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

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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.

The authors are economists at the Kellogg School of Management.

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12 replies »

  1. One thing about lyft and uber drivers is that they can literally choose when they want to work. They can work as many or as few hours as they want, though uber might push them to work more, they have the option of saying no thanks….not sure that kind of flexibility warrants calling yourself an employee. Try lyft and uber, though, decide for yourself. Go to https://getrideshare.com to find free promo codes for uber and lyft, what better way to try than with a free promo code.

  2. In my opinion, their fighting is ridiculous. They are fighting for benefits, but they clearly signed up for a contractor job. Yes, I think Uber should at least offset benefits such as health insurance a little bit, but at the same time, that simply is not affordable for the company.

  3. They are currently trying to raise another billion dollars in VC funding. They are already the most valuable company in the world.. I would be highly surprised if they folded.

  4. I have actually found, when talking to drivers, that a lot of them don’t think they need to report their earnings on their taxes. They really don’t understand how the “contractor” self-employed thing works.

    As for your second point, have you heard of the lawsuits emerging this past year? Drivers are fighting for benefits and are actully winning in court. I will be interested to see what this next year brings.

  5. They absolutely issue the 1099’s for driver earnings. And you can really only pay for a ride digitally, through the app; Which limits the grey area of cash reporting.

    The only cash that they can theoretically not report to the IRS would be any cash tips they may receive while driving (and let’s be honest…I’m sure most of them do neglect to report those earnings…just like the bar/restaurant/service industry)

    I think the driver healthcare is only going to become a bigger and bigger issue for Uber. Surprised it’s kinda gone under the radar for as long as it already has. I’m sure the drivers wouldn’t be too fond of a 29 hour weekly work limit just to *not* receive benefits though; to say the least. But from Uber’s perspective, It seems like one of the easiest loopholes to this issue. Will be interesting to see how this all pans out.

  6. OK, let’s say we DID have a “national health insurance paid for out a progressive graduated income tax.” (I will assume based on the National Health Svc of Great Britain?)

    What would it cover? would there be a premium? a copay? Would it be like Medicare, which expects premiums and operates like a giant government run insurance company? Should smokers and obese patients pay more? Or am I penalized for being healthy and jogging and not smoking? Will my premiums be more because I’m a doctor and not an uber driver? If so, why?

    Or is it like Medicaid, simply “free everything for everyone”?? If so, does it pay for Gleevec? sex-changes? breast implants? eyeglasses? nutritional supplements? scooters? abortions? hearing aids? Viagra? How many MRI’s per month are allowed? How many ER visits per week? will it cover 6 months of inpatient therapy for “marijuana addiction”?? 90 days? what about “chronic Hep C” treatment? who is going to pay for that? And who decides what will be paid for and what won’t be paid for?

    And who pays FOR it? the folks who are ALREADY paying for everything else? My effective tax rate is already pretty damn high right now, while lots of folks pay absolutely zero. Why is that “fair” or even constitutional?

  7. Interesting. But does Uber issue 1099’s to all of its drivers? I would assume there’s a money trail there.

  8. I agree with the author that health insurance needs to be owned rather than rented
    I would be interested to know the average premium including subsidies for a family of four
    In the group market according to Milliman a family of four pays $6,000 a year in premiums , $4,000 a year in out of pocket costs, and the employer pays $14,000 per year
    Whether health insurance is owned or rented who can afford $24,000 per year for a family of 4 which is 19 percent of median household income
    New ways of financing health care is necessary
    Don Levit

  9. Very few, if any, Uber drivers report their cash income. Does that make them receivers of ACA subsidies without honest reporting if they are “private contractors”?

    Time for employer health care to end.

  10. David and Craig, your arguments against the mandate are logically correct.

    But you show what may be a massive naivete about how the ACA became law.

    Megan McCardle and Ezra Klein hit this on the head:

    http://www.bloombergview.com/articles/2013-08-09/fixing-the-mandate-from-hell

    If I may paraphrase, they point out that with no mandate, many millions more Americans would be in the exchanges. And that means many billions more paid out in subsidies.
    And that would cause the very delicate (and sometimes dishonest) so-called deficit neutrality of the ACA to disappear overnight, in fact be buried in red ink.

    By the way, I am not a slavish worshipper of budget neutrality. I think that in some cases it is just fine to raise taxes. The employer contribution to Medicare could have been jacked up to cover the higher subsidies.

    The ACA barely squeeked by as it was. A huge amount of extra subsidies, and enough Democrats would have voted it down.

  11. So true but let’s not forget the politics of this. You may say that “companies offering benefits reduce (their) wages to cover the cost” but that’s only true in Adam smith economic theory. In the real world those who get health benefits are high(er) income earners. Uber drivers and their ilk do not make up the difference. And those who do have health benefits who earn more like Uber drivers and less like investment bankers or Northwestern business profs are desperate to keep them. Because there is no way they will get paid the equivalent in cash (even in post tax $$) if they’re taken away–hence the massive fights by fire & teacher unions, etc, to keep their collective bargaining rights and their benefits.

    Then of course if health benefits were naked and transparent (other than hidden as they are now), the ability for them to be tax free would also be harder to justify and politically maintain. So it’s not only the unions but it’s the high income earners of America who want to keep benefits coming via their employers.

    Finally employers themselves, even though they have shown that they have no capacity to manage the health care system or reduce costs, all believe that they perhaps may be able to one day (or they think they do already!). So there’s no real move for them to give up health care benefits (other than a staged move to the private exchanges as a different distribution mechanism).

    So yes it’s stupid for Uber to have to provide health benefits to a flexible workforce, but no the employer mandate makes political sensible (even if it’s stupid policy). So it won’t go a way for a while.

    What the Uber driver and the workforce of today needs needs is a national health insurance/service paid for out of a progressive graduated income tax. For them and and for everyone else. But we’re not getting that either….

  12. Uber is a Gresham’s Dynamic exemplar anyway. I hope they fold and take a ton of VC money down with them.

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