From a labor-market perspective, the Affordable Care Act has little in common with the 2006 health reform law implemented in Massachusetts.
Some employers are complaining about the $2,000 per-employee-per-year penalty they will pay beginning next year when the main provisions of the Affordable Care Act go into effect. The Congressional Budget Office also warned about the astonishing increase in marginal tax rates that middle-income Americans will experience, because the additional income earned by a family will be considered by the Internal Revenue Service as available for additional health insurance payments.
One might guess that large changes like these would shock the nation’s labor markets, especially the markets for less-skilled workers for whom $2,000 is a significant sum, not to mention the costs of health insurance.
The United States Department of Health and Human Services rejects these concerns, saying that the experience in Massachusetts suggests “that the health care law will improve the affordability and accessibility of health care without significantly affecting the labor market,” The Washington Examiner reported. The Urban Institute also thinks the Massachusetts results will accurately model the national market.
If there were another country or region that had already tried the federal Affordable Care Act, we would learn a lot from the results, regardless of how much business people might be complaining. However, even though the Affordable Care Act and the Massachusetts law 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 labor-market incentives they create.
One of several unique features of the Massachusetts law is that it attempts to leverage the exclusion of employer-provided health insurance from federal personal income tax for the purpose of getting insurance to the previously uninsured. The law encouraged employers to set up a “125 plan” that allows employees to use their own pretax dollars to buy health insurance.
Under a 125 plan, an employer need not pay for employee health insurance: the employer only assists a bit in the administration of the premium payments and withholding. The premium payments themselves come from employee paychecks. And the 125 plans are for employees (who may buy insurance on behalf of their families), not for people without jobs.
Even before the law was passed, Massachusetts employers typically offered some kind of health insurance plan to employees. The state law pushed a significant fraction of the remaining few to try the 125 approach by threatening to bill noncompliant employers for the uncompensated care their employees received around the state, a penalty known as the “free-rider surcharge.” So far, studies have found that enough employers took on 125 plans that ultimately no employers were liable for the surcharge.
In contrast, the federal Affordable Care Act attempts to nudge the national labor market away from the federal tax exclusion for employer-provided insurance by offering large subsidies only to people who are not part of an employer plan, including people who are not employed. The act also passes judgment on the affordability of employer plans and penalizes employers who offer “unaffordable” plans and then have employees who receive the subsidies. The federal penalties can reach $3,000 per employee and are not deductible from business taxes.
As long as they do something like the 125 plan to help their employees use the federal tax exclusion, Massachusetts employers are only nominally responsible for the “affordability” of health insurance or for failures of their employees to take advantage of the plan offered. The Massachusetts penalty is only $295 per employee-year (as far as I can tell, it is business tax-deductible, which makes the $295 less than one-tenth of the federal penalty); it can be avoided by an employer that makes nominal contributions to its employees’ premiums and induces enough employees to participate.
Perhaps it’s wise for the Affordable Care Act to push in a different direction than Massachusetts did, because many economists think the federal personal income tax exclusion promotes health care inefficiencies and diverts much-needed revenue from the United States Treasury.
But that wisdom doesn’t change the fact that the federal law will put very different pressures on employers and employees than the Massachusetts law does. It would be unwise to assume that next year’s national labor market will follow the patterns that the labor market in Massachusetts experienced after 2006.
More differences will be noted in future posts. Take a look at these, especially the video debate linked from the second one.
Does Massachusetts Predict Employer Behavior Under Obamacare? Probably Not: Part 1
Part 2: Does Massachusetts Predict Employer Behavior Under Obamacare? Probably Not