Why Employers Will Drop Health Coverage Under ObamaCare

Before President Obama's health care overhaul passed last year, the Congressional Budget Office predicted that about 19 million people would end up in the law's newly created health insurance exchanges, which offer subsidized health plans to those whose incomes are under 400 percent of the poverty line. But former Congressional Budget Office director Douglas Holtz-Eakin and James Capretta, a former Bush administration budgeting official and senior fellow at the Ethics and Public Policy Center, have estimated that the number could be much higher. The reason? Both employees at the low end of the income spectrum and their employers are going to have a substantial incentive to shift coverage away from employer-sponsored plans and into the exchanges.

Devon Herrick of the National Center for Policy Analysis explains:

The ACA requires individuals to have insurance with certain mandated benefits likely costing $15,000 or more for family coverage in 2016. Economists generally agree employee benefits are a dollar-for-dollar substitute for wages. That implies the pay of a previously uninsured $30,000-a-year worker will be cut 50 percent to compensate for the cost of mandatory health insurance. Further, the only tax subsidy this worker will receive is the ability of his employer to pay the premiums with pretax dollars. That is worth about $3,000.

On the other hand, if this worker can get the same insurance through the newly created health insurance exchange, the federal government will pay a total subsidy potentially worth more than $15,000. It follows that every worker at this income level will want to work for a firm that does not offer health insurance and pays higher cash wages instead.

Thus, employers will have an incentive to drop their health plan in order to offer competitive wages. Employers with more than 50 workers who do not offer health insurance will have to pay a $2,000 fine for all but the first 30 workers — well worth the opportunity to obtain a $15,000 benefit for every employee. Many employers will organize in such a way as to take advantage of the subsidy. Low-income workers will congregate in companies that do not provide insurance; high-income employees will work for firms that do provide it. Firms that ignore these worker preferences will not be competitive.

More people than expected in the exchanges means more subsidies, which means a much higher total price tag. As Holtz-Eakin and Capretta wrote last year:

The CBO projects that the premium-assistance program will cost about $450 billion from 2014 to 2019, but that cost would rise to $1.4 trillion if workers and their family members with incomes between 133 percent and 250 percent of the poverty line were to migrate out of their current job-based plans and into the exchanges on Day One. That's nearly $1 trillion more than the amount advertised by the law's supporters.

Nor is this the only reason why the bill for the exchange subsidies might run far higher than expected; a glitch in how the subsidy calculations were made could end up costing as much as $500 billion more. It's not just the possibility that the exchanges could cost a lot more, depending on enrollment. The other half of the coverage expansion, which relies on Medicaid to cover about 16 million individuals, is also subject to substantial uncertainty about enrollment and associated costs, according to a recent Harvard study. 

Obviously all of these estimates are also themselves subject to uncertainty. But the abundance of ways in which the law might end up costing a lot more also highlight why it's a safe bet that the law's coverage expansion will turn out to be more expensive, perhaps a lot more expensive, than initial projections. The risk that the law will turn out to be costlier than planned seems a lot higher than the possibility that it will come in within the projected budget window.