The following originally appeared in the Wall Street Journal on July 21, 2013.
Why did the Obama administration earlier this month delay enforcement of the Affordable Care Act’s employer mandate until 2015? The administration claims that it needed more time to get the mandate right. Some have suggested that politics—the concern that negative effects of the mandate might kick in before midterm elections in 2014—may have influenced the decision. My own hope is that the administration acted because it is beginning to understand that portions of the ACA are unworkable despite its drafters’ good intentions. For example, if my experience running CKE Restaurants Inc. is a guide, there could be serious problems with the law’s financing mechanism. We currently offer all of our more than 21,000 full- and part-time employees at our Carl’s Jr. and Hardee’s restaurants access to health insurance. At least since 1999, we have offered all of our crew employees access to affordable plans with an annual benefit cap. We currently offer these plans under a waiver from the Department of Health and Human Services, as the ACA prohibits plans with benefit caps. For restaurant general managers, we offer a more extensive plan where the company pays 60% of the premiums. However, only about 6% of crew-level employees and 60% of general managers sign up for health-insurance coverage. These low participation rates surprised me. So over the past couple of years I have asked CKE employees what motivated their decisions. Our crew-level workers tend to be younger, and perhaps unsurprisingly some told me they were unconcerned about illness or injury. Others already had insurance through a spouse or parent. A significant number said they declined coverage because they could get medical treatment “for free at the emergency room.” Among those who had signed up, many said it was because they were concerned about developing a medical condition (perhaps due to a family history of illness), and then being unable to get affordable coverage due to this pre-existing condition. These kinds of responses are why I question the ACA’s viability. The new law’s success depends on young, healthy people who are lower-risk signing up for health insurance to offset the costs of insuring individuals who are at higher risk. If predominantly high-risk individuals sign up, health insurance is going to be very expensive. Yet, even after the ACA takes effect, people will still be able to get medical care at the emergency room. Further, the ACA prohibits insurers from denying coverage because of pre-existing conditions. In other words, individuals will no longer have much incentive to get health insurance as a hedge against the possibility of developing a medical condition. The ACA’s incentive for young workers to pay for coverage is a penalty (or tax) on uninsured individuals. The penalty in 2014 is $95 or 1% of household income, whichever is greater. It increases in 2016 to $695 or 2.5% of household income, whichever is greater. Our company currently plans to offer all employees who work more than 30 hours per week coverage that meets the ACA’s requirements. We are choosing to do that rather than send our employees to the ACA’s health-insurance exchanges and, if the workers qualify, the federal subsidies to help them pay for it. On average, our general managers earn $50,000 per year. Should they decline insurance coverage, they will be subject to an initial annual penalty of $500 and a maximum penalty of $1,250. We estimate that their share of paying the health-insurance premium through our company plan will range between $2,000 and $3,000 per year, well in excess of any potential penalty. The lowest-paid employees who qualify for ACA coverage (as opposed to Medicaid) earn about $11,500 per year. They would be subject to an initial penalty of $115 and a maximum penalty of $695. We currently estimate that their share of health insurance premiums will be $1,091.55 per year—again, well in excess of any potential penalty. So, in the first year, our employees’ insurance costs likely will be four to 10 times more than the ACA’s penalty on the uninsured. This is why I am concerned that the ACA could actually cause the number of our covered employees to decrease, particularly in the first year. The penalty for declining coverage will be low compared with the cost of coverage; and employees will know that if they happen to get sick, they can get insurance after that. So the economically rational decision for young people, like our crew employees, is to pay the penalty and forego the insurance. Despite what the government may believe, our employees are smart enough to figure this out. For insurers, it’s simple math: Premiums collected must exceed claims paid. If too few young healthy people enroll, insurers will raise premiums on those who do. This could result in a spiral of rising premiums—causing more healthy people to drop coverage, driving premiums even higher. The rising cost of insurance affects people whether they purchase insurance through their employers or an exchange, since both depend on private insurers. If insurance costs go up, taxpayers also may end up paying more to foot the bill for the higher cost of subsidized insurance. This is particularly concerning since the administration has announced that it will be unable to verify whether applicants for subsidies actually qualify for them. The subsidies are likely to be very popular. The Obama administration seems to recognize the looming trouble and is urging professional sports organizations and parent groups to encourage young workers signing up for coverage. Maybe that will be effective. It’s certainly preferable to ill-advised attempts to postpone, and thus change, the law by fiat rather than by legislation. Maybe the administration will even do what it should have done in the first place: Take the time to develop a bipartisan, market-driven approach that might actually work.