Obamacare Subsidies Create Perverse Incentives

The Affordable Care Act offers radically different subsidies to people at the same income level, depending on where they obtain their health insurance—at work, through an exchange, or through Medicaid. These subsidies are arbitrary, unfair, and even regressive. Along with the accompanying mandates, they will cause millions of employees to lose their employer plans and maybe their jobs as well.

Take the maids, waiters, waitresses, busboys, custodians, and grounds-keepers at a hotel, making about $15 an hour. The government provides no help for the purchase of employer-provided health insurance. The only subsidy available is the one that has been there all along in the tax code: by purchasing health insurance with pre-tax dollars, employees at this income level will avoid a 15.3 percent (FICA) payroll tax—about $2,800.

Now consider a standard family plan offered in a health insurance exchange. If the $15-an-hour employees are eligible for such a plan, the government will pay anywhere from 90 to 94 percent of the premium depending on the age of the employee and the region of the country. The government subsidy amounts to about $13,617.[1]

Which is better? A $13,617 subsidy or a $2,800 one? If a hotel didn’t send its low-wage workers to the exchange and a competitor down the road did so, the hotel would face about 50 percent higher labor costs than the competitor.

But not so fast. There is another wrinkle in this calculation. Although low- and moderate-wage employees get generous subsidies in the health insurance exchange, higher income employees (say about $94,000 and up) get no subsidy at all. If they obtain employer-provided insurance, however, they can take full advantage of the tax law provision. When the hotel buys insurance for a manager, for example, the premiums not only avoid the 15.3 percent payroll tax, they also avoid a 25 percent federal income tax and, say, a 5 or 6 percent state and local income tax. The upshot: through the tax subsidy, government is “paying” for almost half of the cost of the insurance.

For more on the effects of the Affordable Care Act, please consult my Independent Institute book, Priceless: Curing the Healthcare Crisis.

Notes:
1. The Henry Kaiser Family Foundation, “Health Reform Subsidy Calculator,” June 22, 2010, http://healthreform.kff.org/SubsidyCalculator.aspx.

[Cross-posted at Psychology Today]