Post-Obamacare Reform That Works for Workers and Employers

Posted: Nov 22, 2014 12:01 AM

Judging by the midterm election results, the American public hasn’t forgotten President Obama’s broken promise that “if you like your health plan you can keep your health plan.” The good news for healthcare is that the fallout has disrupted the political status quo so much that a partially patient-centered healthcare reform may be possible soon after the president leaves office.

Even partial reform could bring welcomed relief to millions who lost their health plans. In a study released in October, Edmund F. Haislmaier and Drew Gonshorowski of The Heritage Foundation calculate that 3.8 million people lost benefits from their jobs in the first half of 2014. The two researchers do not segment the job losses by size of firm, but it is a safe bet that Obamacare is accelerating the collapse of employer-sponsored benefits, especially in firms of fewer than 50 employees.

This seems counter-intuitive, because Obamacare’s employer mandate to offer “affordable” health benefits will apply only to bigger firms. (The mandate kicks in next year for employers with 100 or more full-time equivalents and in 2016 for firms with 50 to 99 workers.)

However, for a small firm with a low-paid workforce, the attraction of dropping benefits and sending employees to an Obamacare exchange, where workers can get a tax credit, surely works to accelerate a trend we have seen for years. The Urban Institute has calculated that only 35.2 percent of firms with fewer than 50 employees offered health benefits in 2012, down from 44.5 percent in 2002.

It’s worth recalling that the only reason employers control workers’ health benefits is that if a worker gets health benefits on the job, the benefits are non-taxable. If a worker takes the cash value and buys his own health plan, he is taxed on it. Pre-Obamacare, this alternative was too costly for most people to afford.

But after years of rising costs, employers have found it increasingly hard to continue offering health benefits. Those who do must have either their own internal bureaucracy to manage the offering or enough money to hire a benefits consulting firm to figure it out. Smaller firms with meager resources have no hope of offering coverage.

The American workforce, however, has been habituated to employer-based benefits for decades. Any attempt to reform the taxation of such perks therefore has faced ferocious political opposition. Recall, for example, the vitriol Senator John McCain had to endure when, during his 2008 presidential campaign, he proposed a universal, refundable tax credit for buying individual health insurance. The attack slogan – “The Republicans will tax your job-based health insurance” – was, very narrowly, technically correct, but it evaded the bigger truth.

Fortunately, the near future will offer renewed hope for tax fairness. By 2017, few – if any – workers at small firms will be getting health benefits at work, but many will be getting tax credits through the Obamacare exchanges. So, a reform that frees workers from the restrictions of both employer-based and exchange-based health plans would be a very do-able objective for the next president.

An example of such a reform comes from a conservative group called The 2017 Project. Their proposal would give adults under 35 years of age a tax credit of $1,200 a year; those 35 to 49 years old would get $2,100; and those 50 or older would get $3,000. Parents would get an additional $900 per child. People who can buy health insurance for a lower premium would be allowed to deposit the leftover tax credit in a Health Savings Account.

These tax credits, however, would be available only to employees of firms with fewer than 50 full-time equivalent employees. Workers in larger firms, who remain in the employer-based market, would retain non-taxable health benefits, up to a limit. The tax exclusion would be capped at the 75th percentile of annual premiums, which is currently about $8,000 for a single person. The value of benefits above this cap would be taxable to the employee. (The cap is a simple and straightforward way to immunize the proposal from accusations that the plan attacks employer-based benefits.)

The 2017 Project’s proposal has a couple of great advantages over Obamacare. First, it would reduce the federal deficit by $1.3 trillion over ten years, according to one economic consulting firm. Second, because the tax credit would not phase out as a worker’s income rises, it would avoid the extremely high effective marginal income tax rates that Obamacare creates and that discourage workers from earning higher incomes.

The plan needs refinement on a couple of technical issues. Its underwriting provisions are not actuarially sound, and it will cause some disruption in firms of around 50 workers who have both high-earning and low-earning employees. Nevertheless, it is a refreshing approach to taking advantage of the great opportunity 2017 will offer for real health reform.