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Here's How To Repeal The Employer Mandate And Cut The Deficit

April 09, 2014

By Yevgeniy Feyman

Some people say that bipartisanship is dead. But if rumblings in the House are to be believed, cooperation on Obamacare may yet be possible. The “Save American Workers Act of 2014,” which passed the House 248-179 (with 18 Democrats voting in favor) amends the ACA to redefine “full-time employees” as being those who work 40 hours, rather than the 30 hour definition in the law. While this would have a relatively marginal effect when all is said and done (criticism of the bill has focused on those who are expected to lose coverage as a result – on net about 1 million people), it does begin to repeal an important budget gimmick in Obamacare – the employer mandate.

Those who follow this space should be familiar with the dual-mandate created under the health care law. First, all individuals are required to obtain insurance, else pay a tax; but on top of that, employers with 50 or more full-time equivalent workers are required to provide their full-time workers with health insurance, else pay a per worker penalty of $2,000 (for a much more in depth discussion of employer penalties under the law, see this 2013 CRS report).

Two questions should spring to mind immediately.

First, why is there an employer mandate in the law? The individual mandate (however morally questionable) has some economic justification – with community-rated health insurance, a mandate is needed to get healthy people into the risk pool. Otherwise, adverse selection prevails. (Those looking for a more academic take on this, should read this article.) But the employer mandate is more difficult to justify – indeed, it is little more than a budget gimmick that helps the ACA reach budget neutrality on paper. The revenue generated is substantial – $151 billion over 10 years according to the CBO's latest baseline estimates.

But readers should have another question right about now – why is the employer mandate undesirable, policy-wise? The answer has to do with the high cost of American health care, and World War II-era wage controls. My colleague Avik Roy has written extensively on it, as has Princeton health economist, Uwe Reinhardt. The substance of the argument is this – employer sponsored coverage, subsidized heavily by the tax code, takes away the consumer's role in shopping for health care, which creates a chaotic (or nonexistent) price structure. This allows incumbent providers (think large general hospitals, like Massachusetts General) to price services without any concern for quality or price-sensitivity.

The Trouble With The Mandate

The problem, then, with using the employer mandate to generate revenue is that it doubles down on one of the most heavily subsidized parts of our health care system that tends to drive up costs across the board. But there's another elephant in the room. Having an employer mandate, along with individual health insurance exchanges, and an excise tax on high-cost insurance plans is a schizophrenic approach to fixing health care. The goal of health care reform isn't only to insure more people – it's to make health insurance personal and inject more consumerism into the market. Mandating employers to cover workers, fining them if they don't, and then taxing them on benefit packages that will be offered by three-quarters of employers in 2029, is about as insane as it gets. As such, Obamacare reformers – both Democrat and Republican – have their work cut out for them, and should be looking to eliminate entirely the requirement for employer sponsored coverage.

Politically, this is easier said than done. Repealing the employer mandate will result in significant lost revenue, on top additional outlays for subsidies on the exchanges.

A piece from last year on the Committee for a Responsible Federal Budget's blog roughly estimates the cost of doing so at between $171 and $203 billion over 10 years. (Note: some of these numbers will have changed – CBO's estimate for the average subsidy on exchanges has fallen slightly – but they are not significant differences.) A more recent RAND Corporation estimate of repealing the employer mandate shows a ten-year loss of revenue of around $149 billion (just under CBO's latest revenue estimate). With updated estimates about average subsidies on the exchanges, as well as some assumptions about increased payroll/income-tax revenue (see methodology section at the bottom) the net increase in the deficit comes out to between $149.2 and $155.2 billion over ten-years (from 2014 to 2023).

So how do we offset it?


One idea would be to take advantage of “behavioral responses” for the small number of people affected by the mandate as a whole – these people would end up on Medicaid, on the exchanges, or uninsured. More of their compensation would be paid as wages (and thus would be subject to taxes) which would raise some revenue, but not very much. Moreover, less spending on health insurance (and therefore health care) would mean more spending in other, more productive sectors of the economy. But politically, this would still be a difficult sell, since relative to current law, it would increase deficits.

Another more palatable idea comes from none other than the CBO.

This proposal would first replace an important provision in Obamacare – the “Cadillac Tax.” This provision imposes a 40 percent excise tax on health insurance benefits over certain amounts – $10,200 for individuals and $27,500 for families – which are then indexed to grow at inflation. In essence, this eliminates the value, for employers, of providing insurance over this amount. The idea is to drastically slow the growth in employer sponsored insurance (ESI) costs. According to CBO projections, however, this is still a major source of revenue for the law (indicating that many employers would still offer expensive health plans) in the early years – raising $108 billion in revenue through 2024. The Cadillac Tax is also relatively regressive mechanism – it can significantly raise the tax burden for both high and low-income filers. (For a broader discussion, see page 76 in this report from the Bipartisan Policy Center, as well as my fellow Forbes contributor Chris Conover's post.)

The second element of the CBO option is to then replace the Cadillac Tax with a less regressive cap (at the 50th percentile cost of employer health insurance – $6,420 for individual coverage and $15,620 for family coverage in 2015) on the tax exclusion. (Note: this would cap growth at CPI+1.) By imposing a limit on the tax exclusion (which is itself regressive) rather than a non-deductible excise tax, the distributional effect hits higher income households more than those with lower incomes.

Based on my calculations (methodology at the end of the post), coupling a repeal of the employer mandate with a cap on the ESI tax exclusion reduces the deficit by between $371.1 and $366.4 billion from 2016 to 2023. (This is an 8-year estimate because the employer mandate only begins in 2016.)

More Wages, Cheaper Health Care

The benefit, however, would be greater than the sum of its parts. Employees would see more of their compensation come in the form of cash wages (resulting in more consumer spending), more people would be in the individual market (4 million more according to CBO), and best of all – we could begin to dampen employer contribution to health care cost inflation. This latter point is much more salient than it may seem – one study found that eliminating tax preferences for employer-based health insurance would result in at least a 13.3 percent drop in total health expenditures. I leave it up to readers to determine how much value they place on such dynamic effects, however, and thus exclude these sorts of estimates from my analysis.

One important caveat is that a 50th percentile cap on ESI exclusion is very disruptive. By construction, half of all ESI-insured individuals would either see a reduction in benefits or an increase in taxes (possibly both if the reduction in benefits is fully offset by an increase in cash wages). A more politically-feasible cap would likely fall somewhere around the 75th percentile (as the previously cited Urban Institute report examined; similarly the Patient CARE Act caps the exclusion at the 65th percentile) and would transition into effect smoothly over several years. This would be much less disruptive and would result in lower revenues but could be calibrated to still achieve deficit neutrality.

In all likelihood, at least some of those who lose coverage as a result of the cap would also be eligible for Medicaid. The nice thing about having some extra cash on the table from these reforms is that we can use it. Besides deficit reduction, the extra money could be used to “buy-out” the newly Medicaid-eligible into higher-quality, private coverage. Simply put, there will be “winners” and “losers” from a cap on the ESI tax exclusion, and some of the resulting revenue can be used to help the “losers.”

But how to balance these priorities is ultimately a decision that should come from public debate rather than being pre-determined.

One other concern to bear in mind is the considerable uncertainty (read: we don't know) regarding employers' price elasticities (their responsiveness) for offering coverage. Depending on the specific assumptions used different outcomes can arise: a cap (essentially an increase in the price of insurance above a certain threshold) can cause employers to drop coverage, reduce coverage, or trying to game the system by dropping coverage for lower-income workers who can get better deals on the exchanges. All of this is to say that the precise effect of a cap is difficult to predict – more responsiveness to a cap from employers would lead to more tax revenue but higher exchange spending. Less responsiveness would see the reverse occur. These sorts of uncertainties are inherent to any statistical modeling however.

The bottom line is this. There is now at least a glimmer of momentum for fixing the ACA –rather than each party crouching in their respective ideological trenches.. If support from the left can build, then serious, market-friendly changes to Obamacare might actually find their way to the President's desk. Whether he would sign them is a totally different question.


There are a few figures that were necessary to estimate the full cost of repealing the employer mandate.

1) Loss of revenue

CBO has a baseline estimate for penalties they expect employers to pay under the mandate. The latest is from February 2014. Projected revenues are $130 billion from 2016 to 2023.

2) Additional exchange subsidies

There are two important figures here – the first is how many people would lose coverage due to a repeal of the mandate. Based on a “steady-state” CBO analysis, the Committee for a Responsible Federal Budget estimates that between 0.5 and 1 million people would lose coverage (I assume they get coverage on the exchange). The second figure I now need is the average exchange subsidy over the relevant time frame. This number is also available via CBO's baseline document. Using this average subsidy amount, I can estimate that the cost of additional exchange subsidies would be between $26.2 and $52.3 billion from 2016 to 2023.

3) New income and payroll tax revenue

According to the Urban Institute, ESI tax expenditures will cost $3.086 trillion from 2016 to 2023. (Note: To calculate “in-between” years, I impute a linear rate of growth for tax expenditures between the start and end years that equals the sum total for the entire time period. The in-between years may not be entirely accurate as a result, but orders of magnitude are unchanged.) With this knowledge, along with estimates of ESI coverage from CBO's February Baseline, I can compute the per capita revenue lost due to the ESI tax exclusion — $1,908 in 2016 and $2,808 in 2023 (as a “sanity check,” my 2019 estimate of $2,230 is very close to is very close to CBO's estimate of $2,330). To account for uncertainty regarding the wages of the 0.5 to 1 million people losing ESI (they are likely to be lower-wage and thus have lower tax rates), I divide in half the per capita revenue gain from these individuals. Assuming that compensation not paid in health insurance is then paid as cash wages, the increase in tax revenue due to more compensation taking the form of wages comes out to between $4.6 and $9.3 billion from 2016 to 2023.

Repealing the employer mandate thus appears to increase deficits by between $146.9 and $151.6 billion from 2016 to 2023.

Armed with these figures, it becomes relatively simple to add in the CBO projections for the 50th percentile cap. On net, CBO's cap proposal by itself reduces deficits by $518 billion from 2016 to 2023.

Thus, repealing the employer mandate and offsetting it with a cap on the tax exclusion reduces deficits by between $371.1 and $366.4 billion from 2016 to 2023.

Original Source:



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