Race to the Exits, Before the Taxpayer Subsidy Doors Close
From: The Enterprise Blog
By Thomas P. Miller
Television viewers of a certain age will recall a recurring circus manipulation act on their small screens, most notably on the Ed Sullivan show of the 1960s. It involved a person frantically spinning more and more plates and other flat objects on poles, without them ever falling off.
This comes to mind again in light of the latest projections for how well and for how long ObamaCare’s contorted compromises and complex implementation schemes can keep private health insurance arrangements spinning along without falling and breaking apart. This week, several management consultants at McKinsey & Company concluded that the forthcoming shift away from employer-provided health insurance under the new health law will be vastly greater than expected because (at least on paper) it will make sense for many companies and lower-income workers alike. The incentives provided by the web of new taxpayer subsidies, insurance mandates, and regulatory burdens under the Affordable Care Act (ACA) will trigger a “radical restructuring” of employer-sponsored health insurance (ESI) benefits.
Based on an extensive survey earlier this year of more than 1,300 employers, McKinsey estimates that 30 percent of employers will definitely or probably stop offering ESI in the years after 2014. That year is the first one in which tax credits for coverage in health benefits exchanges will be distributed to individuals and families with household incomes below 400 percent of the federal poverty level. Those tax credits (and accompanying subsidies to reduce cost sharing obligations) will in most cases be substantially more generous for lower-income workers than the comparable amount of tax advantages they could receive under current ESI coverage. And, whether in the spirit of Watergate’s Deep Throat (“Follow the Money”) or bank robber Willie Sutton (“Because that’s Where the Money Is”), employer and employee health insurance coverage decisions will respond rationally by dropping (or restructuring) current coverage, overloading the capacity of state-based insurance exchanges, and overwhelming the under-budgeted resources of federal taxpayers.
The magnitude of these likely developments was officially “unanticipated” by federal policy makers and the Congressional Budget Office (which guesstimated that only 7 percent of employees currently covered by ESI would switch to exchange plans in 2014), although some other analysts rang early warning bells after the ACA was passed. This massive coverage shift will ultimately be unstable and unsustainable. But that doesn’t mean it won’t begin soon.
Why is this going to happen sooner, faster, and broader? McKinsey observes that more and more employers are finding out about the incentives to drop coverage within the ACA provisions. Those with a higher awareness of the health law are even more likely to stop offering ESI, or pursue some alternative to it. The relatively modest penalties imposed under the new employer coverage mandate (for firms with 50 or more workers) do two things: they first draw greater attention to the coverage versus penalty calculation, and then they stack the numbers in favor of many employers (particularly those with a sizeable share of lower- and middle-income employees) letting their workers access more generous, income-based, tax insurance subsidies elsewhere. Finally, the ACA creates a push-pull dynamic. It threatens to push them away from ESI by adding to employer burdens in sponsoring coverage (loss of grandfathering protection, new essential benefits, limits on employee cost sharing, a future Cadillac tax on high-cost plans, etc.) while pulling them toward new exchange-based coverage arrangements promising larger subsidies and (at least initially) more choices.
Congressional enactment of ObamaCare was constructed on top of a shaky platform, dependent on several interconnected balancing acts. A crucial one involved reassuring many Americans already anxious about disruptions to their current health coverage and care arrangements and about mounting federal budget deficits, while simultaneously offering more generously subsidized health benefits to lower-income constituents and more jobs to those who serve them. This required ObamaCare’s architects to reach an initial truce with ESI plans. Keeping employers’ “private” money on the table not only provided a coverage bridge until the new exchanges and their large tax subsidies came on line in 2014 under the ACA, it also helped limit the net budget cost of this first delayed installment of insurance coverage growth. Insurance mandates for employers and individuals to pay for most new coverage with their own funds was supposed to act like a tax to help fund additional health spending that would not be counted in the federal budget. (Relying on expanded Medicaid eligibility as a less expensive supplement to accomplish about half of the total targeted coverage expansion allowed federal dollars to be stretched further, given Medicaid’s very low reimbursement rates for providers.) Meanwhile, legislating future income-related subsidies to individuals qualifying for coverage within insurance exchanges, along with insurance premium regulation that provided more cross-subsidies for older and sicker constituents, provided new tools for broader income redistribution—another Obama administration objective.
Now, let’s recheck those spinning plates of ACA implementation politics. Will many employees resist and protest the loss of what President Obama promised they could keep if they liked it? That’s more of a mixed picture. McKinsey’s survey suggests that a surprisingly large share of workers don’t value their current coverage as much as their employers think they do, and in many cases workers would settle for higher compensation instead and choose less expensive health plans elsewhere. At the same time, there remains a substantial difference between voluntary migration out of ESI by workers and a “forced choice” imposed on those who don’t want to go, or fear being left behind.
In any case, the much greater level of employer exit from sponsoring health insurance, as forecasted by McKinsey, will further stress test the new system. Many of the projections for new capacity in the state-based exchanges don’t take into account the limits of budgetary resources to fund on-budget subsidy costs that may be two to three times as large as previously assumed. They also overlook the real-time administrative complications in trying to rewire the healthcare system and invent parts of a new one (even by 2014), let alone handle a surge of unanticipated customers. The spinning coverage plates will start falling even before tens of millions more people are added to the thin poles of unfunded liabilities, untested mechanisms, and undeveloped relationships. But if the race to the ESI exit doors speeds up, the pile-up will produce the perverse combination of less overall coverage, higher taxpayer costs, thinner benefits, and the even fewer choices we can continue to afford.
In other words, we could indeed stumble into replacing something that is far from perfect (ESI) with something that is much worse (tightly regulated coverage that is even more dependent on deficit-ridden public financing). We need a different exit strategy that leads away from the dead end of ObamaCare.