Job lock: What the ACA does

Links to all posts in the series to which this post belongs are in the introductory post. This post is jointly authored by Nicholas Bagley and Austin Frakt.

As the posts in this series have shown, the available studies provide ample support for the theoretical prediction that many people will experience job lock. In an ideal world, the fear of losing employer-sponsored health insurance shouldn’t drive decisions about where, whether, or how much to work. Attentive to that concern, the drafters of the ACA took a number of steps to mitigate job lock.

Most fundamentally, the Act prohibits any health plan—employer-sponsored or not—from refusing to cover a preexisting condition. (Only grandfathered plans get a pass.) Employers can still impose up to a 90-day “waiting period” before a group health plan kicks in, but that’s it. The elimination of preexisting-condition exclusions should ease somewhat the concerns of workers who might have hesitated to switch jobs because, if they had a gap between jobs of more than two months, a new employer could have declined to cover such a condition for up to a year.

Of even greater importance, the Act revolutionizes the individual market for private insurance. By prohibiting medical underwriting and guaranteeing issue, the ACA makes it more likely that those with preexisting conditions or high anticipated medical expenses can find affordable insurance in the private market. That should encourage those workers to retire earlier, to switch to firms that don’t offer health coverage, or to become entrepreneurs. The overall effect on job lock will be mixed, however. Community rating will make exchange plans more expensive for the young and healthy, which may discourage them from ditching their employer-sponsored coverage.

In any event, employer-sponsored coverage will still be tax-advantaged, meaning that many people will still prefer to get coverage through their employers. That’s particularly true for higher-income individuals for whom the tax exclusion is especially valuable. As a result, job lock won’t go away altogether. On the other hand, the Cadillac tax will gradually claw back some of the tax advantages of more plans over time, beginning with those with very high premiums.

For those under 400% of the poverty line, however, the ACA extends tax credits and cost-sharing subsidies to buy exchange plans. Those credits and subsidies will partly offset the exclusion, mitigating job lock. For low-income workers, the effect could be particularly dramatic: the subsidized cost of insurance on an exchange may be lower than the wage reduction necessary to purchase employer-sponsored coverage. For those workers, exchange coverage could be a better deal than employer-sponsored coverage. Indeed, such workers might shy away from jobs that offer such coverage and pay commensurately less than alternative employment with fewer benefits.

For those under 133% of the poverty line, the expanded availability of Medicaid coverage—at least in states that have expanded their Medicaid programs—could also diminish job lock. Consider the breadwinner in a family of four making just $30,000 at a job that offers health coverage. Prior to the ACA, he or she may have been unable to afford a job at a comparable wage that didn’t offer health coverage. With Medicaid as a fallback, a different job at the same wage would be considerably more attractive.

The ACA also encourages small employers to provide employer-sponsored coverage, which could make it more attractive for workers to take a job with a small firm. The Act extends sizeable tax credits to employers with fewer than 25 employees that offer health coverage. By eliminating medical underwriting, the Act should make it easier for small firms with bad claims experience to secure affordable coverage. (Some firms with good claims experience, however, will see their premiums go up.) The Act also organizes the market for small-business coverage onto an exchange—a SHOP exchange—which, by encouraging price transparency and making it easier to shop for coverage, may encourage small employers to offer health coverage to their workers.

Finally, the ACA broadens a rule that makes the tax exclusion available only to those employers that don’t discriminate in favor of highly compensated workers. Previously, the rule only applied to self-insured employers, which allowed fully insured employers to offer health plans to only a slice of their workforce and still take advantage of the tax exclusion. Once the IRS issues rules to implement the non-discrimination rule, those fully insured firms will have a tax incentive to offer coverage to most of their workforce—including to lower-income workers who might otherwise have been reluctant to take a job with the firm.

Putting all these and other ACA reforms together, the law should substantially reduce job lock. At the same time, we can confidently say it won’t eliminate it. For some people—particularly those with incomes too high for exchange subsidies and who also benefit substantially from the exclusion of employer-sponsored insurance premiums from income taxation—coverage through work will still be the best deal possible. And a lot of small firms still won’t offer coverage, which may lock those people into jobs that offer health coverage.

Quantifying how much the ACA will remove job lock requires extrapolating the research findings to a post-ACA world. That involves some educated guesswork, but Linda Blumberg, Sabrina Corlette, and Kevin Lucia have taken a run at one aspect of the problem and based estimates of what the ACA will do for entrepreneurship and self-employment on some of the entrepreneurship-lock literature covered earlier in the series. They “make a rough estimate that the number of self-employed individuals will increase by about 1.5 million, a relative  increase of more than 11 percent.”

That’s a step in the right direction. Even after the ACA, however, job lock will remain an issue. Indeed, it will remain an issue, at least to some extent, so long as employer-sponsored coverage is subject to different rules than coverage secured in the private market. When it comes to job lock, the ACA is just the latest chapter. It’s not the end of the story.

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