What Is The ‘Free Rider’ Provision In The Senate Finance Bill?

free-rider-02In today’s POLITICO, Sen. Olympia Snowe (R-ME) explained that the group of six senators negotiating the Senate Finance Committee health care bill included a free-rider provision because they feared an employer-mandate could “create a perverse incentive where employers drop coverage”:

There is not a broad-based employer mandate. … There are approximately 170 million Americans that receive coverage through employers. That is a significant percentage of the population. We don’t want to undermine that or create a perverse incentive where employers drop the coverage because their employees could potentially get subsidies through the exchange.”

It’s unlikely that an employer mandate would lead employers to stop offering insurance. To the contrary, in the context of comprehensive reform, an employer mandate would preserve employer coverage and keep the employer contribution in the system. In fact, in response to Republican criticisms, the Congressional Budget Office said on Sunday that the House bill, which includes a strong employer mandate, would “drive 9 million people off of employer-provided insurance plans but that 12 million people who do not have such coverage now would get it — a net increase of 3 million people insured through their employers.”

The “perverse incentives” may be created through the free-rider approach. An earlier version of the Finance Committee’s bill required employers with workers receiving a subsidy in the Exchange or Medicaid coverage to pay 50% of the national average Medicaid costs on behalf of their Medicaid workers and/or 100% of the tax credit for workers in the Exchange.

But if employers are paying 50% of the national average Medicaid costs, then employers in low cost areas would be subsidizing workers in high cost areas, and vice versa. What’s more, since the free-rider mandate only requires employers to partly finance the coverage of lower income workers (workers who qualify for subsidies in the Exchange or Medicaid), it may discourage employers from bringing on new lower income hires. As the Center on Budget and Policy Priorities explains:

– It would make it considerably more expensive for employers who do not offer health insurance to hire workers from lower-income families.

– Employers would have strong incentives to tilt hiring toward people who have a spouse/parent with a good income. Poor parents with children in one-earner families would be particularly disadvantaged.

– Since minorities are more likely to have low family incomes than non-minorities, a larger share of prospective minority workers would likely be harmed.

– Employees (or prospective employees) might be discouraged from applying for Medicaid or subsidies because they know their employer would be charged and fear angering the employer, and might forgo needed health care as a consequence.

– The proposal also could discourage the hiring of low-income people with disabilities who have no choice but to enroll in Medicaid.

– Another concern is that this provision would be very complicated to administer. Employers would need to maintain ongoing data exchange with state Medicaid programs and state health insurance exchanges.