Returning to Brooks’ comments on employee dumping

On Friday I quoted David Brooks and promised to return to the issue he raised. Here’s what he wrote:

The Congressional Budget Office projects that 19 million people will move to the exchanges at a cost of $450 billion between 2014 and 2019. But according to the economists Douglas Holtz-Eakin and James C. Capretta, costs could soar to $1.4 trillion if those who would be better off in the exchanges actually moved to them.

I’ve since read a number of related documents, including those that likely informed Brooks’ column. The one that provides the most detail is “Labor Markets and Health Care Reform: New Results” by Holtz-Eakin and Cameron Smith. In it they illustrate that the number of exchange-subsidy eligible workers for whom employers would spend less by dropping coverage and paying a compensating wage (plus the employer penalty) is three times the number of individuals the CBO calculated would receive exchange subsidies: 57 million instead of 19 million. This explains Brooks’ numbers: 3 x $450 billion is about $1.4 trillion (with rounding).

This assumes all employers who would theoretically benefit from dropping coverage to lower-wage workers would do so. Certainly some employers will do just this. I concede that. But to expect all to do so must be an overestimate.

Anyway, if one assumes all employers would drop coverage if it were beneficial to do so, Holtz-Eakin and Smith write that, “the gross price tag would be roughly $1.4 trillion.” The key word here is gross. Gross! Brooks didn’t use this qualifier, but it is important. Why not net? What’s missing to arrive at the final net cost? One thing I believe is not included are the income and payroll taxes levied on the higher wages those additional exchange-enrolled people will receive. Holtz-Eakin and Smith show how much additional pay would be required to make employees whole, writing,

[T]he evidence suggests that if one portion of that package [worker compensation] is reduced or eliminated – health insurance – another aspect – wages – will ultimately be increased as a competitive necessity to retain and attract valuable labor. Thus, the key question is whether the employer can keep the employee “happy” – appropriately compensated and insured – and save money.

I don’t know how much in income taxes would be collected, but it is something Hotlz-Eakin and Smith could compute. It would somewhat offset the $1.4 trillion gross price. (The CBO likely calculated the offset, so one could just triple it. I haven’t yet found the CBO’s figure on this. Have you?)

Another question is whether all employers who theoretically might benefit from “dumping” will actually drop offers of coverage firm-wide. Holtz-Eakin and Smith don’t assume they all will cut coverage in this way (firm-wide). That’s because if coverage is not offered to lower-wage workers (for whom dumping is economically beneficial to employers), it can’t be offered to higher wage workers either. But there’s another proposed route: “[T]here may be incentives for firms to ‘out-source’ their low-wage workers to specialist firms (that do not offer coverage) and contract for their skills.”

Of course, this is something firms can (and do) do today. Moreover, it’s not costless to outsource. There are transaction costs that would partially offset the benefit. Thus, it is not likely that all firms for which outsourcing would appear beneficial (and which don’t already out-source) would do so. Finally, if this were something all firms that could theoretically benefit would do, we should see a considerable crowd-out effect in Massachusetts. So far, there is no evidence of it.

I’m not saying that the ACA won’t contribute to erosion of employer-sponsored coverage. It will. But it isn’t likely to be as an extreme reaction as some predict, nor will it cost as much as Brooks thinks. The $1.4 trillion price tag he suggested ignores some offsetting factors. It’s just not plausible.

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