Under the 1,502-page Baucus bill, everyone will be required to have health insurance and, for most people, the insurance will be very expensive. In 2016, for example, the minimum coverage is projected to cost:
|Individual:||$5,000 plus $1,700 of potential deductibles and copayments|
|Family:||$14,700 plus $5,100 of potential deductibles and copayments|
If you do not get insurance from an employer, you will be required to buy this insurance in an “exchange,” where there will be government subsidies for those who earn between 100% and 400% of the government poverty level. These subsidies can be quite large. For a family earning $30,000 the (premium plus out-of-pocket) subsidy is $17,300 — an amount equal to more than half of the family’s income! At $42,000 income, the subsidy is $14,000. (See the tables below.)
Now here’s the rub. There are 127 million nonelderly Americans living between 100% and 400% of the federal poverty level. Yet the Congressional Budget Office (CBO) projects that only about 17 million will be in the exchange getting these subsidies.
So what happens to everyone else? They will have to bear this cost on their own (through out-of-pocket premiums and reduced wages) without any new help from government.
And what if people don’t buy the insurance they are required to buy? They will pay a (2016) fine of $600 — a tempting alternative considering that if they get sick and really need insurance, insurers will not be allowed to deny them coverage or charge them a higher premium.
Technically, your employer does not have to provide insurance to you and your family. But if not, and if you go into the exchange, your employer will face a fine (tax) that will be the lesser of:
- The average government subsidy in the exchange, or
- $400 per employee for all employees, whether or not they are in the exchange
Say the average subsidy is $4,000 for individuals and $10,000 for families. Under alternative (1), the employer would be assessed fines in these amounts for employees who obtain insurance in the exchange. Under alternative (2) the employer would pay $400 for every employee.
Writers at such otherwise sympathetic places as The New York Times, The Washington Post and the Center on Budget and Policy Priorities have all remarked on how bizarre this choice is and on the perverse incentives it creates. Let me make four quick observations.
First, let’s combine the interests of the employee and the employer and ask whether it makes sense to be in the exchange or outside of it. Under alternative (1), the fine is equal to the average subsidy. Since workers with above average incomes get below average subsidies in the exchange, these workers and their employers would pay more in fines than they would get back in subsidies. By contrast, below-average-income workers and their employers would pay less in fines than they would get back in subsidies. Under alternative (2), the vast majority of workers would get more in subsidies in the exchange than the $400 fine their employers would have to pay. So wherever this is the cheaper alternative, expect many employers to drop their coverage altogether or not provide it in the first place.
Second, alternative (1) is likely to be cheaper for companies with lots of highly paid workers and a few low-paid ones. Since IBM’s high-income employees will not qualify for any subsidy in the exchange, the company would be better off sending its groundskeepers, maids and custodians to the exchange and paying the average subsidy as a fine rather than paying $400 for every employee. By contrast, a maid service with lots of moderate-income employees and very few highly paid ones would be better off sending everyone to the exchange and paying the $400-per-employee fine.
Third, depending on the employer’s labor profile, these alternatives have radically different hiring implications. If the first alternative turns out to be cheaper, employers will face a $4,000 annual tax on each new, moderate-income, single employee and a $10,000 tax on each new, moderate-income, head-of-household employee. On the other hand, if the second alternative is cheaper, the annual tax on each new hire will be only $400.
Finally, the tax law adds two more wrinkles to these considerations. Although employers can deduct premium payments, they will not be able to deduct the fines. This means that the effective cost of a $400 fine is closer to $600. The effective costs of $4,000 and $10,000 fines are closer to $6,000 and $15,000. Another consideration is the current practice of excluding employer-paid premiums from the employees’ taxable income. This exclusion is more valuable as income rises and employees reach higher tax brackets. Within the exchange, however, the size of the subsidy falls as income rises.
It’s hard to believe we are even considering such a Rube Goldberg approach to health insurance. But since we are, what are the likely consequences? Here are the first ten that come to mind:
- Millions of jobs lost. Economic theory teaches that employee benefits and/or labor taxes are substitutes for wages. Eventually, employees pay for their benefits with less take home pay. No doubt in the long run this is true. In the short run, however, the employer of a $30,000 uninsured employee under alternative (1) either has to endure a one-third increase in labor costs or cut his employee’s paycheck by one-third. I believe the short-run response is likely to be unemployment. For a state such as Texas — where 30 percent of working-age adults are uninsured — the economic effects will be devastating.
As employers and employees adjust to the new health insurance regime (in ways described below), politicians are unlikely to sit idly by. They will meddle more and more. So for almost every employer, the likely future is higher and higher labor costs. As in Europe, employers will try to avoid new hires wherever possible. In any sector that relies on low- and moderate-wage labor that must be supervised on-site, jobs will be permanently lost. Many will go offshore.
- A shift to independent contracting. The CBO is not being creative enough in estimating that only 17 million people will enter the exchange. If you have lavish subsidies in one sector and draconian taxes in the other, people will find a way to exit the latter and enter the former. For example, wherever possible, people will become independent contractors — doing work that could be done by employees in a way that is not counted as “employment.” That way, people can take advantage of subsidies in the exchange without any reduction in wage income.
- Major industrial restructuring. To return to IBM, the ideal solution is to fire all its low-paid workers and contract with outside firms for their services. Newly-created firms could offer grounds keeping, maid, custodial and other services and send all the employees to the exchange for a $400-a-piece fine. More generally, we would expect low-income employees to congregate in firms that specialize in hiring them and selling their services to other firms.
- Emergence of niche markets. Any head of family earning up to $24,000 in 2016 will qualify for Medicaid. And (ironically), employers will not have to pay any fine if they don’t provide insurance to employees who enroll in Medicaid. So low-paid workers will look attractive to employers, so long as they remain low-paid. After a $1 raise, however, if the employee seeks highly subsidized (and probably much better) insurance in the exchange, the employer will get hit with a $17,300 fine! So employers in these markets will survive only by keeping a lid on their payrolls. We can also imagine niche market firms employing spouses, live-at-home teenage workers and anyone else who is getting insurance through another family member. Niche market firms could also emerge, hiring part-time employees (less than 30 hours per week), for whom there are no fines or penalties.
- Growth of the underground economy. Since the subsidy within the exchange phases out as income rises, it creates a penalty on higher earnings that operates just like a tax. As family income increases from $30,000 to $54,000, for example, the decline in subsidy is almost 31% of the income increase. When added to a 15.3% (FICA) payroll tax and, say, a 15% income tax, this pushes the overall marginal tax rate to 61% for below-average-income workers! And this is without even considering the effects of phasing out the Earned Income Tax Credit (EITC) and other welfare benefits. These high tax rates will strongly discourage reported income.
- Higher insurance premiums. Insurers will be required to sell to all comers (guaranteed issue) and charge everyone of the same age the same premium (modified community rating). These restrictions encourage people to remain uninsured (paying a $600 fine if it is really enforced) while they are healthy, secure in the knowledge they can always buy coverage after they get sick. The result: premiums for those who do insure will be much higher than otherwise. We previously reported that in New York’s individual market, premiums are $9,036 for singles and $26,460 for families. Also as previously reported, studies by BlueCross, WellPoint, the insurance industry trade association (AHIP) and every other public and private study are all predicting soaring premiums — a 50% average increase by one estimate and premiums tripling for the young and the healthy by another.
- Fewer insurance choices. Although advocates of health insurance exchanges tout the advantages of competition and choice, there are likely to be far fewer choices in the exchange than there are in the individual market today. In New York, for example, all the commercial carriers have left the market — leaving only BlueCross as the monopoly insurer!
- Higher than anticipated taxpayer costs; fewer than anticipated people insured. We have previously reported on budget shenanigans, designed to disguise the true cost of health reform. Insider leaks now reveal that even with these shenanigans, the first-ten-year cost is in excess of $1 trillion. Beyond that, the CBO is under-estimating how much people will reorder their behavior in the face of the perverse financial incentives described above. Where there are lavish subsidies to be had, people will find ways of having them and this can occur even without any reduction in the number of uninsured. Indeed, the Baucus bill makes being uninsured a very attractive proposition for healthy people.
- New unfunded liabilities. The Social Security/Medicare Trustees reported last spring that the combined unfunded liability in the two programs is $107 trillion — almost seven times the size of the U.S. economy. These obligations will get larger. Even without “reform,” the number of people covered by Medicaid and the State Children’s Health Insurance Program (S-CHIP) will be 76 million by 2019. With “reform,” the number will reach 90 million.
Employers will be indirectly required to provide health insurance for which employees nominally pay no more than 10% of income. Within the exchange, the maximum cost (for the minimum required insurance) will be capped at between 2% of income and 12% (from 300% to 400% of poverty). And here is the problem with that: For the past 40 years health care costs have been rising at twice the rate of growth of income and there is no reason to expect abatement.
So either health insurance costs will take more and more of family income (as the legislation now reads), or government subsidies will close the gap — meaning that taxes will take more and more of family income. If the recent response to Medicare costs for seniors is any guide, the taxpayers will be stuck with a larger liability than anyone is now estimating.
- Exacerbating the problems of cost, quality and access. The Baucus bill will increase demand, but it will do nothing to increase supply. This almost certainly will lead to higher prices and more health care spending. As previously explained, there are no realistic offsetting provisions for controlling health care costs.
Also as previously explained, the perverse incentives of managed competition will encourage health plans within the exchange to underprovide care to the sickest enrollees.
Even if the number of people who are nominally insured rises, access to care may actually decrease. As demand increases and supply does not, the waiting costs of care will rise for almost everyone and the money cost of care will rise for most people. (Remember: The vast majority of people are getting no new government subsidy.) Massachusetts cut the number of uninsured in half. But waiting times to see a new doctor in Boston are twice as long as in any other U.S. city and the number of people seeking nonemergency care at hospital emergency rooms is as high today as ever.
Here is what is worst of all: Not only will “reform” not solve any of the problems it is supposed to solve, it will almost certainly undermine the ability of entrepreneurs in the private sector to solve them.