If Employers Stop Paying Health Care, Who Wins? (Maybe, Everyone)

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Avik S. A. Roy

One of the biggest concerns with the Affordable Care Act has been that the law will drive employers to stop sponsoring health insurance for their workers, instead dumping those workers on to the new law's subsidized insurance exchanges. The Congressional Budget Office, in a provocative new report, believes that such behavior could, in some circumstances, actually reduce the deficit.

DROPPED COVERAGE

A number of credentialed budget wonks, most notably Gene Steuerle (a former Treasury Department official), Jim Capretta (a former health-care specialist at the White House Office of Management and Budget), and Doug Holtz-Eakin (a former director of the CBO), have pointed out that the ACA strongly incentivizes employers to drop coverage for their lower-to-middle-income employees, because those employees get a better deal by seeking out coverage on the law's new exchanges. "Droves of employees--potentially tens of millions--are likely to shift out of employer-provided insurance in the next decade or two," wrote Steuerle in a widely-cited report.

Indeed, the new CBO report agrees that the exchanges offer a better deal for the vast majority of people who qualify for the exchange subsidies. According to CBO's estimates, someone making $50,000 a year (200 percent of the federal poverty level) would benefit $11,300 a year by going onto the exchanges; someone making $74,000 (300%) a year would benefit by $3,000; and someone making the maximum $99,000 a year (399%) would only lose $700: a rounding error.

It's these numbers that drove the findings in the now-famous McKinsey survey that found that 50 percent of employers with a "high awareness of reform" would "definitely or probably" stop offering employer-sponsored insurance in the years after 2014. The McKinsey report detailed a number of creative strategies that companies could use to take advantage of the subsidies, such as increasing the use of part-time employees, and splitting a company into two parts: one that provided coverage for higher-income employees, and one that dumped lower-income workers onto the exchanges.

THE COST OF EMPLOYER DUMPING

The big worry is that employer dumping could explode the deficit. "The CBO projects that the premium-assistance program will cost about $450 billion from 2014 to 2019," Capretta and Holtz-Eakin wrote in 2010. "But that cost would rise to $1.4 trillion if workers and their family members between 133 percent and 250 percent of the poverty line were to migrate out of their current plans and into the exchanges on Day One."

This is where the new CBO report gets interesting. Last year, on the heels of the McKinsey survey, a number of senators and congressmen, led by Orrin Hatch (R., Utah) and Paul Ryan (R., Wisc.) asked the CBO to evaluate a number of different scenarios in which employer dumping was more widespread than the CBO projects. In the new report, CBO argues that dramatic increases in employer dumping would reduce, not expand, the deficit.

The CBO modeled out four different scenarios, on top of their baseline projections for the Affordable Care Act. In Scenario 1, employers dump 7 million more people onto the exchanges and other public programs (Medicaid and the Children's Health Insurance Program). In Scenario 2, employers actually increase coverage by 8 million people, due to the law's employer mandate: effectively the inverse of Scenario 1. In Scenario 3, employers dump 14 million more people onto the exchanges; and in Scenario 4, companies use the McKinsey restructuring strategies to dump their lower-paid employees onto the exchanges, while continuing to pay for insurance for their higher-income workers.

As you can see from the table (click to enlarge), the scenario with the most widespread dumping, Scenario 3, actually reduced the deficit by $13 billion from 2012 to 2022. The two other scenarios with dumping, Scenarios 1 and 4, increased the deficit by a relatively small amount: $45 and $36 billion, respectively. Scenario 2, in which employers covered more people, reduced the deficit by $82 billion.

How could dumping more people onto the subsidized exchanges, in the case of Scenario 3, actually reduce the deficit? Because people who get insurance through the exchanges, rather than their employers, would no longer be able to take advantage of the tax deduction for employer-sponsored health insurance.

So, for example, in Scenario 3, the CBO assumes that the government will spend $310 billion more on the exchanges, and $65 billion more on Medicaid and CHIP. On the other hand, the government will gain $351 billion in tax revenue because of a reduction in the size of the employer tax exclusion, and $45 billion in penalties from the employer mandate. Similar math, on a smaller scale, applies to the other scenarios.

If the CBO's analysis is correct, it would be encouraging news for the fiscal soundness of our new health law. But is it correct?

WHY DUMPING SAVES US MONEY

It appears that the CBO has made a critical assumption in its calculations: that employers who dump health coverage will replace that coverage, on a dollar-for-dollar basis, with increased cash wages. So, for example, if your boss is paying you $50,000 a year, and spending $20,000 a year on your health insurance, under the ACA, he'll drop your health coverage and give you $70,000 in wages. Since you'd be paying income taxes on that extra $20,000 of wages, whereas you weren't paying taxes on your employer-sponsored health insurance, the CBO estimates that the subsidies you'd get from the exchange are offset by new income taxes on your extra wages.

However, it's far from clear that it would work out this way in reality. Under the ACA exchanges, that $50,000 worker would get a premium subsidy of about $12,200, along with cost-sharing subsidies of up to about $3,600, for a total of over $15,000. So an employer could dump your coverage, give you a raise of only $7,000, and feel like he has given you a better deal. That smaller raise could lead to much lower tax revenues than the CBO is projecting.

Another important assumption that the CBO now makes is that insurance premiums will grow at a slower rate--5.7 percent per year--than their previous estimates projected, because premiums grew at a relatively slower rate between 2005 and 2010. "That change," says the CBO, "reduces the estimated costs of the coverage provisions of the ACA," especially the exchange subsidies.

It's far from clear, however, that future rates of premium growth will be as low as they were in the recent past. The ACA has many provisions that will drive up the cost of health insurance, such as the various coverage mandates, the medical loss ratio regulations, and the requirement that exchange-based plans have a high "minimum actuarial value."

KEEP ONE HAND ON YOUR WALLET

If the CBO is right, and we have little to worry about with regards to the fiscal risks of employer dumping under the ACA, this would be a very good thing. Indeed, if we could do so in a fiscally neutral way, moving people out of the employer-sponsored system into one in which individuals bought their own insurance would do a lot to bring choice and competition to our health-care system.

But there's plenty of reason to be skeptical of the CBO's optimism. It will be interesting to see what some of the budget wonks I mentioned above have to say about the government's new projections. Stay tuned.

Follow Avik on Twitter at @aviksaroy.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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