No Pain, No Gain ;O): Could employers dumping health insurance coverage decrease the deficit?

Friday, March 16, 2012

Could employers dumping health insurance coverage decrease the deficit?

???initialComments:true! pubdate:03/15/2012 16:47 EDT! commentPeriod:14! commentEndDate:3/29/12 4:47 EDT! currentDate:3/15/12 8:0 EDT! allowComments:true! displayComments:true!Posted by Sarah Kliff at 04:47 PM ET, 03/15/2012 TheWashingtonPost

In the debate over health reform, there’s a lot of crystal ball-gazing over whether employees will continue to offer health insurance, or send their employees to the new health insurance marketplaces where many could purchase subsidized coverage. One concern is that if lots of employers do this, the health reform law’s price tag would skyrocket as more Americans have the federal government footing part of their insurance bill.

Avik Roy notices something interesting in a new CBO report out today, which comes to a different conclusion: Employer-dumping into the exchange could actually reduce the deficit, rather than increase it. That scenario would only play out, however, if employers compensated for dropped coverage by upping their employees’ salaries.

You can see this in this chart, under the Scenario 3, where the CBO modeled a high level of employer dumping:

If employers drop14 million, currently-insured workers into the exchange, the CBO projects that the federal deficit would actually decrease by $13 billion, since those workers could no longer use the current tax deduction for employer-sponsored insurance. Here’s how the CBO explains it:

In this scenario, those extra costs would be almost entirely offset by higher tax revenues stemming from an increase in taxable wages and salaries that would occur as firms reduced their nontaxed payments for employment-based health insurance. That increase in revenues would amount to $351 billion. In addition, revenues from penalties collected from uninsured individuals and especially employers who do not provide minimum health benefits would be higher in this scenario than in the baseline.

The government would have to spend $372 billion for workers who received their coverage through the exchanges, Medicaid and CHIP. But it would also net more in revenue, from newly-taxable income from fees imposed on employers who drop coverage (generally $2,000 per employee). Do the math, and the federal government ends up with $13 billion in deficit reduction.

There is, however, one big caveat to this analysis: It assumes that when employers drop coverage, the money previously spent on insurance will get tacked onto a worker’s paycheck. “So, for example, if your boss is paying you $50,000 a year, and spending $20,000 a year on your health insurance, under the ACA, he’ll drop your health coverage and give you $70,000 in wages,” writes Roy.

If employers cut coverage without a corresponding pay bump, the government wouldn’t see the increase in tax revenue—and that could leave the government in the red.

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Ezra Klein is the editor of Wonkblog and a columnist at the Washington Post, as well as a contributor to MSNBC and Bloomberg. His work focuses on domestic and economic policymaking, as well as the political system that’s constantly screwing it up. He really likes graphs, and is on Twitter, Google+ and Facebook. E-mail him here.

Suzy Khimm covers the budget, economic policy, and financial regulatory reform. Before coming to Washington, she was based in Brazil and Southeast Asia, where she wrote for the Economist, Slate, and the Wall Street Journal Asia. Follow her on Twitter here, and email her here.

Sarah Kliff covers health policy, focusing on Medicare, Medicaid and the health reform law. She tries to fit in some reproductive health and education policy coverage, too, alongside an occasional hockey reference. Her work has appeared in Newsweek, Politico, and the BBC. She is on Twitter and Facebook.

Brad Plumer is a reporter focusing on energy and environmental issues. He was previously an associate editor at The New Republic. Follow him on Twitter. Email him here.