Systematic Patterns of Employer Benefit Offerings after the ACA

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A number of industries can expect big changes in employee health insurance in the next year or two, while others will continue with business as usual.

Beginning next year, states and the federal government intend to create opportunities for families to purchase health insurance, separate from their employers, through insurance “exchanges” in the states. Insurers and the federal government will heavily advertise the new plans. Most important, middle- and low-income families may qualify for valuable federal subsidies that will serve to reduce premiums and out-of-pocket health costs.

To qualify for subsidized exchange plans, workers cannot be offered affordable insurance by their employers. Paradoxically, employers will create subsidy opportunities for their middle- and low-income employees whenever they fail to offer health insurance.

On the other hand, an employer dropping its health insurance next year will put its high-income employees in a tough spot, because they will have to buy insurance on their own without the tax advantages they had in the past by obtaining health insurance through their employer. As a result, employers with relatively many high-income employees will be under pressure to keep their insurance, whereas an employer of middle- and low-income employees may find them asking for health insurance to be dropped from the employee benefit menu.

Administrative costs, rising premiums and other costs have already made a number of employers lukewarm about health insurance, but they offered it in order to attract employees who do not care to be uninsured or to end up on Medicaid. The new insurance opportunities that become available next year may give their employees enough of an alternative that the lukewarm employers can drop their plans.

Both of these situations are closely correlated across industries, which leaves me to suspect that we can readily predict the industries that will retain employer insurance and predict those that will drop whatever health benefits they currently have. The scatter diagram below displays Bureau of Labor Statistics data on several industries according to the percentage of their employees in families above three times the poverty line (horizontal axis) and the percentage of employers offering health benefits as of March 2012 (vertical axis).

Bureau of Labor Statistics

I measured employees relative to three times the poverty line because that is the family income threshold beyond which the new exchange subsidies are less valuable than the income tax preference for employer-sponsored health insurance.

Industries like colleges, utilities and banking almost always offer health insurance, and about 80 percent of their employees will be getting a better deal on employer health insurance than they would from the exchange plans because their families are above three times the poverty line. For these reasons, I am confident that these industries will continue to offer health insurance to their employees in much the same way that they have in the past.

A couple of industries like “accommodation and food services” (i.e., restaurants), leisure and hospitality, administrative and waste services, and construction already have a mix of employers in terms of their health insurance offerings, so it would not be unusual from an industry perspective for those that currently have health plans to drop them during the next couple of years.

Moreover, the diagram shows how 45 to 60 percent of their employees do not come from families above three times poverty and therefore will have a significant federal health insurance subsidy waiting for them as soon as their employers drop coverage.

Employers that do not offer health insurance may be subject to penalties, but the penalties are not levied based on part-time employees, or levied on small employers, and even the penalties levied will be less than the subsidy opportunities created by an employer of middle- and low-income people that fails to offer health insurance.

For these reasons, I suspect that the stories we will hear about employers dropping insurance will disproportionately come from the industries shown in the lower left part of the scatter diagram, which collectively employ about 25 million people. Some employers in these industries have already discussed such plans.

Substitution between Exchange Plans and Employer Plans

I received this question:

Do you believe the incentive effects related to the ACA will be more limited since: (i) they are more difficult to value/understand as compared to an unemployment check and (ii) the impact is less direct and comprehensive.

My reply:

You have hit on a key, and so far uncertain, economic force in the ACA. At one extreme, people may perceive the exchanges [the method of ACA subsidy delivery] to be something like Medicaid -- far inferior from the coverage they get from an employer. At the other extreme, they may view the coverage as quite similar, and then it becomes a question of which approach saves them money.

Note that U.S. Senators and Congressman will be using the exchange plans, so perhaps they will be pretty nice plans, which is why I am inclined to expect the latter case. But I am examining the former case too because (a) it makes more economic sense for Obamacare to be run that way (see also http://economix.blogs.nytimes.com/2013/05/01/health-coverage-worthy-of-a-senator/) and (b) Massachusetts ran their reform that way.

RE difficulty to value and understand, note that employer insurance is complicated, but employers already have HR personnel in place to assist employees in choosing plans, getting enrolled, and getting reimbursed. When employers drop their insurance, I expect that they will use these personnel to assist their employees with the exchanges too. Moreover, the federal government is devoting advertising dollars and enrollment assistance, so that the exchanges may ultimately enjoy a competitive advantage over employer plans.

Also note that the ACA’s employer and individual penalties are economic equivalents of unemployment assistance from a labor supply point of view, regardless of how people perceive exchange plans, because workers will be subject to the penalties but unemployed people will not.

With that said, I expect a transition period during which time the exchange plans are perceived to be inferior and the labor market impacts of the ACA are muted.

Romneycare, Obamacare, and the Labor Market

Conventional wisdom says that we can make a good guess about the post-2013 labor market impacts of Obamacare just by looking at the post-2006 performance of the Massachusetts labor market as it began its state-level health reform (Romneycare).

If there were another country or region that had already tried Obamacare, we would learn a lot from the results. However, even though Obamacare and Romneycare are both forms of “health reform,” and both seek to reduce the number of people without health insurance, they are quite different in terms of the types and amount of labor-market incentives they create.

The conventional wisdom is incorrect because it ignores these fundamental differences:

1. Obamacare is designed to subsidize high quality insurance plans for middle class people -- plans good enough for your U.S. Senator.  Romneycare only subsidized Medicaid Managed Plans with benefits of far less value than the typical employer health plan.
2. Under Obamacare, middle-class families can get subsidized health insurance for their entire family, including their children.  As noted above, those plans are good enough for their Senator.  Under Romneycare, the new subsidized plans were for adults only; families wanting subsidized insurance for their children had to apply for Medicaid.
3. For the first time under Obamacare (with a brief exception under the American Recovery and Reinvestment Act), most workers outside of Massachusetts will obtain health insurance subsidies only by leaving their job or getting fired -- the economic equivalent of unemployment assistance.  Romneycare did not introduce health insurance subsidies for the unemployed in Massachusetts, because the state has had such subsidies in place since the 1980s.
4. Under Obamacare, middle-class persons leaving a job with health insurance are immediately eligible for subsidized health insurance.  Under Romneycare, there is a six month waiting period, and even then only if the persons do not qualify for Medicaid.
5. Both Obamacare and Romneycare have per-employee penalties for employers not offering insurance but, accounting for the business tax treatment of those penalties, the Obamacare penalties are more than ten times larger.
6. Romneycare was designed to leverage the special federal tax treatment of employer-provided fringe benefits.  Obamacare is designed to reduce the usage of that special federal tax treatment.
7. Romneycare subsidies exclude families between 300% and 400% of the federal poverty line.  Obamacare subsidies do not.  Even if the two reforms had the same income cutoff, a larger fraction of Massachusetts would be above it because Massachusetts is a high income state.
8. Employer-provided insurance was a lot more prevalent in Massachusetts before Romneycare than it is in the U.S. generally.  ie., even if we ignore the penalty amounts and subsidy values, the fraction of the U.S. labor market directly experiencing the Obamacare penalties and subsidies will far exceed the fraction of the Massachusetts population experiencing Romneycare penalties and subsidies. 

The combined difference between Romneycare and Obamacare is greater than the sum of the individual differences noted above, for the simple reason that the total incentive created by new programs is the product of takeup, eligibility, and the value of subsidies to each participant.

As a result of these differences, Obamacare does a lot more to encourage employers to drop insurance.  Under Romneycare, dropping employer coverage amounts to telling employees "It's time for your children to go on Medicaid, and for you to go on a Medicaid Managed Plan, and you probably won't use your family doctor anymore."  Under Obamacare, employees will be told "You can join the same health plan as your Senator AND save money."

Obamacare creates a massive new implicit tax on work.  Romneycare probably created a new implicit tax, but, for the reasons noted above, the Obamacare implicit tax will be one or two orders of magnitude greater.

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To learn more about Romneycare, take a look at the book The Great Experiment.

Modern Wage Economics: Too Subtle for the Blogosphere?

Our economy uses a lot less labor than it did 10 years ago, and for good reason people are interested in the relative importance of supply and demand factors for explaining what happened to the quantity of labor.

Naturally, a supply-demand decomposition exercise is enhanced by looking at both the quantity and price of labor, also known as the wage rate. That's why my book on the recession starts off with various indicators of wage rates and their dynamics (see chapter 2 beginning on page 9).

Three or four decades of labor economics research are of great assistance in this exercise. That research tells us that the price of labor from an employer's point of view is often significantly different than cash earnings per hour, and that a reduction in labor supply could be associated with reduced cash earnings even while it was increasing employer costs:

1. A reduction in labor supply could reduce the quality of labor, with workers putting in less effort, or doing less to maintain their skills, or become less attached to the labor market.  This tends to reduce cash earnings per hour because each hour is less productive.  These have been major factors in the analysis of women's wages, where most economist believe that women's hourly earnings increased as a consequence of supplying more (see Becker 1985, Goldin and Katz 2002, Mulligan and Rubinstein 2008, and many others). See also some of the literature on unemployment insurance such as Ljungqvist and Sargent's paper on European unemployment.
2. A reduction in labor supply or demand could increase the average quality of labor through a composition bias.  See p. 17ff of my book and the references cited therein.
3. Because of fringe benefits, cash hourly earnings are not the same as employer cost.  As employer health insurance expenditure has been growing over time, the growth of cash hourly earnings has substantially under-estimated the growth of employer cost.

The Incidence of Supply and Demand Impulses.

Labor economists have also long studied the incidence of supply and demand impulses: that is, the effects of supply and demand factors on both wage rates and the quantity of labor. The consensus is that: (a) labor demand is more wage elastic than labor supply and (b) labor demand is even more wage elastic in the long run than it is in the short run.

Suppose that the reduction in the quantity of labor were 50% due to demand factors and 50% due to supply factors, and that we had overcome all of the measurement issues cited above. Result (a) means that wages would fall in the short run, because supply shifts translate more into labor quantity than into wage rates while, in comparison, demand shifts translate more into wage rates than labor quantity. In this example, it would be wrong to conclude from reduced wage rates than supply is less important than demand for explaining the change in the quantity of labor.

To put it another way, if we found that wage rates (properly measured) were constant, but didn't know the relative contribution of demand and supply factors to the quantity change, result (a) tells us that the majority of the labor quantity change was due to supply factors. With a labor supply elasticity of 0.5 and labor demand elasticity of -3 (reasonably conservative short run estimates), the constant wage rate result means that 86 percent of the quantity change was due to supply factors and only 14 percent due to demand factors. In the long run, labor demand is even more wage elastic, and the share attributable to labor supply is even closer to 100%.

To put it yet another way, if it were true that labor demand explained the majority of the change in labor quantity, then employer costs (properly measured) would have fallen dramatically.

Despite all of these lessons from labor economics, blogosphere economists attempt to dissect the hourly cash earnings data to perhaps find a small and probably ill-timed reduction and jump to the conclusion that labor supply shifts have made a trivial contribution to the change in labor quantity.

What Job-Sharing Brings

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When employer costs are taken into account, it is unclear whether jobs are something that can be efficiently shared.

The idea behind work-sharing is that employers have a certain amount of work that needs to be done, and that the work can be divided by many employees working a few hours each or a few employees working many hours each. If hours per employee could be limited, by this logic employers would have to hire more employees to get the same amount of work done.

American labor law has traditionally placed some limits on employee hours, such as overtime regulations. While the recent Affordable Care Act does not strictly limit hours per employee, beginning next year it gives employers a strong push toward part-time employment by levying a significant fee per full-time employee and exempting part-time employees from the fee.

A number of employers have said they would change some work schedules to part time from full time to avoid some Affordable Care Act fees. Because part-time workers generally have fewer benefits than full-time employees, this could save employers a considerable sum. From the work-sharing perspective, the part-time employee exemption by itself would be expected to increase employment, because employers would have to hire more people (probably on a part-time basis) to complete work their employees used to accomplish when full time.

But it is possible that work-sharing would reduce employment rather than increase it, because it prevents employers from accomplishing their tasks at minimum cost, adding administrative and coordination expenses. Higher costs for employers may put them out of business, or at least reduce the scale of their business. When companies reduce the scale of their activities, that means fewer employees.

It is also possible that work-sharing would reduce employment by making jobs less attractive to people who desire full-time work. One reason that people sometimes justify commuting long distances to work or enrolling in demanding training programs – trucking and nursing are two such occupations — is that they expect to recoup those cost by taking advantages of opportunities to earn extra by working long hours.

Work-sharing proponents have credited Germany’s comparatively low unemployment rate to its adoption of a work-sharing program, because the program encourages German employers to reduce employee hours rather than lay workers off. Work-sharing proponents may be right, although Germany carried out a number of labor-market reforms at the same time, such as allowing businesses to use temporary workers more easily.

As the Affordable Care Act suddenly pushes business toward part-time employment, we economists will have an unusual opportunity to learn whether cutting employee hours creates jobs, or destroys them.

Fiscal Policy without Incentives: IMF version

The IMF had a recent conference on rethinking macroeconomics. I was not invited and did not attend, but watched the video. Conspicuously absent from the fiscal policy presentations is any acknowledgement that transfer spending in practice reduces the reward to work and as a result is "destabilizing." Nobody raises this issue, let alone explain why marginal tax rates and related incentives should be ignored. It is just common knowledge in this part of the macro community that marginal tax rates are so far down on the list of factors to be considered that they are not even worth one tenth of one percent of the presentation time.

The closest any presenter gets to this issue is that Professor Perotti takes 5 seconds to note that ALL of the econometric evidence on "government spending multipliers" are really estimates of government purchase multipliers and tell us nothing about the effect of transfers on GDP (see page 15 of the pdf containing his slides). Professor Roubini mentions "moral hazard" (approx the 60 minute mark of the video), but he is referring to incentives for government behavior, not inventives faced by households and nonfinancial businesses.

Professor Gordon talks about determinants of hours per capita (75 min mark), but fails to mention marginal tax rates or anything like a substitution effect! In his reply to Gordon, Professor Roubini takes 20 seconds to mention that "In France ... unemployment benefits are ridiculously high" (79:25), leaving open (but unsaid) that high unemployment benefits in other countries may be a factor.

Health Coverage Worthy of a Senator

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To promote economic efficiency and the goal of universal health coverage, perhaps members of Congress should not be required to enroll in the new insurance exchanges.

The Affordable Care Act of 2010 seeks to invigorate the nongroup health insurance market – that is, health insurance that people can buy without going through an employer – by creating and subsidizing insurance exchanges similar to the one created by Massachusetts in 2007. In addition, the law seeks to make health insurance affordable for middle-class families by having the federal government pay part of premiums and out-of-pocket costs, but only for people buying nongroup health insurance through the new exchanges.

A provision of the law known as the Grassley amendment requires members of Congress and their staffs to obtain their own health insurance through the exchanges. The amendment gives the authors of the law, and the authors of future tweaks of the law, a personal stake in the success of the plans to be provided through the new exchanges.

Because members of Congress are accustomed to high-quality medical care provided to them through federal employee benefit programs, one might expect that they would push for top quality care to be delivered through the exchanges too. That is one reason why an (ultimately unfounded) report that the Grassley amendment might be reversed prompted so much outrage. (What’s actually at issue is uncertainty over whether the employer contributions in the current health plan for those on Capitol Hill can be applied to coverage through the exchanges.)

But the possibility that middle-class families could obtain care that is both top quality – good enough for your senator – and subsidized creates a number of economic problems. It gives employers a stronger incentive to drop their coverage, because employers and their employees can take comfort in the prospect that the alternative to employer insurance is a health plan that is good enough for your senator.

If the exchange plans were good enough, people who are rushing to find a job, and people considering leaving their job, would no longer have to see employment as their only means of obtaining top quality, subsidized coverage. As a result, some of those would work less (see the Congressional Budget Office on some of health reform’s work incentives, and a 1994 explanation from Alan Krueger and Uwe E. Reinhardt).

The more attractive the subsidized plans are, the more people will join them, and the greater the costs to the federal government. If the Affordable Care Act proves to be too expensive, drastic steps may result, such as closing enrollment in the subsidized exchange plans or repeal of the law all together. Either result would mean that the law’s objectives would go unmet.

There is an alternative approach, pursued in Massachusetts, for those not covered through an employer, a spouse’s employer, or Medicaid or Medicare. They may be eligible to join one of several subsidized plans under the state’s Commonwealth Care program (most are operated by the Medicaid managed care organizations), but those are less desirable than the plans typically offered by employers. With that as the alternative for their middle-class employees, employers would be discouraged from dropping coverage. People would have an incentive to work, because that’s where the best plans would be available.

Massachusetts did not have anything like the Grassley amendment.

For these reasons, economists have long recommended that subsidized goods be of somewhat lower quality than goods available without subsidy. Massachusetts followed that advice, and found that (a) their health reform approach significantly reduced the number of uninsured and that (b) less than 10 percent of the people in Massachusetts whose family income fell in the subsidy-eligible range chose to participate in the subsidized plans.

Although politically incorrect and perhaps unfair, allowing members of Congress to keep their federal employee coverage might be the best thing for universal coverage and reducing the impact of the Affordable Care Act on the federal budget.

Changes in Consumer Credit Laws

Kyle Kerkenhoff's paper (p. 78) tabulates several ways that consumer credit laws have changed since 2007.

The Future of Driving

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Driverless vehicles would be a windfall for households and businesses that acquire them but would probably increase traffic and nationwide fuel usage.

Google and other innovators are working on vehicles that someday might drive themselves with little or no attention from human passengers. The vehicles of the future will have fast, observant computers that automatically communicate position and road conditions with other vehicles on the road.

Driverless vehicles are expected to help children, the blind, the elderly and others who currently cannot safely drive themselves. Helped by their huge amounts of data and computing power, driverless cars are also purported to reduce traffic congestion and nationwide fuel consumption by driving smarter.

But smarter driving will lead to more driving, because smarter driving reduces the cost per mile of vehicle usage. The end result of additional driving could be more traffic and more aggregate fuel consumption.

These days, a driver has three main costs of the trip to consider: fuel consumption, vehicle wear and tear, and time and attention devoted to driving that could be for something else. (Drivers also need to consider other costs of vehicle ownership, such as the purchase price and the cost of insuring the vehicle.)

Fuel and wear and tear cost roughly 50 cents a mile, which is why employers reimburse employees for job-related personal vehicle usage at about that rate. At an average speed of 30 miles an hour (including stops, traffic conditions and so on), each mile takes two minutes of driver time. For those who value their time at more than $15 an hour, the time cost of the trip exceeds the combined fuel and wear and tear costs.

Research has shown that cutting travel costs through reduced gas prices causes people to drive more, for example by eschewing carpools and public transportation. A driverless car should also cause people to use their vehicles for more miles, because they could use their time in the car to sleep, work, watch television, read a book and do other things they might normally do at home.

Households and business may also begin to use vehicles with no human passengers or drivers in order to move goods from one place to another and, by economizing on the human driver costs, they may want to move more goods than they do today.

As people take on additional activities in their personal vehicles, they may also demand larger vehicles that necessarily require more fuel per mile.

Before driverless cars are adopted, a number of hurdles must be cleared. Some refinements in vehicle technology need to be resolved; insurance companies and state regulators must also figure out liability issues.

Even if driverless vehicles led to more congestion and more aggregate fuel consumption, driverless vehicles would be a welcome technological advance, because the billions of hours that people already devote to driving could be put to alternative uses.

But expect new driving technologies to increase the number of vehicles on the road.

The Wealthy Keep the Tax Man Guessing

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Although wealthy people are a small fraction of the population, their behavior is of great practical interest to Treasury officials.

Every year, the United States Treasury receives extraordinary amounts of personal income tax revenue in April as individuals file their returns and reconcile the taxes they owe with the taxes that were withheld from their paychecks during the previous calendar year. Most people do not owe much, if anything, when they file their return but a small group of taxpayers has large balances to settle.

The chart below shows the inflation-adjusted amount of individual income tax receipts by the Treasury in April of each year since 1998, as reported by in the Daily Treasury Statement. The amount has fluctuated wildly, from a low of $122 billion to a high of $235 billion. The standard deviation of these April receipts is $36 billion.

United States Treasury

The general state of the economy in the calendar year helps to predict the amount the Treasury receives in following April. At the same time, additional fluctuations in April receipts derive from the situations and behaviors of a small segment of the population not well represented in the unemployment rate and other measures of the business cycle: the wealthy.

First of all, taxes are withheld less often from asset income like dividends and capital gains than they are withheld from wages. The wealthy receive a larger share of their income from assets than from wages, not to mention that by definition the wealthy have more of both types of income. Second, much of the population does not owe any income tax – let alone owe extra in April – and the wealthy pay a disproportionate share of income taxes.

The wealthy have become an even more important driver of tax revenues in recent history, as an increasing share of the nation’s income has accrued to them. Thomas Piketty and Emmanuel Saez have compiled decades of data for the United States (and other countries). They find, for example, that the very wealthiest of America’s households — the top one-tenth of 1 percent — recently received about one-thirteenth of the nation’s income, while they received only one-fiftieth in the 1960s and 1970s.

The wealthy are sometimes idolized and other times envied, and for these reasons alone their behavior is of interest. But Treasury officials have another reason to stay abreast of the wealthy: their activities are an important determinant of the amount of revenue received by the Treasury, and when it is received.

If you have special insights into how the wealthy behave, consider applying for a job at the Treasury.