Thursday, August 29, 2013

Is the Affordable Care Act Different from Romneycare? A Labor Economics Perspective

            The Affordable Care Act was designed to expand the fraction of the population covered by health insurance.  The act (hereafter, ACA) includes taxes on employers and various implicit taxes on employees that go into effect over the next two years.  Economic theory suggests that such taxes would contract the labor market in an amount commensurate with the amount of the new taxes.
            The federal government and other advocates of the Affordable Care Act have dismissed concerns that the coming labor market contraction would be significant, or even noticeable, by pointing to Massachusetts’ experience with a reform also designed to expand insurance coverage (hereafter, Romneycare).  Because the Massachusetts labor market did not noticeably contract relative to the rest of the nation after Romneycare went into effect (Dubay, Long and Lawton 2012), the U.S. Department of Health and Human Services said “The experience in Massachusetts … suggest[s] that the health care law will improve the affordability and accessibility of health care without significantly affecting the labor market” (Contorno 2013).  As Jonathan Gruber put it, “We’ve actually run this experiment, folks: we ran it in Massachusetts” (Gruber 2011, 27:02).[1]
            This paper assumes for the sake of argument that forecasts of the employment and work hours effects of the Affordable Care Act ought to rely on, among other things, an examination of Romneycare and Massachusetts’ labor market activity surrounding its implementation.[2]  However, in doing so it is worthwhile assessing the direction and magnitude of the incentives created by both reforms, and to do so with a common methodology.  This paper makes such an assessment, drawing on a companion paper (Mulligan 2013) that reports more details on the methodology and results for the ACA by itself.
            The Massachusetts reform, passed in 2006 and implemented over the subsequent two years (Dubay, Long and Lawton 2012), specified that state residents must have health insurance, or potentially face a monetary penalty.  It created a couple of health plans with means-tested subsidized premiums.  The reform also penalized employers for not providing health insurance for enough of its employees, with the penalty amount linked to the number of employees on the payroll.  Roughly speaking, the nationwide ACA has the same three elements, which will take effect over the next two years.
        The tax rate effects of Romneycare are in various directions.  In combination, they raised marginal tax rates in 2010 by less than one half of one percentage point relative to what they would have been without Romneycare.  The ACA adds about 4.9 percentage points to marginal tax rates: about twelve times Romneycare’s addition.
       The results account for the fact that many people will not participate in programs for which they are eligible, the tendency of the act to move people off of means-tested uncompensated care, and the fact that Romneycare implicitly taxes unemployment benefits.  Although parts of Romneycare builds “notches” and “cliffs” into household budget sets – that is, infinitesimal income intervals over which marginal tax rates are infinite – my quantitative results are not a consequence of those notches or cliffs.

[1] See also the Urban Institute study concluding that “the broad similarities between the ACA and Massachusetts’ reform suggest that we can expect to see patterns in the response by employers under the ACA similar to those observed under health reform in Massachusetts” and that “the evidence from Massachusetts would suggest that national health reform does not imply job loss and stymied economic growth.”  (Dubay, Long and Lawton 2012)
[2] I use “Romneycare” to refer to the MA health law as implemented after 2006 (with special emphasis on 2010), regardless of whether the implementation details were determined under the governorship of Mitt Romney or Duval Patrick, who took office in early 2007.

1 comment:

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