The Incidental Economist

Ask an economist about employer-sponsored health insurance (ESI) and it won’t be long until s/he tells you it distorts the labor market. To most health economists, “job lock,” the idea that workers work more or face constraints in job mobility due to provision of work-related health insurance, is a real and important phenomenon. It’s one reason why many advocate limiting or ending the exclusion of ESI from taxation, among other reforms.

But why, you might ask, do some so firmly believe in job lock? What’s the conceptual or theoretical explanation? Where’s the evidence that it exists and is substantial? If it exists, what laws and regulations help keep it in place? Finally, how does the Affordable Care Act (ACA) begin to address it, if at all?

We’ve touched on some of these questions and their answers on this blog over the years, but never addressed them in full. That’s about to end. In a series of posts and with some help from Nick Bagley and Daniel Liebman, I will tackle these questions. Daniel’s annotated literature review lists some sources that will inform the series. I will not exhaustively cover the papers he described, but will attempt to provide a representative overview. For this purpose, I will rely most heavily on the literature reviews contained in Gruber and Madrian (2002), Fairlie, Kapur, and Gates (2011), Bradley, Neumark, and Barkowski (2013), and GAO (2011). Nick’s forthcoming post will cover the legal landscape. He has also provided helpful feedback on early drafts of my posts.

By way of overview, the nature of ESI can affect the labor market in two ways. It can affect labor force participation (LFP), by creating disincentives for retirement—particularly before the age of Medicare eligibility—and affect the decisions of secondary workers (e.g., the spouse of a family’s primary wage earner). It can also affect job choice and create disincentives for job mobility, including entrepreneurship.

Gruber and Madrian wrote a job lock literature review in 2002, covering the literature on the subject that had developed through that year. Their review, divides the literature into studies of job choice and analyses of LFP for three types of adults: older adults (near retirees), prime-aged men/married women, and single mothers. The last group is largely considered in the context of Medicaid, and the studies are more properly viewed as analyses of “welfare lock” (nonparticipation in the labor force so as to maintain eligibility for means-tested benefits). Gruber and Madrian concluded that “there is a fairly consistent case to be made that health insurance matters quite a bit for decisions such as whether to retire or to change jobs.” A systematic literature review published in 2011 by the GAO concurs with Gruber and Madrian. It found that of the 31 studies reviewed, “29 presented evidence consistent with job-lock.”

This introductory post will serve as an index to the series’ posts. All expected posts are listed below, and links will be added as they posts go live.

1. Job lock: Introduction [this post]
2. Job lock: Theory
3. Job lock: Relevant laws and regulations
4. Job lock: Labor force participation (retirement decisions)
5. Job lock: Labor force participation (married couples)
6. Job lock: Job mobility
7. Job lock: Entrepreneurship lock
8. Job lock: What the ACA does
9. Job lock: Conclusion

@afrakt

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Judging by my email, the main point of my post yesterday was not as clear as it could have been. So, let me come at it a different way: In addition to the new taxes it imposes, Obamacare includes the relief of a significant labor market tax. Surprised? Read on.

Recall, if you will, the labor market conditions prior to January 1, 2014. If you happened to land a job with employer-sponsored health insurance (ESI) you enjoyed (1) tax-free health benefits (the big ESI tax subsidy), (2) guaranteed issue (the group plan had to take you, pre-existing conditions and all), and (3) community rating (you were not charged more/less based on your health status). Let’s call these benefits the “Big Three,” for short.

But, if you worked for an employer that did not offer ESI or if you didn’t work at all, you couldn’t necessarily obtain the Big Three. Subsidies weren’t in place in the individual market (yet). Individual market insurers in many states could deny you coverage or charge you more based on your health. (If you happened to have a spouse with ESI coverage, you might have been able to take advantage of the Big Three. If you qualified for Medicaid or Medicare, you had other options besides the individual market.) So, the labor market was clearly tilted by an explicit tax provision (the ESI tax subsidy) and two implicit ones (the existence of guaranteed issue/community rating in some labor market circumstances but not others).

What we had was the almost necessary combination of a labor market and a health insurance market. Employers were buying labor and selling highly valuable coverage, bundled with the Big Three benefits. Potential, able-bodied workers were selling labor and buying health care simultaneously. That was the only way they could get the Big Three. Yes, there was a market for non-group (non-ESI) coverage, but it didn’t function well and it did not come with the Big Three.

What do we call this situation? I’d call it a type of labor market tax, albeit a complicated one.* Some people really had different options and some had to pay a great deal more for health insurance than others. Some couldn’t get affordable coverage at all. Relative to those with an ESI option, those without were taxed:

• Retired early to spend more time with grandkids or to care for a sick spouse? Taxed.
• Took a job with a small, non-profit that didn’t offer coverage? Taxed.
• Left the big firm to start your own business? Taxed. (Yes, the self-employed can deduct health insurance premiums, but that doesn’t address underwriting and risk-rating costs. Read this as post-COBRA, if you like.)
• Laid off and exhausted COBRA benefits? Taxed.
• Company went bankrupt and you couldn’t immediately find a new job with ESI benefits? Taxed.
• Fresh out of school but couldn’t find work with ESI benefits. Taxed.

You get the idea.

What happened on January 1 of this year is that this pre-ACA labor market tax was (imperfectly) addressed. Now there are subsidies in the individual market, albeit different from the ESI one. Individual market plans are guaranteed issue/community rated, like ESI ones. I acknowledge that there still exist some explicit and implicit taxes, but to have removed or prevented all of them would have been more disruptive and politically challenging, even if economically more efficient. Still, the ACA could be amended for efficiency. I’m for that!

Now, let’s consider some objections, some of which came up in emails to me:

When considering ACA taxes, you can’t fold in stuff that isn’t in the ACA, like the ESI tax subsidy or that ESI is guaranteed issue/community rated? This makes zero sense. If we take this objection seriously, then we can’t compare the post-ACA world to the counterfactual, pre-ACA one at all. The point isn’t that ESI features existed pre-ACA. The point is that the difference between what a potential or actual labor market participant faces across options pre- and post-ACA has changed. Some tax has been removed (per the above) as some have been added. You can’t just focus on the added taxes and not consider that which was removed. That’s cherry picking and incomplete.

Many people can avoid the tax you’re talking about by working at jobs that offer ESI. Those that do not are voluntarily choosing to forgo an ESI offer. To admit to this type of sorting, which does exist to some extent, is to accept my point. There really was a labor market tax and that caused people to change their behavior, to take jobs for health benefits rather than the nature of the work and/or just to avoid the tax.

The effects of addressing the tax you’re talking about are tiny relative to other Obamacare taxes. Can’t we ignore them? I have made no claim to their size. If they’re of a size so trivial that they can safely be ignored, this needs to be demonstrated. Paul Krugman wrote, “[R]educed labor supply [from the ACA] adds modestly to the true cost of health reform, although it also adds to the benefits. But the key word is ‘modestly’.”

Clearer?

* It might more properly be called a labor market “distortion,” but it’s not conceptual different from imposing a flat tax on everyone and then subsidizing different classes of people differently. That we would call a “tax.” UPDATE: I’m told an even more precise term would be an “implicit tax wedge,” which arises if making one decision vs. another, causes one to face differential implicit taxation.

@afrakt

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By my own assessment, as well as that of some followers on Twitter, Casey Mulligan’s latest post on the Economix blog is not easy to parse. He makes a good point about implicit taxes in the Affordable Care Act that’s worth understanding, so I will elaborate. He also omits a related point that is no less worthy, which I will get to.

There could hardly be a health policy wonk that doesn’t know that (1) workers with access to affordable (defined here) employer-sponsored insurance (ESI) are not eligible for premium tax credits or cost-sharing subsidies for exchange-based plans; and (2) exchange-based premium tax credits and cost-sharing subsidies phase out with higher income (eliminated at 400% and 250% of the federal poverty level, respectively). Mulligan thinks the labor market effects of the former have not been fully appreciated.

The Affordable Care Act contains at least two economically distinct taxes on labor market activity. Even the experts on the law have failed to recognize all of them. […]

[T]he law’s advocates have yet to acknowledge the new implicit employment tax, let alone estimate the number of people who will face it.

It’s pretty obvious that both are work disincentives, since only by working can one potentially obtain access to affordable ESI. And, by working, one’s income rises, leading to a lower exchange subsidy if one qualifies for one. To clarify that these are two, distinct taxes on labor, Mulligan imagines the a world in which exchange-based insurance subsidies didn’t phase out.

[E]ven if the health insurance subsidies in the Affordable Care Act had been a specific dollar amount that was not phased out with household income, the law would still act as a tax on employment because most workers [those with affordable ESI offers] could not get the assistance during the months they were at work.

Mulligan is correct. However, I would dispute that this is something experts and advocates have failed to acknowledge. I recall many discussions of the differential subsidization of health insurance for two individuals with the same income, one with access to affordable ESI coverage and one without. I concede that finding those discussions now, several years after they occurred, is not easy. Perhaps Mulligan could not. I also tried and have, so far, failed.

What Mulligan perhaps means, however, is that until recently there has not been much work on quantifying the labor market effects of the fact that most workers are not exchange-subsidy eligible. He cites his own work, that of the CBO, and a paper by David Gamage that does so. I defer to his knowledge of the literature on this point and refer you to his posts for the links.

So, Mulligan’s point that there are two separate work disincentives bundled in exchange subsidies may not have been clear to some readers, but it is a fine one, as far as it goes. What he did not mention in his post,* however, is the other, major subsidization of health insurance for the working-age population—the tax exclusion of ESI coverage—the system it supports (the only guaranteed issue, community rated one for the non-elderly, pre-ACA), and how both those will be affected by the ACA.

That the cost of ESI coverage is not taxed is a huge work incentive. Moreover, in contrast to exchange subsidies, the tax exclusion is an implicit subsidy that grows with income. Of course there are huge labor market effects associated with it and the community rated, guaranteed issue, employer-based system it supports. Among them, pre-ACA, is the fact that some people could not as easily obtain affordable coverage on the individual market (due to underwriting and/or lack of subsidization) and had to keep working just for the ESI benefits. This “job lock” story is also acknowledged by the CBO, as it should be.

The ACA will affect this work incentive in at least two ways. It reforms the individual market so that consumers can’t be denied or charged extra for coverage just because they’re sicker. Also, beginning in 2018, it will impose a “Cadillac tax” on high-premium ESI plans that will offset the ESI tax exclusion, albeit in an imprecise and suboptimal way.

Like Mulligan, I’m no fan of the unequal and distortionary ways in which various explicit and implicit taxes act as work incentives or disincentives. What I would like to see, however, is an evenhanded treatment of them. Noting that the exchange subsidies impose an anti-work, distortionary force without acknowledging that the tax exclusion for community-rated, guaranteed-issue ESI (for those who can obtain it), as well as the pre-ACA individual market, impose pro-work, distortionary forces gives a misleading impression of what the ACA will do, and what the CBO and many others have expressed.

I’ll end with a final point: Work is good. But it is not the only good. If it were, we’d all be advocates for heaping on even more benefits for workers. We’d eliminate Social Security and Medicare. We’d heavily tax non-work income (capital gains). And, we’d certainly not object to very generous tax treatment and preferential market structure of ESI.

One thing most economists and policy wonks agree on is that the ESI tax exclusion, though a benefit to workers, is too distortionary and should go. Most economists are, therefore, willing to accept—even welcome—the removal of an incentive for work. Of course some people will choose to work less if it is removed. The question we should ask is: do we really want people to work just because it’s the only way they can obtain affordable health care insurance? All quantification of labor market distortions aside, that sounds like a significant reduction in liberty to me.

* He is well aware of it, and I trust it is in his work. It certainly is in that which he cites, the CBO’s in particular.

UPDATE: Further clarification of a key point in this post is here.

@afrakt

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The release last month of the blueprint for a Republican alternative to the ACA has brought renewed—and welcome—attention to the tax exclusion for employer-sponsored health coverage. On that point (and others), the blueprint hints at some common ground between Republicans and Democrats. Once the midterm elections have passed, it may even suggest an opportunity for compromise.

Because employees pay taxes on their wages but not on their health benefits, the tax exclusion gives workers incentives to accept lower wages and more health coverage than they would in the absence of the exclusion. The result is excess spending on health care. This is not especially controversial: as the Republican blueprint explains, “economists across the political spectrum largely agree that the current distortion in the tax code helps to artificially inflate the growth in health care costs.”

Reducing that distortion is what the ACA’s “Cadillac tax” is all about. The Cadillac tax imposes a 40% excise tax on the costs of employer-sponsored coverage that exceed a threshold amount, effectively capping the exclusion at that threshold. When the tax goes into effect in 2018, the threshold will be $10,200 for individual coverage and $27,500 for family coverage. The threshold will increase over time, but, after 2020, only with the rate of inflation, not with increases in medical inflation, which have historically been considerably higher.

Although relatively few plans will approach the threshold at first, linking the threshold to overall inflation means that, over time, more and more plans will brush up against it. Eroding the tax exclusion for high-cost plans increases the pressure on employers and insurers to keep health spending in check.

The Republican blueprint pursues the same goal, only much more aggressively: it would cap the exclusion at 65% of the costs of an average plan. That’s a Cadillac tax on steroids. According to one analysis of the plan, the blueprint would cap the exclusion at about $5,400 for individual coverage and $11,250 for family coverage—significantly less than the $10,200 and $27,500 figures for the Cadillac tax. (Although the authors of the blueprint have since retreated from those low thresholds, they still endorse capping the exclusion.)

But here’s the trick. Neither the Cadillac tax nor the Republican blueprint addresses another big problem with the tax exclusion for employer-sponsored benefits. As it stands, the exclusion is worth more to individuals in higher tax brackets than those in lower tax brackets. That means the exclusion disproportionately benefits the wealthy.

Capping the exclusion based on the costs of an employee’s health plan would make the exclusion somewhat less regressive—high earners tend to have expensive health plans. But not all workers with expensive health plans have high incomes. Unions in particular worry that the Cadillac tax may harm their members. Many unions, especially those representing public employees, have negotiated generous benefits packages for their members. Because of the Cadillac tax, unions are coming under tremendous pressure to accept cuts to those benefits.

This discontent from some of the Democrats’ most ardent supporters presents an opportunity. What about tax reform that both reduces economic distortion and is more progressive? The exclusion, for example, could be replaced with a tax credit for employer-sponsored insurance—a fixed amount that each taxpayer could subtract from her overall tax liability. Less radically (and probably less effectively), the tax exclusion, instead of being capped at a set amount of a health plan’s cost, could phase out with income.

Either reform would encourage employers and insurers to cut their spending on health care, whether by pressing for systemic changes, negotiating lower prices, or shifting costs to consumers. Unions won’t be thrilled about that, but the changes could be delayed for unions in current contracts until they renegotiate against the backdrop of the new tax rules. In any event, tax reform that limits an unhealthy market distortion should make Republicans (and some Democrats) happy.

At the same time, a reformed exclusion would assure that the federal government devotes its forgone tax revenue to those who need it the most—not to those in the highest tax brackets. Improving the fairness of the tax treatment of health insurance, and easing union members’ tax burdens, should make Democrats (and some Republicans) happy.

So maybe there’s room for a deal. I don’t want to be Pollyannaish about this: the politics of health care in general, and the tax exclusion in particular, are miserable. But if the ACA does stick, as seems increasingly likely, both parties should be on the lookout for policies that could attract bipartisan support. Reforming the tax exclusion could—perhaps—be one such policy.

@nicholas_bagley

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Put yourself in the position of an employer that’s looking to save money on the health coverage you offer your workers. Wouldn’t it be great if your costliest employees declined that coverage and instead bought insurance on an exchange?

Heck, you’d be willing to pay your sickest employees to refuse coverage. On average, your share of a family’s health plan comes to almost $12,000. Your costliest employees are even more expensive to cover. What if you offered those employees a $6,000 bump in wages if they declined coverage? You’d still come out ahead—and, now that the ACA is up and running, your employees might be better off, too. They could buy comparable health insurance through an exchange and, if the tax credits are rich enough, even pocket some of the $6,000. You win, your employees win. Only the federal government, which pays for the tax credits, loses.

Now, for most employers, the math won’t add up this neatly. Workers are only eligible for tax credits if their employers don’t offer affordable, comprehensive coverage. Employers that offer such coverage (and most do) would have to pay workers who can’t get tax credits a whole lot more to tempt them onto the exchanges. Large employers that don’t offer such coverage, however, are subject to a tax penalty, starting in 2015. Buying out sick workers and paying a penalty might not be worth it.

But here’s the key: small employers don’t face a penalty for failing to offer affordable, comprehensive health coverage. So if you’re a small employer that offers costly or skimpy coverage, it may make financial sense for you to “buy out” your sickest employees. Tempting, right? So tempting, according to a recent story in Bloomberg Businessweek, that some small, self-insured employers are already toying with the idea. There’s a catch, though: “Such a practice may be illegal, and it might leave business owners open to employment discrimination claims.”

I don’t think the legal concerns are warranted. Although the ACA forbids employers from dumping employees with preexisting conditions into high-risk pools, the same prohibition doesn’t extend to exchange plans. Nor does the federal law that governs employee-benefit plans—ERISA—tell employers that they can’t offer sick workers money in exchange for declining health coverage. ERISA was amended in 1996 to prohibit employers from discriminating among workers based on their health status, but only when it comes to eligibility rules and premiums. So long as a chronically ill worker is allowed to participate in the health plan on an equal basis with her colleagues, offering her cash to decline coverage wouldn’t seem to run afoul of the prohibition.

The Americans with Disabilities Act (ADA) also doesn’t appear to present a problem. True, many chronically ill employees are disabled within the meaning of the ADA, and buying out only those employees would draw a distinction between the disabled and the non-disabled. The ADA, however, only prohibits (as relevant here) “classifying” disabled workers in a way “that adversely affects the[ir] opportunities or status.” It’s hard—maybe not impossible, but hard—to see how an offer of cash could “adversely affect” a disabled employee. After all, the offer would only be accepted if the employee believed it made her better off.

Nor do other federal nondiscrimination laws bar the practice. Employers can’t discriminate against older employees or in favor of highly compensated employees, for example. But those prohibitions don’t speak to a policy directed at the sickest workers, whatever their age and however richly compensated.

Now, it’s possible that some states have laws on the books that would prohibit a buy-out policy. I can’t rule that out. It’s also possible that I’m missing something—the law of employee benefits can be maddeningly complex. (I’m indebted to a benefits expert and TIE reader who helped me think this through.) But I haven’t seen anything yet that casts doubt on the legality of paying high-cost employees to decline coverage.

Still, even if it’s legal, the buy-out option may not tempt many employers. It won’t make financial sense for most; others could balk at an approach that might tick off employees. If the practice were to become common, however, it would pose a big problem. Shunting workers to the exchanges would increase the federal government’s tab for tax credits. Worse, risk pools on the exchanges would deteriorate, which would drive up premiums. The ACA probably wouldn’t unravel as a result; reports of death spirals tend to be greatly exaggerated. There’s no question, however, that the widespread adoption of buy-out policies would be an unhappy development for health-care reform.

nicholas_bagley

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There were some good comments to my post on why employers don’t impose an individual mandate. Below I respond to some of the issues raised.

Some people have experienced what seems to them to be an employer mandate, and maybe that is possible in some states. But not all employers impose one and the vast majority of large-group programs — which is what I was writing about — operate without issue.

What is common is for insurers working with small businesses to require a minimum participation level: 75% to 90% is typical, according to Paul Fronstin of the Employee Benefit Research Institute, with whom I emailed about this issue.

Workers could opt out and as long as they had coverage elsewhere. [T]hey wouldn’t count negatively against the minimum participation requirement because they weren’t uninsured.

Others said they had no option but to accept coverage, which certainly sounds like a mandate. According to Fronstin, “Small companies often just pay the full cost of employee-only coverage, not really giving workers a choice to opt out.” Again, these are small companies, not the large employers I was talking about.

Some wrote that they were compensated if they declined coverage. This happens, but it’s not typical and often the payment is a fraction of the premium. It’s less common in the large-group market because, as Fronstin told me,

In the large group market it’s tough for a large employer to get the right people to opt out.  If only healthy workers opt out it doesn’t save you any money because [such a person] wouldn’t be costing the employer anything to begin with and the employer would lose the token worker premium contribution.

The reason I focused on the large-group market is because it does function well. It’s stable. And there’s nothing like a uniform mandate, even if there may be something like one for a small subset of organizations. The small-group market, in contrast, does not function well. Mandate-like inducements are attempted to retain a viable mix of risk. This is not a good analog for the exchanges, which are designed to serve tens to hundreds of thousands of individuals per state, in other words, large risk pools.

I fall back to my original assertion. If the risk pool is large enough and out-of-pocket premium costs are (or are perceived to be) low enough, there is no need for a mandate. This raises the question of how low is low enough? I don’t know the answer, but the large group market gives us a lower bound.

@afrakt

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On Monday, I mused about whether employers would risk-rate their health insurance offers if they could. I concluded that the answer was “no” due to path dependency (status quo bias). Employer-sponsored plans are community rated, just as will be those offered in the remade individual market. Yet, this is a somewhat controversial aspect of the new marketplaces, even though it’s not controversial for employer-sponsored plans.

That’s odd, and it got me thinking about another novel element of the law that’s controversial: the individual mandate. If we need such a mandate now, why didn’t we perceive a need for one for employer plans before? That is, why don’t employers require employees to take up insurance? That they don’t and that employer-sponsored health insurance — or the large-group market, really — basically works should make us think: Do we need a mandate?

One purpose of the individual mandate is to prevent adverse selection (too many sick people signing up) to an extent severe enough to destabilize the market. Though there have been adverse selection problems among plans offered by employers, it’s not a rampant problem for employers in general, at least not those with large enough risk pools (large group). Almost all large employers offer coverage. It’s stable (PDF, see p. 25). Why?

First, employer-sponsored plans are highly subsidized. They’re subsidized through the tax exclusion of premiums. People also perceive that they’re subsidized to the extent that employers appear to pay part of the premiums. Yes, employees really pay the employer share through reductions in wages. However, it’s not as if each individual can immediately recoup those wages in full for himself or herself by declining coverage. In the short-term, you really are giving up the employer contribution if you refuse coverage. So, this certainly feels like a subsidy.

Second, the sickest employees are forced to stop working due to poor health. They then drop out of the employer-organized risk pool. The fact that you have to be healthy enough to work to get into the risk pool acts as a bulwark against adverse selection. Note that this does not readily extend to dependents. An unhealthy dependent might remain in the pool so long as the policyholder continues to work.

Third, workers, by definition, have income. In general, those with income are better able to afford health insurance, relative to those with no income. This makes it more likely that even the healthy will take up coverage. Again, this is a direct result of tying insurance to work.

A few other ideas were offered on Twitter: It’s “habit” or “culture” to get health insurance with your job. Maybe a lot of people just do it by default, without thinking much about the cost. Another point is that there is an open enrollment period. If workers miss it, they’re at risk for health care costs for a full year, until the next open enrollment period. Of course this will be true in the new individual marketplaces too, so it’s not helpful in explaining why an individual mandate is necessary for them but not for employer sponsored plans.

Looking these reasons over, I am most impressed by the size of the subsidy, both real and perceived. If one’s employer pays about 75% of the premium (which is typical) and one-third of one’s contribution is a tax subsidy (roughly the average), then it seems like one is only paying 16.5% of the premium. That’s a huge subsidy, or perception thereof.

Honestly, I’m with candidate Obama on this one. If we subsidized insurance to this extent for everyone, we’d have no need for an individual mandate. Basically, if it’s cheap enough, you don’t have to make people buy it. They’ll just want it. And that’s what happens with employer-sponsored plans, though other features I mentioned play a role in its viability too.

It’s my bet that we could remove the individual mandate from the law, but that wouldn’t work without making it dramatically more expensive through much higher subsidies.* Is there a bill-passing coalition for that?

* An alternative is to make insurance dramatically cheaper through, say, higher deductibles. But this doesn’t entirely avoid greater subsidization since not everyone can afford higher deductibles.

@afrakt

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Redistributive public policy is even more of a theme in the group health insurance market, which is nine times larger than the individual market and the dominant source of “private” health coverage. The government massively subsidizes this market by excluding employer-provided health benefits from income and payroll taxes. Federal tax advantages for health insurance add up to $300 billion a year.

These tax subsidies are highly coercive. Take a family with salary income of $60,000 and a health plan worth $15,000. If this family instead took all of its income as $75,000 in cash salary, it would face an income and payroll tax hit of around $4,500, or about 6% of its income. For comparison, the individual mandate penalty in Obamacare will be limited to 2.5% of income.

–Josh Barro, Business Insider

@afrakt (via phone)

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I’ve enjoyed (more than I should) the excitement around Austin’s posts on Senator Cruz’s health care subsidies. This is partly because we originally made this point more than two years ago. But since you’re all paying attention now, I think it’s worth a brief explanation on why the Cadillac tax matters.

The first thing the Cadillac tax does is apply downward pressure on the cost of health insurance. In other words, it tries to get companies to avoid plans that cost more than $40,000 a year (what do you get with that?) and instead shunt more money into wages instead of benefits. But the second thing it does is limit the “subsidy” that goes to the well-off.

In other words, think of that 40% tax on amounts above the Cadillac tax limits as a means of recouping the ~40% subsidy that people are getting for their insurance. In other words, the Cruz family would get a subsidy only on the first $27,500 of their insurance. The subsidy they would then get is still a LOT ($9900 by my calculation), and would cover a number of people on Medicaid, but at least there would be a limit. Unless you think people who do get $40,000 a year just in health insurance deserve more than $10,000 from the government in subsidies to help pay it.

@aaronecarroll

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In association with the Baker Institute’s Oct 25th conference on health care reform, I have a post up at their site about incentives for employers to offer (or not offer) health insurance before and after ACA implementation. Go read it.

Also, videos of the proceedings of the conference are online here.

@afrakt

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