Fix is needed for subsidies

The Patient Protection and Affordable Care Act was designed to expand private health insurance coverage through four key reforms to the health insurance system. Although these four reforms were intended to fit together like pieces of a jigsaw puzzle, in reality they fit like pieces from four different jigsaw puzzles. This flaw must be acknowledged if the ACA—or some improvement thereon—is to achieve its objectives.

The ACA's primary goal is to ensure that every American not eligible for Medicare or Medicaid is covered by a “bronze” insurance policy having a minimum cost of approximately $10,000 for a family of four—or $3,600 for a single adult. Unfortunately, when examined as a whole, it is clear that the ACA's four key reforms do not require anyone to actually bear these costs—neither the insured, nor the insured's employer, nor the government.

The first key reform is the rule requiring insurance in the individual and small-group markets to be offered and priced without regard to pre-existing conditions. Without this important reform an individual with a pre-existing condition generally would only be able to get reasonably priced insurance through an employer's large group plan. Unfortunately, this reform eliminates one of the reasons why large employers have viewed employer-provided group health insurance as an important competitive advantage in attracting employees. If insurance can be readily obtained in the individual markets, there may be less of a perceived need for employers to provide it.

The risk that employers might respond by dropping their large group plans, or reducing their subsidies for such plans, led Congress to adopt the second key reform, the employer mandate. However, despite its real or perceived burden to many employers, the actual economic benefit to the worker from this requirement is quite small.

For example, for a 45-year-old husband and wife, each making $25,000 and each working for a large employer, the employer mandate would only require each employer to provide around $1,225 of subsidies or a total of $2,450 towards an insurance package that would cost approximately $10,000 for a family of four (according to the Kaiser Family Foundation). That $1,225 is the excess of the $3,600 cost of a self-only policy for a 45-year-old worker over 9.5% of that worker's wages, or $2,375. Thus, even after receiving $2,450 of employer subsidies, this family must still pay $7,550 towards the $10,000 cost of the “bronze” family policy the act intends them to have.

The third key reform, a tax credit subsidy, was intended to help make this cost affordable. Unfortunately, no family will qualify for any tax credits if either spouse works for an employer that offers them a self-only policy with the minimum subsidy required under the employer mandate—$1,225 per worker in this example. Thus, our family with income of $50,000 must still pay $7,550 towards the cost of their $10,000 insurance policy.

Most employers are expected to comply with the mandate, thus making their employees ineligible for tax credits. Although $1,225 is not a trivial cost for many employers, it is less costly than a nondeductible penalty of $2,000 for every employee or the alternative penalty of $3,000 for each employee that obtains a tax credit subsidy. This was intended. By design, the tax credits will likely be available only for the relatively small number of individuals or families where no one works full-time for a “large” employer.

The fourth key reform, of course, is the individual mandate. Under that rule, our hypothetical family would face a choice between incurring $7,550 of pre-tax costs for a $10,000 policy or paying nondeductible penalties of approximately $2,100. Unfortunately, because of the first reform requiring that insurance be offered without regard to pre-existing conditions, it is easy to project that many such families will delay purchasing insurance until it is needed, effectively assuming the risk of health expenses they incur until the next annual open enrollment period. As many have predicted, that will likely send the cost of insurance at the exchanges higher, possibly making the exchanges completely nonfunctional.

Given the way these four key reforms fit together, or fail to fit together, the only way to fix the law is one of the following:

• Reduce the amount of minimally required insurance for all Americans.
• Increase the subsidies required under the employer mandate.
• Increase the penalties for violating the individual mandate.
• Shift the entire burden to the taxpayers by expanding the availability of tax credits (either directly or indirectly by repealing the employer mandate which would enable more individuals to qualify for the tax credits).

As the last option would obviously have potentially severe budgetary consequences, and the second and third options appear to be politically problematic, the first option may have to be considered.

Donald Susswein, a former tax counsel to the Senate Finance Committee, is a principal at Washington-based McGladrey, a tax consulting firm.