, the Obama administration simply decided, without any apparent discretion, to delay enforcement of the law for one year and, for the current year, to apply the statute only to employers with more than 100 employees, even though the number the statute picks is 50. If a change to the tax code is so complicated that it takes mid sized businesses with financial advisors 5 years to understand it, perhaps that’s a sign there is something more fundamentally wrong.

At any rate, the employer mandate is, for lack of a more sophisticated term, stupid. If it actually works, it keeps people off the individual exchanges, which is exactly what should not be happening. The employer mandate perpetuates both symbolically and literally the counterproductive tie between a poorly functioning and lumpy labor market and something as important as health.  It puts the employers’ decision as to what sort of coverage best suits the employee ahead of the ability of the individual to choose.  The tax deductibility of payments helps the wealthy more.  The lack of portability between jobs decreases the sort of continuity of care that might improve health. It is everything a good liberal should hate.  (Indeed, some have had the courage to note the many flaws with the current law.) And so I wonder if King v. Burwell comes out against the government, whether the employer mandate, which has barely made it on to the Obamacare Aircraft, might be abortively deplaned with eager Republicans and Democrats in need to save face actually coming together on this issue.  Indeed, if I were a Limbaugh-style Republican who wanted Obama to fail, I would actually insist on the employer mandate continuing as a way of starving the individual exchanges of healthy people who might stabilize their prices and of helping high income voters more.


One’s perspective on the ACA can’t be whether it helps insurers or whether it helps the medical profession.  In fact it shouldn’t even be on whether more people have health insurance.  The positive factor to be considered is whether it has improved health.  I will concede that, on balance, it probably has — slightly. Many medical interactions are beneficial and, although supply of medical practitioners has not increased much, there are 2-4% more such interactions thanks to the ACA.   In any event, whether the ACA marginally improves health is not the exclusive test.  These programs have to be paid for and they come at a heavy price.  The CBO now estimates the ACA will increase our budget deficit by $849 billion dollars through 2026. It is not, contrary to prior representations, paid for.

If you forget about Medicaid expansion and take the net increase the uninsured as a result of the ACA and divide that by the cost of providing coverage to them, it turns over 10 years to average with premium subsidies, cost sharing reductions, the 3Rs, and administrative costs about $7,600 per person.  And in addition to racking up our already bloated deficit, there will be be taxes, fees and subsidies that have their own perverse incentives. Some have estimated the cost of providing a currently uninsured person an additional year of a quality life at over $200,000 possibly over $1 million. That’s enough that we have to look hard at whether there might be some better and simpler alternatives.

As we move forward  ought to be looking not at Obamacare vs. The Bad Old Days Where Evil Insurers Deprived Sick People of Coverage but rather to a variety of alternatives ranging from, yes, Bernie Sanders Single Payer plan to, better,  libertarian plans to use market mechanisms more effectively  to perhaps better yet, lots in between.  Yes, Obamacare has gotten off into the air, but if they would honestly call “Mayday,” it is my hope that a variety of people would try to help out.

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Does it pay for small business to SHOP?


A key feature of the Affordable Care Act are the “SHOP Exchanges.” These are markets established by either a state exchange pursuant to section 1311 of the ACA or the federally facilitated market (FFM) pursuant to section 1321 of the ACA in which employers with fewer than 50 full time equivalent employees can purchase health insurance for their workers. They can do so without being subject to either rating based on the projected health of those covered or “experience rating” in which premiums are tied to health expenses in prior years.  SHOP exchanges are intended to be a mechanism whereby the burden of providing healthcare can remain where some people (not me) believe it belongs: with the employer.

To date, the key feature of the SHOP exchanges has been their complete failure to attract customers.  A GAO report issued in November, 2014, said that only 76,000 individuals—including employees, their spouses, and dependent children— had enrolled in SHOPs operated by a state and, although the data was, amazingly enough, not available from the federal government for the remaining states whose marketplace it operated, enrollment had apparently followed a similar dismal pattern.  This is in stark contrast to yet another stunningly wrong forecast of the Congressional Budget Office, which, as late as April 2014, had made forecasts that tax credits under section 45R of the Tax Code would cost $1 billion for 2014, an estimate that implies enrollment by more than a million, persons in the SHOP exchanges.

There have, of course, been multiple explanations of the failure of the SHOP exchanges in 2014.  As has been well documented, the computer systems for the Federally Facilitated Marketplace (FFM) simply did not work.  Applicants thus had to resort to more primitive paper processes. Second, the transient nature of a tax credit offered to some SHOP purchasers may have been insufficient to attract buyers, some of whom likely feared it would heighten expectations among employees of employer provided coverage that would be difficult to sustain in two years when the tax credit expired. And a variety of other explanations have been offered ranging from insufficient advertising to competition from non-SHOP-exchange markets, to difficulties with use of traditional intermediaries in the new market.

But perhaps, as some have noted, the basic problem is that it purchase of policies on a SHOP exchange at full or close-to-full price just doesn’t make doesn’t make a lot of economic sense when it appears that most employees could otherwise qualify for a taxpayer funded subsidy if they purchased similar policies on the individual exchanges.  If small employers have the funds to help their employees more and want to help them meet medical expenses, perhaps the best medicine would be green: cash.  Such a choice would have the fringe consequence — perhaps fringe benefit — of pushing more healthy people into the individual exchanges thereby reducing the risk of an adverse selection death spiral. It might also have distributional consequences that many would regard as an improvement. One can thus see the seed of bipartisan support for repeal of this provision.

The rest of this entry explores this proposition using four sample scenarios.   Given that employees can purchase policies on the individual exchange that, at least for now, will be subsidized by the federal government in many instances, does it make sense for benevolent employers to provide health insurance or to instead,  give workers higher wages, and let them choose to purchase policies that may be subsidized on the individual exchange?

Executive Summary

Several factors matter in determining whether it makes sense to SHOP from the perspective of an employer and employee:

1.  How much of a subsidy, if any, is the employee entitled to if it purchases a policy on the individual exchange.  This may in turn depend not just on the compensation the employer pays the employee but also on the size of the employee’s household and sources of income of other household members. The higher the subsidy, the less generally it is in the interest of the employee that the employer purchase coverage through the SHOP exchange.

2. Would the small employer be eligible for a tax subsidy under section 45R of the Tax Code (section 1421 of the ACA).?These subsidies can range up to 50% of premiums.  Generally, the higher the 45R subsidization rate, the greater the possibility that it is in an employee’s interest that the employer purchase coverage through a SHOP exchange rather than provide the employee with cash.

3. How do premiums in the individual market match up with premiums in the SHOP market for comparable policies.  Many supposed that SHOP market policies might be cheaper and provide an advantage to employer purchase.  But to the extent there are no such savings or, as perhaps is turning out to be the case, SHOP policies are more expensive, the case for having a SHOP exchange option is weakened.

4. To what extent do the preferences of the employer about which plan to select (Metal Levels and Plan Types) match the preferences of the employees.  To the extent the fit is poor, that is factor suggesting that benevolent employers do better to avoid the SHOP exchange and instead give their employees cash so they may do as they see fit.

If it turns out that few employees benefit from the existence of the SHOP exchanges or that its distributional consequences are not sensible,  the case for simplifying the Affordable Care Act by elimination of this component makes some sense.


Here are the families in the scenarios: Dora, the Dursley family,  James and Mary,  and Ada.

Example 1: Dora

Consider Dora, a 40 year old single woman making $27,195 per year working for a business Exploration, Inc. , that employs 40 full time equivalent workers and is thus ineligible for any sort of section 45R subsidy.  For concreteness, we’ll put Dora in Harris County, Texas (Houston).  If Exploration, Inc. goes to the SHOP marketplace for 2015,  it will find that the second cheapest silver plan is sold by Blue Cross for $400 per month ($4,800 per year) for a single person age 40.  The policy features a $3,000 all-inclusive deductible and a $6,350 all-inclusive out-of-pocket limit.  So, if Exploration, Inc. were to purchase this policy, Dora would have health insurance and no additional tax liability as a result.

Suppose that in lieu of paying $4,800 in premiums to buy health insurance for Dora, Exploration just raises Dora’s wage by $4,800 .  Call this her gross “in lieu compensation.”   Assuming Dora is in the 15% marginal tax bracket, she would actually receive $4,080 of in-lieu compensation from her employer.  If Dora then went to the federally facilitated marketplace for Texas, Dora would find that she could purchase an essentially identical policy from Blue Cross with the same deductible and out-of-pocket limit for $363.60 per month or $4,363 per year as a gross premium. But, at least until a decision against the Obama administration in King v. Burwell throws the nation into chaos , Dora would be eligible for a small subsidy from the federal government of $15.22 per month since the second cheapest silver plan in her area (a “Blue Advantage Silver HMO”) costs $250 per year.  Dora’s net premium would thus be about $4,181.

Thus, to be in almost exactly the same position as would have been had Exploration purchased a policy on the SHOP exchange, Dora would be out a net of $101. Maybe, at least for Dora, its marginally in her interest if her employer goes SHOPping.

Dora accounting
Dora accounting

But this small negative sum may well be offset by a benefit Dora receives as a result of Exploration not going to the SHOP exchange and not buying health insurance for its employees: freedom. Freedom could help Dora in a variety of circumstances.

Suppose, for example, that Dora is in great health, has some money saved up, and just wants a Bronze policy to cover her against catastrophic medical expenses.  Now Dora can go to the Exchange and pick up a Blue Cross Bronze “Blue Advantage Bronze HMO” policy for just $191.03 per month gross and about $176.03 per month after her subsidy.   After she pays this net premium and her taxes on the $4,800 she got from her employer, she’ll have about $1,970 left in her pocket.   If her medical expenses for the year end up being $4,970 or less for the year she’s come out ahead relative to where she would have been under the hypothesized Silver policy purchased by Exploration.

Or, suppose Dora isn’t in such good health and doesn’t like the risk created by a silver plan.  She wants a platinum plan.  She could obtain the “UnitedHealthcare Platinum Compass 250” plan with a deductible of just $250 and a out-of-pocket limit of $1,500 for a gross premium of $328.91 per month or $3,947 per year. The net premium for the policy after consideration of subsidies would be about  $3,764 per year.  She could buy this with the extra compensation she received from Exploration Inc. and still have $316 left over. If her medical expenses ended up being very low or somewhere between $1500 and $6,350 she will end up ahead.

Example 2: The Dursley Family

Vernon Dursley is the 40-year old Vice President  Grunnings, a small drill manufacturer in Potter County, South Dakota. His family consists of his 40-year old wife Petunia and his young son Dudley, who is diabetic.  Grunnings employs 15 individuals full time who have an average annual wage of $23,000.  Dursley himself earns $90,000 per year.  If Grunnings went to the SHOP exchange operating by the FFM for South Dakota, it would find a Bronze plan, “Sanford Simplicity-$3,000” available at a gross premium of $716.05 per month to cover the Dursley family.  Because, however, Grunnings employs fewer than 25 people and pays a low annual average wage, it is eligible under section 45R of the Tax Code (section 1421 of the ACA) for a federal tax credit for one third of the amount of such purchases.  Thus, the amount Grunnings would save by not purchasing the policy — at least with respect to Mr. Dursley — is $477.37 per month or about $5728 per year.

Giving Mr. Dursley $5,728, will not, however, be enough to enable him to purchase comparable coverage for his family on the FFM for individual policies for South Dakota.  He is not eligible for a subsidy because his income is more than 400% of the applicable federal poverty level.  First, the Dursley’s marginal tax rate is likely to be 25%.  Thus, he will not net $5,728 from the Grunnings bonus; he will net $4,296. The least expensive Bronze policy for the Dursleys would be the “Dakota Reserve 6000” for $558.58 per month or about $6,703 per year.  Thus, the Dursleys would be about $2,407 worse off if Grunnings failed to purchase a SHOP policy.

Dursley accounting
Dursley accounting

The underlying reason that the Dursleys do better if Grunnings SHOPs is that that Mr. Dursley is a well compensated employee of a company that is eligible for a tax credit if it goes to the SHOP exchange.  Thus, even if premiums in the individual market are a little lower for comparable benefit packages as they are in the SHOP market, that benefit ends up being overwhelmed by the differential tax treatment.

Example 3: James and Mary

This example is somewhat more complicated but it is also quite important.

James is a 60 year old worker in medium health working for Peaches Unlimited in Peach County, Georgia.  He’s married to his 60 year old wife,  Mary.  His household makes $50,000 per year.  Peaches, which has 30 full time equivalent employees, has considered going to the SHOP Exchange and providing Bronze coverage for its employees and spouses, paying for all of the employee’s premium expenses and for half of the spouses. When it does so, it finds one plan: “BCBSHP Bronze Pathway X Enhanced 5000 30 6600 Plus” a POS (point of service) plan from the Georgia Blue Cross/Blue Shield carrier.   The premium attributable to a 60 year old couple is $14,652.  But Peaches will only pay half the premium for spouses, so, if Peaches were to purchase this policy, the annual incremental cost attributable to James and Mary would be $10,989.  For this, James and Mary would get a plan with a $10,000 deductible for medical expenses, an additional $1,000 deductible for drugs, and a $13,200 out-of-pocket limit.   If they wanted the policy, however, James and Mary would have to cover half of Mary’s premium, which would add an additional $3,663 to their costs.  So, if we are to compare apples to apples, we need to see what James and Mary’s financial position would be if they shopped instead on the individual exchange.

Suppose that Peaches gives James and Mary $10,989 in in lieu compensation. They would likely have a marginal tax rate of 15%, which would make their after-tax additional compensation about $9,341.  If James and Mary try to acquire a matching plan, the closest it looks they can come is the Humana Bronze 6300/National POS – OpenAccess plan, which has a gross premium of $1,181 per month or a hefty $14,177 per year.   The net premium, however, will be only $5,578 after premium tax credits are received.  Thus, James and Mary will be able to take the $9,341 in after-tax compensation they received, pay $5,578 and have  $3,762 left over.  But it’s better than that.  James and Mary won’t have to pay $3,663 for half of Mary’s policy.  So, in fact they will be $7,426 better off and Peaches no worse off if Peaches does not go to the SHOP exchange.  For a couple making $50,000 that is a lot of money.

James and Mary accounting

How has this happened?  It is the result of three factors coming together: (1) James and Mary being eligible for a large subsidy from the federal government due to their age and the consequent high cost of a silver policy; (2) Peaches having too many employees to be eligible for any sort of tax benefit from the government;  and (3) the high price of SHOP policies in Peach County relative to individual policies. As shown here, when these factors come together, employees should prefer a situation in which employers give them cash, not expensive health insurance policies.  Moreover, if Peaches does not go to the SHOP exchange, James and Mary are no longer wedded to the likely small number of plans Peaches wants; they can pick any plan that best meets their needs available in the individual exchange.

Ready for one more?

Example 4: Ada

Ada is a 30 year old programmer at Babbage Enterprises , a small tech firm in Allegheny County, Pennsylvania.  It has 10 employees but their average wage is $75,000 per year, making Babbage ineligible for any section 45R tax credit.  Ada is single and makes $100,000 a year.   It believes employees should have the best health care available. Babbage, which has a CEO  with recurrent heart problems, could go to the SHOP Exchange and purchase a Platinum PPO for its employees — the “UPMC Small Business Advantage Platinum PPO $250 $10/$25 – Premium Network” for which the cost of adding Ada would be $353.94 per month or $4,247 per year.  For that Ada would receive a plan that had a unified $250 deductible and a unified $1,250 out-of-pocket limit.

But what if Babbage instead provided Ada with $4,247 in additional compensation?  Ada could go into the FFM for Pennsylvania and find a policy similar to the UPMC one listed above.  She could get the “UPMC Advantage Platinum $250/$20 – Premium Network” for a gross premium of $391.75 per month ($4,701 per year )with a unified $250 deductible and a $1,500 out-of-pocket limit.  Ada would have to dig into her own pocket to do so, however.  Because Ada is in likely in the 25% marginal tax bracket, she will net only $3,185.25 from the additional compensation.  And, because Ada’s income is well above 400% of the federal poverty level, she will receive no advance premium tax credit to help pay for the policy.  Thus, Babbage’s decision not to purchase on the SHOP exchange will end up costing Ada about $1,516 if she wants a comparable policy.

Ada accounting

Ada is worse off largely because she gets no subsidy and because, by receiving cash instead of health insurance, she loses the current tax advantage offered by the latter.  Thus, it is the wealthy individual who is hurt by having to go to the individual market.

Provisional Conclusion

All of the above is hardly a proof.  There are lots more scenarios to be considered. But my initial conclusion is that the SHOP exchanges tend to be most useful only for the wealthy who would not get a premium tax credit were they to go to the individual exchange.  Also since my preliminary research indicates that, on balance, SHOP policies are at least as expensive as individual policies and because the employer purchasing a SHOP policy generally ends the ability of the employee to get a subsidized policy on the individual exchange, the option to purchase in fact may hurt employees and their families.

So, we have to ask.: If we are going to keep some version of Obamacare, why not help stabilize the individual exchange pools by bringing some additional people into them: the generally healthy people who work for small employers.? So long as the market works and those employers pass on to their employees what they would have spent on the SHOP exchange for health care, most except the wealthiest are likely to be better off. Although one answer to this provisional suggestion is that doing so will hurt the federal budget — more people will get section 36B tax subsidies — there may be many who share the preference for a simpler Obamacare, and one that helps breaks the peculiar stranglehold that employer provided health insurance has had on this nation since the government distorted the market after World War II.


My colleague Professor Jessica Roberts has alerted me to a fine academic article on this subject:

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A roadmap for legal attacks on the employer mandate delay

After going through notice and comment rulemaking, the Internal Revenue Service and the Department of the Treasury announced a “final rule” Monday that the employer mandate  tax contained in the Affordable Care Act (26 U.S.C. § 4980H) will not apply at all to large “bubble” employers with between 50 and 99 workers until after December 31, 2015, and that employers with 100 or more workers can avoid the § 4980H tax from December 31, 2014 to December 31, 2015, by offering compliant health insurance coverage to 70% of its employees. These provisions amend previous IRS rulings that the employer mandate tax would start for plan years beginning after December 31, 2014, and that a large employer would need to offer health insurance coverage to 95% of its employees before it would be exempt from the potentially steep taxes imposed by section 4980H.  Both the new final regulations and the earlier ones contradict the language of the Affordable Care Act, which states that the tax kicks in for plans beginning after December 31, 2013, and that an employer must offer health insurance coverage to “all” of its employees, not 95% and certainly not 70%, before it could escape this form of taxation.

In this blog entry, I want to accomplish three goals.  I want to educate on the legal issues created by the recent regulation.  I want to suggest both a conventional path to challenge the regulation and an unconventional path.  And, I want to advocate.  I want to implore the readers of this blog who are predisposed to think highly of President Obama to really question the precedent they let be set by permitting an Executive to refuse to collect a tax for years in circumstances where it is crystal clear that Congress has directed that it be done. There is a serious risk that future leaders may not share the same priorities as President Obama or themselves. Immunizing non-collection decisions from judicial correction will lead to collapse of government programs those sympathetic to our current President believe are worthy. It could also lead subsequent Congresses to refuse to enact government programs that make sense only if payment for them can not be subverted by a recalcitrant executive branch.   In short, the people who should be most disturbed about what the President has done are his many friends who support not just the now-gutted employer mandate but who believe that the federal government has a major role in, as with the ACA, redistributing wealth acquired through the market.  I would be very impressed if they mustered the courage to stand up to their friends.

A conventional path to challenge the employer mandate delay

Here are some plausible book moves in the legal chess game that likely lies ahead for the decision yesterday to modify the times and conditions under which the employer mandate will be enforced.


Opponents will hunt for a plaintiff.  As others have noted, due to a doctrine called “standing,” this will not be so easy. Under Supreme Court precedent, the plaintiff is going to have to show (a) that the failure to enforce the employer mandate caused the plaintiff’s employer not to provide health insurance, (b) that the employer would provide the requisite form of health insurance if the tax were being enforced, and (c) that the plaintiff has  actually been damaged by the failure of their employer to provide health insurance. If, for example, the employer says it is not sure what it would do if the tax were imposed, a case challenging the delay is likely to fail for lack of standing. Or if it could be shown that the failure of the employer to provide health insurance actually permitted the employee to purchase equally good and similarly priced health insurance on an individual Exchange, a case challenging the most recent IRS rules would likewise likely fail for lack of standing.

On the other hand, there may well be plaintiffs out there with standing to sue.  There are about 18,000 firms with more than 50 employees in the United States. While some might make decisions on whether to provide health insurance that would be unaffected by the tax, if even 5% would admit to being affected by the tax — whose whole point, after all, is precisely to cause the result plaintiff will need to show — that would represent a universe of 900 potential businesses that almost surely employ more than 50,000 employees. It takes only one employee with standing to bring suit in order to challenge the legality of the President’s latest actions.

The best plaintiff would be an employee of a large corporation that has not provided “minimum essential coverage” (a/k/a/ health insurance) but which says, without equivocation, that it would do so if the employer mandate were in place. It would be best if the insurance the employer would have provided would cost the employee less than alternatives made available on the individual Exchanges.  Perhaps, for example, the employee worked for an employer that had extraordinarily healthy employees — a large gymnasium chain filled with youthful, mostly male, low-health-cost physical trainers , for example —  and could thus provide even minimally acceptable coverage via self insurance for less than the amount the employee could obtain on an individual Exchange.

Violation of the Administrative Procedures Act

Plaintiff’s argument

Once the standing hurdle is overcome, expect a challenge based on violation of section 702 of the Administrative Procedures Act (5 U.S.C. § 702).  This law states: “A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof.”  The plaintiff will argue that Congress has spoken with crystal clarity on the issue of when section 4980H was supposed to take effect: it was supposed to take effect for plan years beginning after December 31, 2013.  There is nothing ambiguous about that date. There is nothing for the Supreme Court — let alone the Internal Revenue Service — to interpret.

Saying the year 2013 means the year 2015 is completely and totally absurd. The 2013 date chosen by Congress did not encompass the idea of “sometime in the kind of nearish future.” Congress balanced many factors, including the difficulty of complying with the statute and the desirability of having the employer mandate coordinate with many other provisions of the ACA that take effect starting in 2014.  Moreover, given the enormous costs of the ACA, even in the reduced form taken by original projections, the $10 billion per year in tax revenues the employer mandate was expected to generate, was another reason to call for adoption in 2013. Under these circumstances, Congress did not choose to give large employers 5 years and 9 months to figure out how to finance and acquire health insurance for their employees; Congress thought 3 years and 9 months of “transitional relief” was perfectly adequate. Congress did not want the goal of reducing the number of uninsureds subverted by letting employers off the hook or, perhaps, the burdens on the subsidized Exchanges exacerbated by large employers not pulling their weight.

The situation is no better, plaintiffs will argue, for the Obama administration’s decision in the regulations to distinguish amongst different sorts of large employers, letting employers with between 50 and 99 employers off the hook in the year 2015 while compelling at least some employers with more than 100 employees to provide health insurance in the same year. The statute carefully defined large employers in this context to mean more than 50 employees and deliberately chose 50 as the point at which to balance the importance of employer-provided insurance against the administrative and financial burdens of forced provision. Congress did not choose, for example, to stage imposition of the employer mandate first on the biggest of the large employers and a year or so later on the smaller within that group.

Finally, even if there was some basis for staging imposition of the mandate, plaintiffs will argue, the Obama regulations have butchered the provision of 4980H that calls for imposition of a large tax unless the employer offers insurance to all eligible employees. Conceivably the agency could stretch the “all” concept to 95% as it did before.  Perhaps 95% could be justified as a bright line proxy for the sort of honest mistakes that Congress would not have wanted to serve as a predicate for a hefty tax. But when the Executive branch goes from “all” to 70% it can not be said with a straight face that anyone is speaking about  providing a safety zone against honest mistakes.  Now we are talking an entirely different regulatory regime.  The Administrative Procedures Act does not give the Executive branch the power to legislate; and if it did so, the APA would itself be unconstitutional.

The Chevron Deference rebuttal

Expect the defendants to fight back with something known in the law as “Chevron deference.” This widely cited doctrine emerges from the observation that executive agencies actually have a lot of expertise in interpreting statutes in their area.  Therefore, it should be assumed that Congress would have wanted the agency to have considerable leeway in interpreting statutes. So long as the agency follows the right procedures in developing its rules, such as the “notice and comment” rulemaking that preceded the recent pronouncement on the employer mandate,  the rules developed by the agency are lawful and binding even if the court would itself not have interpreted the statute the way the agency does. The main caveat — and it is the big “Step 1” in the Chevron process — is that the agency’s interpretation has to be a reasonable interpretation of the statute, a “permissible construction.”

But, the plaintiff will argue — and I believe with great success —  “Chevron deference” does not exist where the statute is really not subject to interpretation at all. As the Supreme Court said in Chevron, USA v. Natural Resources Defense Counsel, Inc., “If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” And it is hard to imagine anything clearer than “December 31, 2013.”  It is hard to imagine a construction of “all” — particularly in a context in which alternative taxes (4980H(b)) are placed on employers that offer compliant health insurance to at least some of their employees– that could mean 70%.  It is just not a reasonable construction.

“But wait,” I hear some judge asking.   “Are you saying that the IRS could not give a company a few extra weeks to get health insurance? Are you saying that the IRS could not give companies any leeway in obtaining health insurance and saying that if a single employee goes uninsured the company is subject to a $2,000 per employee (minus 30) tax?” No, not quite. As to the few weeks grace period, I do not believe the IRS can interpret the statute to permit such to occur automatically.  I understand giving a select company a few extra weeks if there were extraordinarily circumstances — a natural disaster, an unintentional failure of communications — but Congress (a) already gave the companies more than a three year grace period to get health insurance for their employees and (b) assesses the tax on a monthly basis, $166.67 per employee per month, so that the company would not in fact be hit with a $2,000 whammy.  And as to whether the IRS could give companies some leeway, again, if there were a factual showing that it would be easy for a company to mess up on a small percentage of employees and that some accommodation was necessary in a particular case, I do not believe some leniency would subvert the intent of Congress. But I see no evidence from the IRS that a 30% mistake zone is necessary; instead, this appears to be a way of simply mellowing out a tax regime that the Executive branch now believes (perhaps rightly) is too harsh without, however, asking Congress, who might actually agree were the case respectfully put to them, to assist with a modification of the statute.

The Prosecutorial Discretion rebuttal

The better argument the Obama administration will muster goes under the name “prosecutorial discretion.” The idea, buttressed by many case, including the 1985 Supreme Court decision in Heckler v. Chaney, is that the Executive branch needs lots of leeway in determining enforcement priorities and there is therefore a very strong presumption against judicial review of decisions not to prosecute and not to pursue agency enforcement actions. And while, to be sure, most of these cases arise where the government is less transparent about its enforcement priorities, surely the government should not be restricted in its otherwise existing discretion just because it sought notice and comment before deciding what to do and was transparent enough to publish the basis on which it would make decisions.

Here are some quotes from Chaney which the Obama administration’s attorneys  are likely to throw in the face of any potential challenger to its regulations.

  • “[A]n agency decision not to enforce often involves a complicated balancing of a number of factors which are peculiarly within its expertise. Thus, the agency must not only assess whether a violation has occurred, but whether agency resources are best spent on this violation or another, whether the agency is likely to succeed if it acts, whether the particular enforcement action requested best fits the agency’s overall policies, and, indeed, whether the agency has enough resources to undertake the action at all. An agency generally cannot act against each technical violation of the statute it is charged with enforcing. The agency is far better equipped than the courts to deal with the many variables involved.”
  • “In addition to these administrative concerns, we note that, when an agency refuses to act, it generally does not exercise its coercive power over an individual’s liberty or property rights, and thus does not infringe upon areas that courts often are called upon to protect.
  • “[A]n agency’s refusal to institute proceedings shares to some extent the characteristics of the decision of a prosecutor in the Executive Branch not to indict — a decision which has long been regarded as the special province of the Executive Branch, inasmuch as it is the Executive who is charged by the Constitution to “take Care that the Laws be faithfully executed.” U.S.Const., Art. II, § 3.”
  • “The danger that agencies may not carry out their delegated powers with sufficient vigor does not necessarily lead to the conclusion that courts are the most appropriate body to police this aspect of their performance.”

Sounds bad for our plaintiff!

There is, however, the noteworthy footnote 4 in Chaney that should give plaintiffs some hope. After all, Chaney articulates the doctrine of agency discretion as a strong presumption, not an irrebutable one. Here is what Justice Rehnquist said:

We do not have in this case a refusal by the agency to institute proceedings based solely on the belief that it lacks jurisdiction. Nor do we have a situation where it could justifiably be found that the agency has “consciously and expressly adopted a general policy” that is so extreme as to amount to an abdication of its statutory responsibilities.” See, e.g., Adams v. Richardson, 156 U.S.App.D.C. 267, 480 F.2d 1159 (197) (en banc). Although we express no opinion on whether such decisions would be unreviewable under § 701(a)(2), we note that, in those situations, the statute conferring authority on the agency might indicate that such decisions were not “committed to agency discretion.”

In other words, plaintiffs may be able to argue that this is not a case where the agency is in fact making enforcement decisions based on budgetary priorities or the probability of success. Few if any of the reasons behind the discretion doctrine exist here; the doctrine of discretion should not exist for its own sake precisely because it derogates from popular sovereignty exercised via Congress. There should be enough of a paper trail for the plaintiff to show persuasively that, the agency is making an enforcement decision based on a sense that the statute is unfair or unwise or, if someone has left a smoking-gun email around, pure political considerations.

The facts of Adams bear some resemblance to the facts here. Just as here there is a statute calling on the IRS to levy a tax starting in 2014, in Adams, there was a statute that directed certain federal agencies to terminate or refuse to grant assistance to public schools that were still segregated. Just as here the agency in charge (the IRS) is apparently going to refuse to pursue that tax in 2014 (and 2015) as a matter of policy, in Adams the federal agency in charge (Health, Education and Welfare) effectively adopted a policy of refusing to stop funding segregated public schools. The fact that there was general non-enforcement as a matter of policy distinguished the case, in the view of the Adams court, from conventional prosecutorial discretion.

The other hope for plaintiffs would be to use the extreme example of this case as a way of infusing contemporary doctrine on review of agency inaction with some thoughts from Justice Thurgood Marshall in his concurring opinion in Heckler v. Chaney. Marshall’s thoughts might have particular appeal to Justice Elena Kagan, for example, who, in addition to being fair minded, was one of Marshall’s clerks close to the time Chaney was decided.  Marshall, who perhaps unfortunately took an expansive view of the majority opinion in order to criticize it, and who appears to have drafted without noting its cautionary footnote 4, wrote several quotations that might prove helpful if introduced gently.

“[T]his ‘presumption of unreviewability’ is fundamentally at odds with rule-of-law principles firmly embedded in our jurisprudence, because it seeks to truncate an emerging line of judicial authority subjecting enforcement discretion to rational and principled constraint, and because, in the end, the presumption may well be indecipherable, one can only hope that it will come to be understood as a relic of a particular factual setting in which the full implications of such a presumption were neither confronted nor understood.”

“But surely it is a far cry from asserting that agencies must be given substantial leeway in allocating enforcement resources among valid alternatives to suggesting that agency enforcement decisions are presumptively unreviewable no matter what factor caused the agency to stay its hand.” (emphasis in original)

Moreover, conceivably traction might be gained in an attack on the employer mandate regulations by limiting the theory of the case to agency failure to enforce a regulation as opposed to decisions of prosecutors not to pursue criminal charges. As Justice Marshall wrote:

“A request that a nuclear plant be operated safely or that protection be provided against unsafe drugs is quite different from a request that an individual be put in jail or his property confiscated as punishment for past violations of the criminal law. Unlike traditional exercises of prosecutorial discretion, “the decision to enforce — or not to enforce — may itself result in significant burdens on a . . . statutory beneficiary.” (citing Marshall v. Jerrico, Inc., 446 U. S. 238446 U. S. 249 (1980)).

Nonetheless, plaintiffs will have to contend with the fact that (a) Thurgood Marshall’s ideas on prosecutorial and agency discretion were not shared by the remainder of the court and (b) the extreme conditions found in Adams have not been found in other cases in which such “footnote 4” claims have been brought.  The presumption established by Heckler v. Chaney has clearly remained a very strong one.

A Tax Whistleblower action: An unconventional path for challenging the employer mandate delay

The greatest difficulty for those disturbed by the Obama administration’s regulatory subversion of its own law is the prosecutorial discretion argument discussed above. Almost everyone thinks there should be some degree of prosecutorial discretion and the case law strongly and pretty persuasively supports the idea that the judicial branch should at least seldom be able to force prosecutors or agencies to more forcefully enforce laws, particularly where Congress has the ability to coerce the Executive branch to do so through aggressive techniques such as appropriations or, I suppose, in the most egregious cases, impeachment.  The tension will be whether and under what circumstances the Executive branch under the rubric of “prosecutorial discretion” can completely subvert the language and intent of a statute through a refusal to collect a tax.

So, might there be another path for attacking the regulation, one either already in existence or one created by Congress?

IRS Form 211 (filled in)
IRS Form 211 (filled in)

Perhaps. There is a remedy on the books already that might at least make the Obama administration squirm. It would do so because it might make clear that what was going on was not an exercise in prosecutorial discretion at all, but rather an effort to rewrite the statute.  The idea is to for anyone at all to be a whistleblower  under 26 U.S.C. § 7623 and to advise the IRS via a Form 211 that a particular large employer, preferably one that had over 1030 employees and therefore could owe more than $2,000,000 in 4980H taxes, had failed to provide health insurance to its employees and had failed to pay any of the taxes created in section 4980H. The whistleblower does not need to show fraud to file a Form 211. The whistleblower merely needs to show that there has been an underpayment of tax. Of course, to protect against claims of bad faith, the Form 211 should disclose that the claimant knows that the employer is relying on IRS regulations as a defense but that the claimant asserts that those regulations are unlawful.

Now, I would not expect the IRS to then take a customary next step of pursuing the non-paying large employer for the 4980H taxes. I would not expect the IRS to provide any award to the whistleblower that would be available if the IRS had actually collected any money as a result of the Form 211 filing.  But it is this failure of the IRS to do anything or to pay anything that might trigger the right of the Form 211 claimant to bring a legal action in which the legality of the Obama administration’s delay of the employer mandate could be challenged. Section 7623(b)(4) of the Internal Revenue Code permits “any determination regarding an award” to be appealed to the Tax Court, which has jurisdiction over such appeals.

Again I would not expect the IRS to take such an appeal lying down.  The IRS will claim that it has complete discretion over whether to pursue a taxpayer brought to its attention under Form 211. A decision to the contrary could create the potential for massive, expensive litigation.  Moreover, the IRS will say, the appeal permitted by section 7623(b)(4) is one over the size of any award not over whether the IRS decides to proceed with any administrative or judicial action based on information contained in a Form 211.

These will be strong arguments. They may well persuade the Tax Court.  They may well persuade a Circuit Court of the United States to which an adverse decision of the Tax Court can be appealed. But what they will expose is that the IRS does not regard the regulatory changes it has made as merely ones of prosecutorial discretion — deciding where and how to expend its resources detecting underpayments. Here, that work has already been done for them. Instead, they constitute a substantive rule on the circumstances — none for 2014 and few for 2015 — under which a large employer that fails to provide health insurance should be liable for taxes that Congress demanded be paid under section 4980H.  Perhaps, therefore, the Tax Court, or, on appeal, an Article III appellate court or the Supreme Court might summon up the courage to  say, kind of like the suggestion in footnote 4 in Chaney, that, although the IRS may have broad discretion, it does not  have “discretion” to abdicate its statutory responsibilities. It can not fail to pursue obvious tax deficiencies brought to its attention by a third party when the only reason for so declining is an unlawful regulation promulgated by the IRS in a usurpation of legislative powers. Whatever one thinks of the merits of the employer mandate, such a decision, in my view, would be a healthy restoration in the balance of power among the federal branches of government.

One other note

It was suggested by a friend that Congress could overcome such exercises of prosecutorial discretion by an expanded use of  “qui tam” lawsuits. This remedy, which dates back to the 13th Century and has seen a resurgence over the past 20 years in the United States, allow a private citizen to bring a civil action in the name of the government and collect some of the money otherwise owed to the government.  Qui tam litigation is a broad and complex subject on which I do not pretend great expertise. But, as I understand it, qui tam lawsuits generally permit a private party to go forward only if the Executive branch either supports the private party’s efforts at supplemental enforcement of a regulatory norm or at least acquiesces to it.  Under 31 U.S.C. 3730(c)(2)(A) and case law interpreting one of the major branches of qui tam actions, the government can basically kill a qui tam lawsuit to which it objects even if the underlying claim is meritorious. It would therefore take a special qui tam statute that expressly squelched this veto power in order for such action by Congress to permit an attack on the delay of the employer mandate.  More fundamentally, however,  the probability of a gridlocked Congress enlarging qui tam rights to facilitate judicial overturning of the Obama administration’s delay of the employer mandate and doing so over a presidential veto is about zero.


I’m forging some new ground here and laying out arguments without weeks of legal research in order to get them on the table.  I am likely missing things or even, perchance, getting things wrong.  My hope, however, is that what I’ve written is intelligent and helpful enough to get others to discuss further and potentially take action on the serious legal issues involved when a President decides not to collect taxes that Congress has clearly demanded be paid.


This blog post benefited greatly from a conversation with Professor Sapna Kumar, an expert on administrative law.  I, of course, am responsible solely for any mistakes made herein and I have no idea what Professor Kumar — whose main focus is the intersection of administrative law and intellectual property — thinks about the Affordable Care Act or its implementation. So, if you don’t like the post or there is something wrong, don’t blame her.

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