While the latest Obamacare regulation for employers may slip the radar of those outside the beltway, the new rule may have serious consequences for employers and employees, serving to double down on the worst parts of the health care law.
Arguably the two most well-known provisions of Obamacare are the widely unpopular individual mandate, and the health care exchanges. The former helps ensure adequate risk pools when insurers are required to sell expensive coverage to all regardless of health status, and the latter provides a somewhat centralized portal through which to funnel subsidies to those purchasing coverage. Still, these subsidies are expected to cost about $1 trillion through 2024 – and that means that you not only need some cash to pay for it, but you also need to restrict eligibility to protect taxpayers from ballooning costs. Under the hood, Obamacare's official fiscal neutrality partly relies on a clever budget gimmick – the employer mandate.
Beginning in 2015, the law will require employers with 50 or more full-time equivalent workers to offer coverage to their full-timers, or else pay a penalty. The Congressional Budget Office projects that these penalties will amount to around $139 billion over 10 years – not nearly enough to offset the $1 trillion in subsidies, but still no small potatoes. But there's a more important gimmick at play here – by requiring employers to provide insurance coverage, the number of people receiving subsidies is likely reduced quite a bit, making it that much easier to pay for the law. This makes it costly for employers to “dump” their workers onto the exchanges, while still ensuring that coverage numbers increase.
The new regulation issued by the IRS seek to further increase the cost of such “dumping.” The agency is now interpreting the law as prohibiting employers from giving workers a pre-tax fixed dollar amount to purchase coverage on the exchanges, an arrangement commonly known as an “employer payment plan.” The penalty for doing so is a staggering $100 per day or $36,500 a year – per employee.
So what does all this mean?
Well for starters, it further cements in place one of the most perverse elements not only of Obamacare, but of our health care system in general. The massive tax advantage offered to employers, but not to individuals, has drawn consensus from health economists as being a major driver of health care costs. But tax-advantaged health care benefits aren't a free lunch – they reduce take-home cash wages, and also result in about $250 billion less in annual revenue for state and local, and the federal governments.
But this new ruling also makes reforming the law even more difficult. For those who want to see significant reforms to the law, repealing the employer mandate has been a bipartisan rallying cry – Republicans could take credit for reducing business's burden, while Democrats could give in on a relatively unimportant element of the law. With the administration now envisioning a future where employer-sponsored coverage remains strong, making such changes becomes ever more difficult.
More importantly, using the public exchanges could have been a powerful safety valve, especially for small or mid-size businesses facing growing health care costs. Instead of committing to providing benefits at an ever-growing cost, companies could have used the public exchange to set effective annual limits on premiums, while giving workers a much wider choice of plans that they would otherwise receive. Over time, this would have made it easier to eliminate the tax distortion – and the pre-tax dollars going to workers for individual market coverage would instead turn into taxable wages.
Make no mistake, businesses will still work to control health care costs – the Cadillac Tax (a 40 percent excise tax on high-value plans) creates a natural, predictable ceiling for benefits. But rather than using the public exchanges (and growing the individual market, with more choice and control for consumers) they will likely do so through private exchanges pioneered by companies like Aon Hewitt and Mercer. But those most disadvantaged by the IRS's decision will be small and medium-sized businesses who can't self-insure the way large corporations can, and can't get the same rates they do either. For them, private exchanges or paying the penalty are the only alternatives.
Of course, if you have fewer than 50 workers, this makes it even more appealing to drop coverage altogether (or not to offer it to begin with).
Can we reform the reform? Absolutely. But not if the administration isn't game.
Original Source: http://www.forbes.com/sites/theapothecary/2014/06/02/doubling-down-on-bad-policy/