Why Health Reform’s Cost Estimates Don’t Hide Up To $50 Billion Per Year

The Daily Caller’s Neil Munro is out with a report claiming that the government will have to spend an additional $50 billion a year subsidizing insurance as a result of an oversight in the Affordable Care Act. Under the law, people between 133 and 400 percent of the federal poverty line and insured individuals who have to spend more than 9.5 percent of their household incomes on their employer sponsored plans qualify for subsidized coverage within the exchanges. Munro points to a study published by Richard Burkhauser (for the Employer Policy Institute), which argues that employers and employees will be encouraged to collude and bump up the employee’s contribution past the 9.5 percent threshold in order to qualify for subsidized coverage. It’s a win-win for both parties: the employer could cut back health care costs; the employee may find a better deal in the exchanges. Here is Burkhauser ‘s explanation:

But companies and their employees share great incentives to rearrange workers’ compensation to win more of these federal subsidies, he said.

For example, he explained, an employee can ask his employer to raise the price of company-provided insurance in exchange for an equal increase in salary. In many cases, that would boost the share of his income spent on health insurance to a percentage above the 9.5 percent threshold.

Such an arrangement, Burkhauser added, would make the employee, his spouse, and his children all eligible for federal health care subsidies while enriching both employer and employee — even after the Treasury Department collects fines from U.S. workers.

Burkhauser’s research found that because of the law’s incentives, an extra one-sixth of workers who get their health insurance from employers — or roughly an additional 12.7 percent of all workers — would gain by transfering themselves and their families into the federal exchanges.

Current projections suggest 75 percent of all employees will avoid the federal subsidies and stay in employer-backed health insurance plans. Burkhauser’s estimate, however, suggests that only about 65 percent of employees would have an adequate incentive to remain in privately funded health plans.

Burkhauser also claims that a new interpretation from the Joint Committee on Taxation strengthened the incentive of employees to jump into the exchange. On May 4, 2010, that agency issued a memo explaining that an employee could only qualify to receive federal subsidies through the exchange if the cost of their individual policies exceeded 9.5 percent of income. Such an interpretation excluded the costs of family plans and could result in far fewer people being eligible for subsidized insurance. It would, Burkhauser argues, encourage employees to ask their employers to charge them more for health care (pushing them past the 9.5 percent threshold) and make up the difference by offering higher wages.

But how practical is this? Well according to page 29 of Burkhauser’s own report, not very:

For example, employers and employees may have incentives to renegotiate compensation packages, but they may not be able to because of institutional rigidities. This could also occur because there may not be pass-through of health insurance costs in the form of higher wages at the individual level. Employers may not know the family income of their workers and whether workers are potentially eligible for subsidies in the exchange. Employers may fear that a consequence of raising employee contribution rates may be to incent their non-smoking workers to leave the employer risk pool (since tobacco use is an allowed rating factor that we do not consider in our work), and this may reduce their incentive to increase premium contributions. Employers may also fear that despite the tight regulations on what are now allowed rating factors under insurance reform, they may be denied coverage if their employee take-up rate drops beyond a certain level, a concern especially for small firms that may lead them to drop coverage entirely. Workers may not understand that the reason their wages increased is because employers increased their employee contributions.

And, not to mention the fact that employers whose employees have to spend more than 9.5 percent of their incomes on health care are penalized and pay a fine (which they would presumably pass on to the employee). So yes, if employees and employers can overcome all of these hurdles then maybe the costs of subsidizing coverage would be higher than expected. But economists I spoke to say that they would be nowhere near the $50 billion figure — even if the government issues a final regulation that would allow the cost of family health insurance plans to count toward the 9.5 percent threshold.