The Future of Healthcare Reform

Over at the New Yorker, John Cassidy has a long post arguing that healthcare reform is going to cost more than either Democrats or the CBO think. Most of the post is a rehash of all the fuzzy accounting arguments we’ve heard before, so I’m going to skip those. Another part argues that even with a fine in place, lots of individuals will ignore the mandate and choose to go without insurance anyway. I think Austin Frakt does a good job of disposing of that here.

But what about small businesses that currently insure their employees? Today they have two big incentives to offer health coverage as part of their compensation package: (1) they can offer it more cheaply than their workers could buy it on their own, and (2) they can offer it to everyone. In today’s system a lot of middle-aged employees would be unable to get insurance at all if they were dumped onto the individual market. But that changes when the reform bill kicks in:

Take a medium-sized firm that employs a hundred people earning $40,000 each — a private security firm based in Atlanta, say — and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500).

In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)

In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.

Now, this is not quite as devastating as Cassidy thinks. For starters, he’s cherry picking the absolute sweet spot for gaming the system. Go much below $40,000 and you’re mostly talking about jobs that don’t offer health coverage in the first place. Go much above it and the subsidies get lower very quickly. And of course unmarried employees are treated differently than married ones. If there were 50 million workers in the position Cassidy describes, that would be a problem. But it’s probably a lot less than that. What’s more, it’s quite possible that Congress will tweak the rules as time goes by to try and maximize coverage while minimizing gaming like this. It won’t be entirely successful thanks to pushback from interest groups of various kinds, but I think it’s naive to think that there will no legislative response at all to the real-life rollout of the reform bill.

But….that’s only part of my response to this. The other part is this: I think this is a good thing. If it hit a huge number of workers at once, it might not be. But if it gradually erodes the employer-based healthcare system in this country and replaces it with an evolving version of the reform bill passed last week — well, I’m all for that. Linking healthcare to employment has always been ridiculous, and anything that pushes in the direction of breaking that link is a positive development.

So: it won’t be as bad as Cassidy thinks. And anyway, it’s actually an incentive in the right direction. Count me as pleased, not alarmed.

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