Why ObamaCare's Unequal Subsidy Structure Will Make the Law Far More Expensive Than Projected

James Capretta, a former Bush administration health and budgeting official, explains how ObamaCare's health insurance subsidies will create massive new inequality between working class families:

[A Congressional Budget Office] analysis confirms a crucial point about ObamaCare which remains poorly understood, which is that the law creates a massive inequity in insurance subsidies for working families with low wages.

Under the new law, workers with incomes below 400 percent of the federal poverty line but above the level for Medicaid eligibility who get their coverage through the new state exchanges can get federally financed "premium subsidies." These subsidies will be phased down as incomes rise but are quite substantial for persons at about twice the poverty rate or just above that level. At the same time, workers who get their insurance from their place of work also get an indirect federal subsidy because employer-paid premiums are excluded from workers' taxable income.

The problem is that the subsidies inside the exchanges will far exceed the tax subsidy for employer-paid premiums at the lower end of the wage scale. How big is the gap? CBO quantified it for us in its recent analysis. For a family of four at twice the poverty rate ($50,000 in annual income in 2016), the cost of health insurance would be $11,300 less in the health exchanges than in employment-based coverage, largely because the federal subsidies in the exchanges far exceed the tax benefit for health insurance for families in low marginal tax brackets. For a family of four at three times the poverty rate, the cost of health insurance would be $3,000 less in the exchanges than in employment-based insurance, again largely due to the fact that the government would be paying a larger share of the costs for them in the exchanges.

This disparity between workers with employer-sponsored insurance and those who buy subsidized insurance through the law's health exchanges is going to create tremendous pressure on employers to drop health benefits for lower paid employees. CBO thinks that existing labor laws are going to make it difficult enough for employers to drop insurance only for lower paid employees. But employers will almost certainly start looking for ways to exploit legal loopholes that allow them to dump certain employees into the exchanges.

And, as Capretta notes, there will also be significant political pressure on legislators to rewrite laws in a way that ensures more equal treatment, which probably means allowing employers to send their lower-income employees to the exchanges. That could have serious fiscal consequences: The vast majority of the cost of ObamaCare is paying to expand insurance coverage, and if the law's insurance subsidies are suddenly available to a lot more people than estimated, then the overall cost will be far higher than projected. Capretta and former Congressional Budget Office director Douglas Holtz-Eakin have estimated that if employers shift more employees than expected into exchanges, the expense of the additional subsidies could add $1 trillion to the law's total cost.