Thursday, May 9, 2013

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.

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


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