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Losing Employer-Provided Coverage: Another ACA Prediction Comes True

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Losing Employer-Provided Coverage: Another ACA Prediction Comes True

October 14, 2014

This past week provided an important example of the anticipated effects of the Affordable Care Act coming to pass. Walmart has announced that it will no longer offer health insurance for 26,000 part-time workers, prompting a piece at Vox recognizing that this termination of coverage occurred because “Obamacare changes the calculus on getting coverage at work” and noting that “the loser in the Walmart decision is the federal budget.”

Sarah Kliff, author of the Vox piece, explains as follows:

For low-wage workers, Obamacare has introduced a new and big drawback to the employer insurance. Namely, anybody who gets access to affordable coverage at work is barred from getting subsidies through the new exchanges. This is even true for people who don't buy insurance at work; just the act of getting offered employer coverage blocks individuals from getting financial help. . . .For a worker like that, losing health insurance at work doesn't actually look like a bad deal. Instead, it’s a pretty good deal: it gives part-time employees the chance to qualify for way more generous financial help than Walmart would ever offer.

In other words, the ACA enables Walmart to cut its labor costs without necessarily lowering the standard of living of its employees, simply by shifting much of these workers’ health insurance costs to taxpayers who, in Sarah Kliff’s words, “will now take on the financial burden of helping to pay for thousands' of part-time workers' medical bills.”

In a similar decision last year Trader Joe’s also cut health benefits for its part-time workers, citing the rationale that such an employee “is only able to receive the tax credit from the exchanges under the act (ACA) if we do not offer them insurance under our company plan.” 

This effect of the ACA was not only predictable but predicted. In a 2012 Mercatus Center paper on the ACA’s fiscal effects I wrote:

The ACA creates a horizontal inequity between two hypothetical low-income individuals; one who purchases insurance via an exchange receives a substantial direct federal subsidy, whereas one who receives employer-provided insurance does not. This differential treatment could well lead either to the second individual’s moving into the health exchanges (thus increasing participation rates) or to the federal government expanding low-income subsidies to those with ESI (increasing costs). Some experts have noted that the law may create an incentive for some workers to request reduced employer contributions to health insurance to render them eligible to receive the more generous federal subsidies in the exchanges. The influence of such inequities upon the substantial financing risks under the ACA is barely taken into account in the figures presented in table 2. Perhaps more importantly, the financing risk surrounding the exchange subsidies is only dimly visible within the projection period ending in 2021. It is over the longer term that the potential for more rapid cost growth in the exchange subsidies threatens its most damaging fiscal effects.

This point was important in that context to understand whether the ACA's budget costs might ultimately be higher than originally projected. As low-income individuals’ health insurance coverage shifts from employer-provided benefits to the ACA’s subsidized exchanges, taxpayers will be required to finance significant new costs and the law’s effect on the budget will worsen. 

The Congressional Budget Office (CBO) appears to be concluding that its original estimates did not take full account of this effect. In 2011, CBO estimated that about “6 million to 7 million people” would lose their offer of employer-provided health coverage as a result of the ACA by 2019 which, netted against other individuals gaining employer-provided coverage, would result in a net reduction of 1 million in those holding employer-sponsored health insurance. In 2012, CBO revised this estimate to project that 11 million people would lose their employer coverage offers by 2019 due to the ACA, with a net reduction of 5 million in those with employer-provided insurance. By this year CBO had further increased its estimate of those losing employer coverage offers to 13 million, with a net reduction of 8 million in those with employer-sponsored insurance.

None of this is to make a value judgment about whether it is good or bad for our society to shift away from the historical employer-based framework for providing health insurance. It is important, however, to have accurate expectations of the ultimate costs of the ACA. 

Any time a law such as the ACA creates a horizontal inequity—in this case, providing one low-income individual with health insurance subsidies while denying those subsidies to another individual with the same income—individuals will attempt to take advantage of that government-established preference. In this case it means individuals moving out of employer-provided coverage, where the cost of the benefits is met from their compensation, to the ACA’s new exchanges, where taxpayers will subsidize a substantial portion of the cost. 

That the ACA has this effect is not only being recognized by CBO but also belatedly by policy advocates, such as those at Vox, whose latest writings offer the subjective value judgment that dropping employer-provided coverage and adding these costs to taxpayers’ “financial burden” is “good news.” That is a matter of opinion rather than of factual reportage. The incentive driving this effect, however, is certainly real as are its adverse implications for the federal budget. 

It would have been preferable if these effects of the ACA had been publicly acknowledged when the legislation was originally debated, so that the public could make an informed judgment as to whether to facilitate this coverage shift and to accept the additional budgetary costs that accompany it. In any event, this consequence of the ACA was not only predictable but specifically predicted.

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.

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