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Obamacare Bombshell: 4 Million People Who Thought They Were Gaining Coverage, Won't

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The new study by Burkhauser, et al.

Now, there’s a new study that suggests that employer dumping under Obamacare could be significant, leading to an explosion of the law’s costs and thereby the federal debt. A working paper by economists Richard Burkhauser and Sean Lyons of Cornell and Kosali Simon of Indiana, published by the National Bureau for Economic Research, examined various reasonable assumptions regarding the behavior of employers under the law.

Burkhauser and colleagues found that, in a worst-case scenario, the number of people covered by Obamacare’s subsidized exchanges could be more than double the estimates of the Congressional Budget Office and the Joint Committee on Taxation. “In the most dynamic case (broad affordability and maximum change in premiums)…Exchange coverage increases from 10.23…to 22.89 percent” of the privately-insured workforce. This would lead to worst-case of $48 billion a year in additional federal spending, according to a version of the study published by the Employment Policies Institute.

How could this be? When Burkhauser and colleagues sent their original study to the Employment Policies Institute, they were asked a relevant question by Michael Saltsman, a research fellow there. “We go to EPI,” Burkhauser told me, “and Mike Saltsman, who was the EPI guy working with us, asked us: ‘How come [your estimate] is different from the CBO?’ We said, we weren’t sure. We didn’t know why our numbers were so different than the CBO’s…I have tremendous respect for the Ph.D. economists at CBO who do the numbers…those people are first rate.”

A new strategy for employer dumping: offer coverage that the government considers "unaffordable"

It all comes down to what appears to be a tweak used by the Joint Committee on Taxation that gave the new health law a favorable fiscal score. (While commentators tend to focus on the role of the Congressional Budget Office in scoring legislation, the Joint Committee on Taxation takes the lead on scoring changes to the tax code.) Bear with me while I try to explain what they did.

As you probably know if you read this blog, Obamacare attempts to expand coverage to the uninsured through two primary mechanisms: (1) expanding Medicaid’s eligibility requirements; (2) creating state-sponsored exchanges in which individuals can purchase insurance, and benefit from a sliding scale of federal subsidies based on their income.

In order to prevent employers from dumping their workers into the exchanges, the law fines employers at $2,000 times the number of total employees less 30 if they don’t offer health insurance to all of their employees. In addition, the law fines employers at a lesser rate—$3,000 on a case-by-case basis—for each employee who has not been offered “affordable” coverage and ends up getting coverage through the exchanges.

As the McKinsey consultants pointed out in their write-up of their employer survey, this affordability provision provides employers with an interesting strategy: they can offer insurance to their workers, but make the premiums “unaffordable,” so that workers are still eligible for the exchanges, and pay the lower $3,000 fines for each of those workers only, instead of the much larger fine of $2,000 times the entire number of employees less 30.

Indeed this appears to be the best way for employers and their workers to milk the Obamacare teat: not so much by giving up on providing coverage, but by providing “unaffordable” coverage to lower-income workers, with their mutual consent, because those workers can then sign up for more generous coverage under the exchanges.

How does Obamacare define “unaffordable” employer coverage?

Here’s where the technicality comes in: how does the government define “unaffordable?”

Section 1513 of PPACA fines “any applicable large employer [who] fails to offer its fulltime employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer sponsored plan.” In other words, employers must not only offer coverage to their workers, but also to workers’ families.

But employers can’t just provide any old sort of coverage; it has to be “affordable” coverage. So Section 1401 of the law [§1401\36B(c)(2)(C)(i)] states that employer-sponsored coverage is “unaffordable” if the required premium “exceeds 9.5 percent of the applicable taxpayer’s household income.”

Let’s try a real-world example. Take a couple in which a husband makes $50,000 a year, and his wife is a homemaker, for a total of $50,000 in household income. If the husband’s employer requires a premium for a family plan that exceeds $4,750 (9.5% of $50,000), the plan is considered “unaffordable” by the government. Given that most family health plans cost more than $4,750 a year in premiums, this definition could encompass a whole lot of people, triggering massive government subsidies.

JCT tweak makes federal costs vanish

It appears, however, that the “real-world example” I just described isn’t real. Instead, the JCT used a narrow, and therefore more fiscally favorable, interpretation of the affordability language when they scored the final bill in a joint CBO/JCT report dated March 20, 2010. JCT defined “unaffordable” coverage as a self-only policy for an individual worker, in which the premiums exceeded 9.5 percent of household income. Because the average cost of an individual-only plan is about one-third that of a family plan, this tweak makes it three times as hard for an employer-sponsored plan to be deemed as “unaffordable.”

The reasoning behind the JCT's narrow interpretation is not obvious, given that Section 1513 requires employers to provide coverage both to employees and their dependents. In addition, the JCT’s narrow point of view wasn’t apparent at the time that PPACA was being voted upon, because on the day the final vote took place in the House, the JCT told Congress something different.

In a report the JCT published on March 21, 2010, the Committee used the more straightforward, broader definition of “unaffordability” that took into account the family plan example I described above. However, on May 4, 2010, several weeks after PPACA was signed into law, JCT issued a correction, stating that the March 21 interpretation was wrong, and should be replaced with “self-only coverage.”

However it came about, this subtle, technical tweak was extremely consequential. Late in the evening of March 21, 2010, the House of Representatives passed the Patient Protection and Affordable Care Act, with a number of skeptical Democrats voting with their leadership in the final hours, persuaded that PPACA had been certified by the CBO as deficit-neutral. Without the JCT tweak, PPACA would have been sunk by an additional 10-year cost of $150 to $500 billion. Instead, Democrats used the favorable CBO estimate to claim that Obamacare was fiscally responsible.

Has the CBO overestimated the law’s coverage expansion?

This tweak isn’t just a problem for conservative opponents of Obamacare, but also for its liberal advocates. If the JCT interpretation is correct, then millions of people who thought they were gaining coverage under the law—spouses and dependents of employed Americans—won’t. If the JCT is wrong, the CBO’s estimates of PPACA’s exchange costs are way too low. Increasing the law’s costs will upset conservatives, but decreasing the law’s coverage expansions will upset progressives. Congress needs to get to the bottom of this.

This grenade may end up exploding in Kathleen Sebelius’ hands, because Sebelius will have to issue regulations that clarify these provisions. Says Burkhauser, “This is the dilemma. If the HHS Secretary decides that they really did mean single coverage, then you’re going to have several million [people who aren’t going to get coverage under the law].  The family’s [breadwinner] is given affordable coverage, but the families can’t get onto the exchange rolls. This is going to be unpopular.”

Fiscal chicanery is nothing new, and its role in the passage of Obamacare has been widely documented. But the problem of employer dumping onto the exchanges is the law’s most serious, and the one that presents the greatest danger to the law’s fiscal stability. No matter whose side you’re on, this problem requires serious attention.

UPDATE 1: Julian Pecquet of The Hill was the first person in the press, to my knowledge, to discuss the study; he reports that "some of the administration's closest allies on healthcare reform warn this situation could dramatically undercut support for the law." Neil Munro of the Daily Caller helped identify the discrepancy in the JCT's interpretations of the law, an article that Matt McKillip flagged for me. Austin Frakt writes, "The authors are not making a prediction about what will happen, so much as showing the extremes of the range."

UPDATE 2: Section 5000(e)(1)(B)(i) of the law may be the source of the JCT's narrow interpretation, as it defines the "required contribution" by the employee for affordability purposes as "the portion of the annual premium which would be paid by the individual...for self-only coverage." The $150-$500 billion in additional exchange subsidies should be thought of as the gross costs of reversing the JCT tweak; net costs would include partially off-setting revenues from the $3,000-per-case employer penalty.

UPDATE 3: Update 2 turns out to be accurate. On Friday, August 12, the Treasury Department, working in concert with HHS, issued a notice of proposed rulemaking that endorsed the narrow JCT interpretation of the affordability provisions. The notice declares that “an employer-sponsored plan also is affordable for [an employee’s relative] even if the employee’s required contribution for the family coverage does exceed 9.5 percent of the [employee’s income].”

Treasury will hold a public hearing on November 17 to discuss these issues. Here is the full text of the section on affordability regulations (emphasis added):

Section 36B(c)(2)(C)(i) prescribes the standards for determining whether employer-sponsored coverage is affordable for an employee as well as for other individuals. In the case of an employee, under section 36B(c)(2)(C)(i), an employer- sponsored plan is not affordable if “the employee’s required contribution (within the meaning of section 5000A(e)(1)(B)) with respect to the plan exceeds 9.5 percent of the applicable taxpayer’s household income” for the taxable year. This percentage may be adjusted after 2014.

In the case of an individual other than an employee, section 36B(c)(2)(C)(i) provides that “this clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee.” The cross-referenced section 5000A(e)(1)(B) defines the term “required contribution” for this purpose as “the portion of the annual premium which would be paid by the individual... for self-only coverage.”

Thus, the statutory language specifies that for both employees and others (such as spouses or dependents) who are eligible to enroll in employer-sponsored coverage by reason of their relationship to an employee (related individuals), the coverage is unaffordable if the required contribution for “self-only” coverage (as opposed to family coverage or other coverage applicable to multiple individuals) exceeds 9.5 percent of household income. See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 111th Congress, JCS-2-11 (March 2011) at 265 (stating that, for purposes of the premium tax credit provisions of the Act, “[u]naffordable is defined as coverage with a premium required to be paid by the employee that is more than 9.5 percent of the employee’s household income, based on the self-only coverage”).

Consistent with these statutory provisions, the proposed regulations provide that an employer-sponsored plan also is affordable for a related individual for purposes of section 36B if the employee’s required contribution for self-only coverage under the plan does not exceed 9.5 percent of the applicable taxpayer’s household income for the taxable year, even if the employee’s required contribution for the family coverage does exceed 9.5 percent of the applicable taxpayer’s household income for the year.

Although the affordability test for related individuals for purposes of the premium tax credit is based on the cost of self-only coverage, future proposed regulations under section 5000A are expected to provide that the affordability test for purposes of applying the individual responsibility requirement to related individuals is based on the employee’s required contribution for employer-sponsored family coverage. Section 5000A addresses affordability for employees in section 5000A(e)(1)(B) and, separately, for related individuals in section 5000A(e)(1)(C).

UPDATE 4: Footnote 70 of the JCT's original March 21, 2010 report appears to correctly describe the narrow interpretation of the affordability provisions (emphasis added):

For example, if an employee with a family is offered self-only coverage costing five percent of income and family coverage costing 10 percent of income, the employee is not eligible for the tax credit in the Exchange because self-only coverage costs less than 9.5 percent of household income. The employee is not exempt from the individual responsibility penalty on the grounds of an affordability exemption because the self-only plan costs less than eight percent of income. Although family coverage costs more than 9.5 percent of income, the family does not qualify for a tax credit regardless of whether the employee purchases self-only coverage or does not purchase self-only coverage through the employer. However, if the family of the employee does not maintain minimum essential benefits coverage, the employee's family is exempt from the individual mandate penalty because while self-only coverage is affordable to the employee, family coverage is not considered affordable.

UPDATE 5: Julie Appleby of the Washington Post updates the intra-Democratic tussle in an April 2012 article:

Consumer advocates oppose the rule because it bases affordability on how much employees would pay to cover themselves, not on the cost of covering their entire family. As a result, they say, many workers will be unable to afford family coverage, yet their spouses and children will be ineligible to get help to buy insurance. An estimated 3.9 million dependents would be affected, according to one estimate.

“The proposed rule excludes people Congress intended to cover,” said Bruce Lesley, president of First Focus Campaign for Children, which wrote a letter to Treasury signed by more than100 advocacy groups, including the American Academy of Family Physicians, the Children’s Defense Fund, the March of Dimes and the National Council of La Raza.

The letter calls on the president and congressional leaders to take “administrative action or legislation” to clarify what Congress intended.

Treasury officials are reviewing the comment letters as they draft final rules expected to be released in the upcoming weeks.

“We are working with consumers, businesses and all interested parties to ensure women and families get the affordable care they need,” Treasury Department spokeswoman Sabrina Siddiqui said in a statement, declining to elaborate.

Supporters of Treasury’s proposed rule, among them employer groups and insurance brokers, say it closely follows wording in the law that defines affordability in terms of the cost of “self-only coverage...”

“The notion that Congress wrote the law in a manner that would exclude many families from access to more affordable coverage . . . is simply incongruent,” the lawmakers, including Rep. Sander M. Levin (D-Mich.), ranking member on the Ways and Means Committee, and Rep. Henry A. Waxman (D-Calif.), ranking member of the Energy and Commerce Committee, wrote Treasury in a Dec. 6 letter.