Code Red: Two Economists Examine the U.S. Healthcare System

June 18, 2015

Uber and the 1950s Logic of the Affordable Care Act’s Employer Mandate

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:39 am

We have recently blogged about what is perhaps the best feature of the Affordable Care Act – the individual insurance exchanges. These exchanges have the potential to create one of the first well-functioning individual insurance markets in the United States. In addition, they are an implicit recognition of the nature of the contemporary American economy – one where workers frequently move employers and are increasingly serving as independent contractors for multiple firms.

However, a recent ruling by the California Labor Commission reminds us of what must be one of the worst features – the requirement that large employers provide health insurance to all employees working more than 30 hours per week.  This mandate is a remnant of a 1950s economy where workers remained employed at the same firm for decades and the Internet was just a series of tubes that existed in our dreams.  Ironically, the ACA insurance exchanges not only make the employer mandate obsolete, but the mandate actually weakens the viability of the exchanges by locking a large portion of the healthy population into the employer provided insurance market.

In the ruling in question, the Commission declared that Uber drivers in California are employees, and not independent contractors. Data show that 15 percent of UberX drivers work more than 35 hours per week, and 40 percent of UberBlack drivers work more than that amount.  Another 30 percent of UberX drivers average 16-34 hours per week. Under the ACA, these hours statistics mean that a national interpretation of the California ruling would affect tens of thousands of people who contract as drivers with Uber, none of whom will be better off for it.

If all Uber drivers are considered employees, this ruling means that Uber must either provide health insurance to its drivers, pay a penalty, or limit the hours of all of their employees. It is unlikely that Uber will pay the penalty. If it provides insurance, it would want to lower compensation to offset the expense, but this would be practically impossible for Uber. The reason is that Uber has a “per ride” compensation system, so it would have to reduce compensation across the board, including drivers who work less than 30 hours weekly. It seems that the only viable option for Uber is to cap all drivers at 29 hours per week – something that would great limit the flexibility of Uber drivers.  Note that in a survey of Uber drivers, 74 percent said that they value the ability of Uber to smooth their income. In weeks where their other jobs (over 60 percent of Uber drivers have another income source) don’t provide enough income they can increase their hours with Uber to make up the shortfall. Given the liquidity constrained nature of many individuals, we should applaud the ability of firms like Uber to help the meet temporary income shortfalls through increased labor supply rather than more dubious means such as pay-day lenders.

The exchanges represent the first viable substitute for an employer mandate, and we should make every effort to support this policy. Without exchanges, many would-be self-employed workers would be hard pressed to find affordable health insurance and, if they could, they would be one illness away from reclassification into a much higher premium category. This would naturally drive many workers to choose a large company offering health benefits (even without the employer mandate, around 99 percent of large companies offer health insurance to their workers). Of course, the companies offering benefits reduce their wages to cover the cost.  But most workers don’t mind this – the cost of obtaining individual coverage was, before the ACA, was so much higher than the decreased wages from their employer.

But what a silly way to organize contemporary labor markets – i.e. forcing people to work for large companies in order to have insurance coverage. This shoehorns people into jobs that are often sub-optimal or in the case of the recent Uber ruling may constrain them from getting the most out of existing employment opportunities. It also provides an artificial competitive advantage to large firms over small firms and new entrants – which often have to pay much higher rates for health insurance and therefore face higher labor costs.

We support the ACA exchanges because they eliminate this folly. But it is equally foolish and shockingly counterproductive to also require firms to provide insurance.  If it were not for this mandate, all firms could offer their workers higher wages and let them find the coverage they want on the exchange. This would level the playing field for small firms and give peace of mind to the self-employed.  It would also deepen the risk pool in the exchanges, which is essential to their long term success.

In other words, if we get rid of the mandate, we sever the artificial relationship between health insurance and labor markets.  But the mandate, and the antiquated economic logic it represents, keeps this artifice intact.  Many companies have already redesigned their jobs to skirt the 30 hour rule.  Uber will soon join their ranks.  It is the height of folly.

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