Obamacare’s sliding scales and slippery slopes
Last week, as Americans celebrated Independence Day, the Obama administration made a pair of big announcements about the Affordable Care Act, the crown jewel of the president’s domestic policy efforts: two of the ACA’s key enforcement provisions—income verification and a mandate for employers to provide healthcare—are being delayed until 2015. The exchanges will still open and subsidies will flow in 2014, but efforts to ferret out fraud, or for that matter honest mistakes, will be put on hold. Reading between the lines, it seems as though the White House was acknowledging that the health system created by the ACA is unworkable in its current form.
As Eugene Steuerle, a fellow at the Urban Institute, has explained, the ACA establishes a “four-part, nearly-universal, health care system” built around Medicare, Medicaid, employer-sponsored insurance, and the new state-based insurance exchanges. The really confusing thing about our new four-part health system is that the federal subsidies available to households earning the same income can vary dramatically, depending on which part of the health system you find yourself in. As long as you are old or disabled, Medicare treats all comers roughly equally. The federal contribution to Medicaid varies from state to state, but the level of coverage tends to be pretty similar across recipients. Subsidies for employer-sponsored insurance, meanwhile, are much higher for households earning high incomes, and thus paying high taxes, than for less affluent households, while subsidies for the new exchange policies are generous for low-earners and phase out for high-earners. The upshot is that subsidies for many low- and middle-income households are far more generous on the exchanges than they are for employer-sponsored insurance.
Given that the subsidies on the exchanges are more generous than the subsidies for employer-sponsored insurance, the ACA took various steps to contain spending. One of the most important was its employer mandate, which imposed a fine on mid-sized and large employers that failed to provide full-time employees with affordable insurance options. The idea was that the fine would nudge employers to offer affordable insurance options, underwritten by the relatively stingy tax subsidy for employer-sponsored insurance, thus containing the growth of exchange subsidies.
Last Tuesday, however, the Obama administration announced that it would delay enforcement of the employer mandate, for reasons that remain unclear. The White House claims that it needs more time to make the mandate user-friendly, but many outsiders claim that the administration belatedly recognized that the mandate might discourage firms from hiring full-time employees. Regardless, the delay of the employer mandate means that firms won’t be punished for failing to report whether or not they are offering their employees affordable insurance options. This in turn means that the new state-based insurance exchanges won’t be able to verify whether individuals applying for coverage on the exchanges have access to affordable insurance through their employers.
The ACA also aimed to contain costs through the aforementioned sliding-scale subsidies on the exchanges. The fact that the tax subsidy for employer-sponsored insurance is generally worth much more to the rich than the poor strikes most observers as perverse, and with good reason. So sliding-scale subsidies seem like an improvement. The problem, however, is that sliding-scale subsidies require income verification. And income verification is very difficult in a complex, volatile economy in which income can vary considerably from year to year, and even from month to month. I could use my tax return to apply for subsidies on the basis of my income for last year, but I might need more generous subsidies if my income falls this year or less generous subsidies if my income is higher. This means that the IRS, the agency charged with overseeing income verification, will have to create some kind of appeals process, on top of everything else it has to do. If this strikes you as a train wreck in the making, you are not alone. Now, of course, the Obama administration has announced that it’s not going to worry too much about income verification, at least not until 2015.
It might be too cynical to conclude that millions of Americans will deceive their way into more generous subsidies than they are entitled to receive under the ACA. For one thing, those who are dishonest face the threat of heavy fines come 2015. But if the employer mandate and income verification are unworkable now, it is hard to see how they will be workable a year from now, or five or ten years from now for that matter. And if the federal government never gets around to getting the employer mandate and income verification up and running, one can easily imagine a growing number of employers, particularly low-wage employers, choosing not to offer employer-sponsored insurance. A true cynic might argue that the Affordable Care Act has amounted to an elaborate bait-and-switch. We were promised universal healthcare on the cheap, thanks to employer mandates and sliding-scale subsidies. But lo and behold the employer mandate and the sliding-scale subsidies are all-but-impossible to administer, and so we’re going to wind up with a health system centered on the new insurance exchanges that will be far more expensive than advertised.
The most straightforward way to address the ACA’s growing pains is to abandon both the existing tax preference for employer-sponsored insurance and the sliding-scale exchange subsidies and replace them with a dead-simple fixed-sum tax credit. John Goodman of the conservative National Center for Policy Analysis has called for a refundable tax credit of $2500 for individuals and $8000 for a family of four to help finance insurance payments. The beauty of this approach is that it would level the playing field between employer-sponsored insurance and the exchanges, and it would be relatively easy for the federal government to implement. Moreover, it wouldn’t create a work disincentive, as working longer hours or for higher pay wouldn’t lead to a cut in your subsidy. Not everyone will embrace Goodman’s idea. Liberals might argue that it’s not generous enough and conservatives might argue that it costs too much. Yet it has a virtue that the ACA as currently conceived does not, namely that we actually have some hope of getting it up and running.
