In March, the Congressional Budget Office (CBO) released a new study on employee migration out of job-based plans and into ObamaCare’s state exchanges. The effect of ObamaCare on employer-based insurance has been a hotly debated topic ever since the law was enacted in March 2010. Several independent analysts predict that “dumping” into the exchanges will occur at a much higher rate than CBO assumed in its original estimates of ObamaCare and have argued that the result would be much higher federal costs than CBO estimated.
Perhaps not surprisingly, CBO used the release of its most recent assessment of the law’s impact on insurance arrangements to defend its original cost estimates and again argue that the law will, on a net basis, reduce future budget deficits. CBO’s latest estimates indicate that 3 to 5 million fewer workers will be in job-based insurance plans in 2019 to 2022 due to Obamacare’s incentives — a relatively small number compared to the nearly 160 million Americans who are expected to get their coverage from their place of work in the coming years. Moreover, CBO suggests that, even if migration out of employer plans is higher than what the agency is currently projecting, it won’t add much to the federal budget deficit because taxes would rise almost enough to fully offset any spending increase. Most news accounts dutifully reported these finding from CBO as the primary takeaways of the study.
But there’s actually a whole lot more to this story than that.
For starters, CBO’s analysis confirms a crucial point about ObamaCare which remains poorly understood, which is that the law creates a massive inequity in insurance subsidies for working families with low wages.
Under the new law, workers with incomes below 400 percent of the federal poverty line but above the level for Medicaid eligibility who get their coverage through the new state exchanges can get federally financed “premium subsidies.” These subsidies will be phased down as incomes rise but are quite substantial for persons at about twice the poverty rate or just above that level. At the same time, workers who get their insurance from their place of work also get an indirect federal subsidy because employer-paid premiums are excluded from workers’ taxable income.
The problem is that the subsidies inside the exchanges will far exceed the tax subsidy for employer-paid premiums at the lower end of the wage scale. How big is the gap? CBO quantified it for us in its recent analysis. For a family of four at twice the poverty rate ($50,000 in annual income in 2016), the cost of health insurance would be $11,300 less in the health exchanges than in employment-based coverage, largely because the federal subsidies in the exchanges far exceed the tax benefit for health insurance for families in low marginal tax brackets. For a family of four at three times the poverty rate, the cost of health insurance would be $3,000 less in the exchanges than in employment-based insurance, again largely due to the fact that the government would be paying a larger share of the costs for them in the exchanges.
So, if workers would be better off in the exchanges, why does CBO assume so few of them will migrate out of employer plans? CBO acknowledges that the numbers could be far higher than its 3 to 5 million estimate. As the analysis documents, there are 48 million people in households who today get their insurance through their place of work and have incomes above the level for Medicaid eligibility (138 percent of the federal poverty line) but below 300 percent of the federal poverty line. These are the people who would benefit substantially from getting dumped by the employer plans into the exchanges. Why does CBO assume that won’t happen?
In sum, CBO believes that other preexisting labor laws will make it very difficult for employers to selectively dump their workers into the exchanges. Due to non-discrimination rules, an employer can’t offer insurance just to high-wage workers. That means an employer that stopped offering insurance would have to dump higher-paid workers into the exchanges too. And if higher-wage workers stopped getting employer-paid health insurance, that would reduce the government’s deficit as these workers would get far less in exchange subsidies than they would lose in terms of forgone tax benefits for employer-paid premiums.
But what if CBO is wrong and employers are able to find ways around the existing rules to create a two-pronged approach to coverage, with high-wage workers staying in tax-preferred employer plans and low-wage workers migrating to the exchanges? In effect, that’s what CBO modeled (though with very modest assumptions) in what it called “scenario 4.” In that simulation, CBO assumes that 20 percent of those with income below 250 percent of the federal poverty line but above Medicaid eligibility would migrate from job-based plans to the exchanges. Net federal costs under this scenario would be $36 billion higher than CBO’s base case, even after assuming some higher federal revenue from the assumption of higher levels of taxable compensation. And that’s assuming just 20 percent of these households would find their way into the exchanges. What if the number is 50 percent? Or 75 percent? Then the hit to the budget would be far higher.
What CBO’s latest report does not attempt to address is the likelihood that this kind of inequity will be allowed to exist for very long in federal law. Because, make no mistake, if CBO is right and migration out of employer plans is minimal, that will mean low-wage households with employer-based insurance will be getting far less support from their government than others who have the same incomes but get their insurance through the exchanges. And the differences wouldn’t be trivial but would amount to many thousands of dollars every year. So, even if CBO is right and the rules are strong enough to prevent segregation of the workforce by income, how long is that kind of disparate treatment of similar households going to be tolerated by politicians?
The history of new federal entitlement programs is that spending is almost always higher in reality than it was projected to be at enactment because, once the government sets the rules for eligibility, more people than expected come out of the woodwork and adjust as necessary to get on the program and take advantage of the government’s new offer of financial help. Based on CBO’s latest analysis of the future of job-based health insurance, there’s no reason to believe Obamacare will be any different.