How to Structure a “Play-or-Pay” Requirement on Employers

President Obama has made health care reform a top priority, and Congress expects to pass a bill this year. All of the proposals under serious consideration are “hybrid” approaches, designed to build on the current system of job-based coverage while providing health insurance to all Americans, including those who are not offered it through their place of work. These proposals are often termed “shared responsibility” approaches, because they envision joint contributions by the public sector, individuals and employers. Individuals pay for coverage on a sliding scale based on income with public subsidies for low- and middle- income families. But employers also continue to be responsible for crucial aspects of financing and managing coverage.

In the hybrid health reform proposals under consideration in Congress—as in California in recent years—employer responsibility generally takes the form of “play-or-pay.” Firms that do not directly provide health care to their employees (or “play”) are required to “pay” into a public pool. Play-or-pay is distinct from what we call “play-or-penalty,” in which firms that do not directly provide health care are fined for their noncompliance but those fines do not directly fund their workers’ coverage. In play-or-pay proposals, employer contributions are not penalties for failure to provide insurance, but a financing source for the insurance coverage of their workers, whose enrollment in the public pool flows directly from the employers’ decision to contribute.

Even within the broad play-or-pay approach, however, many key design choices remain. How Congress resolves these choices will not only shape the constraints and opportunities that employers face; it also has important implications for other strategic aspects of health care reform: how people will be enrolled, how subsidies will be administered, how many people will continue to have employer-sponsored coverage, and so on. And, of course, employer requirements raise important political issues as well. Yet how employer requirements should be structured has received relatively little attention in the current debate, and the experience of states like California that have considered such requirements have been only superficially discussed.

This policy brief examines the policy design, economic effects, and political ramifications of employer requirements. We focus in particular on what Congress can learn from the California experience, as well as from an independent cost and coverage analysis of the “Health Care for America” proposal—a national play-or-pay plan closely resembling current legislative initiatives that was developed by one of us (Hacker) with the support of the Economic Policy Institute. We begin in Part I by reviewing the key reasons for having a play-or-pay requirement. In Part II, we provide a set of recommendations, drawn from the California experience and the “Health Care for America” plan, for navigating the design and political issues raised by national play-or-pay bills. Finally, Part III examines the economic effects of an employer requirement. We conclude that the potential negative effects are modest, are outweighed by potential benefits, and could be easily addressed in the design of the requirement itself.