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Obamacare: Destined to Flop? Part III

Wednesday, September 18, 2013

In Parts I and II of this four-part series, AEI’s Joseph Antos looked closely at how the exchanges will work and whether they will make coverage affordable. In this installment, he looks at what is likely to happen to those who have coverage.

The Affordable Care Act (ACA) is remarkable for remaining consistently unpopular with the public. The latest NBC News/Wall Street Journal poll, taken in early September, shows that 44 percent of those polled think the new law is a bad idea, compared with 31 percent who support it. That’s the worst showing for the president’s program since it was enacted. According to the survey, only 12 percent of respondents think the law is having a positive impact on them and their families.

The problem is not that the public does not know how good the ACA will be. The problem, if you can call it a problem, is that 85 percent of Americans already have health insurance, most through their employers. Few of them will be eligible for lower premiums or larger subsidies in the exchanges. Offering the status quo — if you like your coverage, you can keep it — will not make the majority of the public fall in love with one of the most complex pieces of legislation in modern times.

Especially if that promise cannot be kept. The coverage that workers have today will soon be a thing of the past. Employers have already begun to change their health plans and restructure their workforces to avoid some of the higher health costs arising from the ACA. As a result, workers will pay more for less generous employer coverage.

The coverage that workers have today will soon be a thing of the past. Employers have already begun to change their health plans and restructure their workforces to avoid some of the higher health costs arising from the ACA. As a result, workers will pay more for less generous employer coverage.

The prospect of new taxes and higher costs has caused many employers to take a second look at the way they manage their employee benefits. The “Cadillac tax” in the ACA penalizes employer health plans whose total premiums exceed $10,200 for an individual or $27,500 for families. Although that tax does not start until 2018, firms are beginning to take steps to lower the cost of their plans.

Beginning in January, the United Parcel Service will exclude from its health plan 15,000 working spouses who are eligible for coverage at their own jobs. This action lowers UPS’s benefit costs and reduces the average insurance premium that determines whether the plan is liable for the Cadillac tax. Families affected by this exclusion will pay more to maintain the same level of health coverage for the excluded spouse.

One cannot place all the blame for UPS’s cost-cutting move on the ACA. Health care costs have been putting pressure on employers long before the president’s health reform was made law, and employers do not need any special legal authority to modify their health benefit programs. But employers do their best to avoid having to pay new taxes, and the Cadillac tax is generating the predictable response.

Mercer, a human resources consulting firm, reports that 6 percent of companies with more than 500 employees excluded working spouses with access to other coverage in 2012, up from 3 percent in 2008. That trend is likely to accelerate.

Towers Watson, another benefits consulting firm, found more evidence that the ACA is causing employers to rethink their health benefit plans. In a survey of mid-size and large employers, they found that nearly 40 percent of firms are changing their employee health plans for 2014. Even more employers will adopt new strategies to cut costs in 2015 and 2016 to avoid having to pay the Cadillac tax.

Everyone who currently has insurance will pay more as a direct consequence of health reform.

The ACA imposes other new taxes, including a surtax on investment income for high-income households and increased Medicare payroll taxes for high earners. Several of the new taxes will directly increase health insurance costs for those who already have coverage. The most significant ones are taxes on health insurers, pharmaceutical manufacturers, and medical device makers, which together will add $100 billion to health care costs over the next decade. Most of that higher cost will be passed on to consumers in the form of higher premiums and out-of-pocket spending.

Higher taxes will drive up insurance costs, but expanding health insurance coverage is likely to have an even greater impact on those costs. The ACA could eventually provide as many as 20 million people with heavily subsidized insurance. Those 20 million newly-insured people will demand more health services once most of their costs are paid for. The supply of services will not be able to keep pace because of the time and investment needed to train more health professionals and build new health facilities. Consequently, prices will rise and patients will find that wait times for appointments for non-emergency care will increase.

Everyone who currently has insurance will pay more as a direct consequence of health reform. Health sector taxes will rise and demand for services will increase, driving up prices. Employer plans will become more restrictive in an attempt to control costs, beneficiaries will pay more out of pocket for their health care, and premiums will rise. But some employees will lose even more.

The ACA’s employer mandate requires mid-size and large firms to offer coverage to all of their employees or pay thousands of dollars in penalties. An employer with 50 or more employees who does not offer insurance that meets federal standards will pay $2,000 per full-time employee, excluding the first 30 employees. A company with 50 employees would pay $60,000 in fines; one with 100 employees would pay $140,000. An employer who offers coverage would be subject to a fine of $3,000 for every employee who opted instead for subsidized coverage through the exchange.

Although the 40-hour work week remains the norm in most industries, the ACA defines a full-time employee as someone who works 30 hours a week or more. This was meant to ensure that most workers in larger firms would be covered by their employer’s plan.

Although the 40-hour work week remains the norm in most industries, the ACA defines a full-time employee as someone who works 30 hours a week or more. This was meant to ensure that most workers in larger firms would be covered by their employer’s plan.

Employers can minimize the amount of the fine by reducing work hours below 30 and cutting back on hiring to remain under 50 employees. Perversely, the brunt of those changes will be borne by the low-wage workers who were supposed to have been helped by the mandate. Rather than making it possible for those workers to be covered by what is often a generous health plan, the mandate will result in lost wages and send more people into the exchanges for insurance.

The recent decision by the administration to delay the employer mandate by a year does not change the incentive that some firms have to cut back on their workforces. In fact, it gives firms more time to map out a strategy to avoid the steep penalty that will be levied if even one of the company’s employees receives an exchange subsidy.

The penalty is a real threat for many companies. Even with the employer paying a substantial part of the premium, low-income workers often cannot afford to buy into the company plan. The 2012 survey of companies with more than 1,000 workers by the benefits consulting firm ADP Research Institute found that 73 percent of workers earning $15,000 to $20,000 a year declined their employer’s health coverage, compared with 20 percent or less for workers earning at least $35,000. Many of these workers would be eligible for heavily-subsidized insurance through the exchange, which triggers the employer penalty.

There is growing evidence that employers are shifting to part-time workers and shorter hours where they can. Last October, Darden Restaurants, one of the 30 largest employers in the United States with brands that include Olive Garden and Red Lobster restaurants, stopped offering full-time schedules to its hourly employees in some locations. In February, thousands of part-time state workers in Virginia were told that their hours would be cut to no more than 29 hours a week. Last March, Regal Entertainment Group, which operates more than 500 theaters in 38 states, rolled back the hours of its non-salaried workers.

The White House insists that these are merely anecdotes, but some of the biggest supporters of health reform are beginning to worry. Joseph Hansen, president of the United Food and Commercial Workers Union, which has 1.2 million members, says the problem is real: "Wait a year. You'll see tremendous impact as workers have their hours reduced and their incomes reduced.”

The recent decision by the administration to delay the employer mandate by a year does not change the incentive that some firms have to cut back on their workforces. In fact, it gives firms more time to map out a strategy to avoid the steep penalty that will be levied if even one of the company’s employees receives an exchange subsidy.

Mid-size and larger firms, and those that self-insure, have another option that has created a stir among consumer advocates. HHS did not bar those employers from offering health plans with reduced benefits. The agency may have assumed that the $2,000 per worker penalty would be sufficient to prevent firms from offering what some consider “bare bones” plans. However, employers who have previously offered such plans to their workers would see big increases in plan costs if they complied with all federal benefit requirements, enough to make paying the penalty less expensive. Even though the employer mandate has been pushed off a year, some retailers and restaurant chains are considering limited-benefit plans that could be in place as early as next year.

The ACA primarily focused on the uninsured, but there are several provisions that can improve the coverage consumers already have. The most widely publicized improvement allows young adults up to age 26 to be added to their parents’ policy. In addition, insurers will no longer be able to place annual or lifetime limits on the dollar value of coverage.

Parents are now able to include their children up to age 26 in health plans that provide dependent coverage. Those young adults can qualify even if they are living on their own. This change, which took effect in September 2010, helped 3.1 million people between the ages of 19 and 25 gain coverage. Those who are newly covered through their parents’ plan are more likely to have pre-existing health conditions and higher expenses than the average young adult.

Adding more beneficiaries to a parent’s health plan increases the cost of the plan. To cover that cost, premiums increase. If the parent is insured through an employer’s plan, the additional cost is shared by everyone in the firm who purchases dependent coverage. In most cases, an employee who does not add an adult child pays the same higher rate as an employee who does.

Insurers can no longer limit the dollar amount they will spend each year, or over the lifetime of your policy, for covered benefits considered essential. The ban on lifetime limits was phased in starting September 2010, and the ban on annual limits begins in 2014.

Most people who have health insurance through their work will be hard-pressed to identify how they are helped by the ACA.

The Kaiser Family Foundation’s 2009 Employer Health Benefits Survey found that 59 percent of workers covered by their employer’s health plan were subject to a lifetime limit on benefits, although the limit was at least $2 million for two-thirds of those workers. Fortunately, very few people come close to exceeding such limits. If the additional cost is spread over everyone with insurance, the average premium increase would be low. Price Waterhouse Coopers estimated that increasing lifetime limits from $1 million to $10 million would increase insurance premiums by about 1 percent.

Most people who have health insurance through their work will be hard-pressed to identify how they are helped by the ACA. Few households have adult children who need to be brought into their parents’ plan. It is likely that few consumers are fully aware that their insurance coverage is limited. Many discount the financial risk imposed by such limits, thinking that they are unlikely to incur millions of dollars in health costs — and most of them are correct.

That leaves the president with an intractable political problem. His signature legislation provides a subsidy for at most 20 million people to buy health insurance. That subsidy and other regulatory requirements increase the cost of insurance for 170 million people who already have coverage through their employers. As a result, their coverage will become less generous and their access to providers will be reduced. Some will even be forced to work shorter hours and take home less pay because of the ACA.

That’s not a winning formula for any politician. But the president has shown that he does not need strong public support to initiate unprecedented changes in the health sector. The success or failure of his reform depends on what happens next.

Joseph Antos is Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute.

FURTHER READING: Antos also writes "Would You Buy Insurance from This Man?" and "Health Care for the Poor, or Poor Health Care?" Scott Gottlieb argues "Why Obamacare Shouldn't Force Poor Seniors into Medicaid" and James C. Capretta contributes "Reforming Medicare Integrated Care: An Alternative to the Obama Administration's Accountable Care Organizations." Antos answers the question "Will Slower Medicare Growth Save the Trust Funds?" from an AEI event on Medicare in June.

 

Image by Dianna Ingram / Bergman Group

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