An 18-wheeler roars off into mountainous terrain with engine and transmission going full fury, but with the brakes lying on the repair shop floor. Welcome to Obamacare 2014.
The engine is the individual mandate—Obamacare’s command that all must have health insurance by New Year’s or face a new tax. The transmission is the individual subsidies—taxpayer contributions to assist some in purchasing the expensive new insurance. The brakes are the employer mandate, which was deemed unworkable for now and put on hold until (at least) 2015.
The employer mandate was designed to slow the break-up of employer-based insurance plans and the flow of individual subsidies from the U.S. Treasury. Without the employer mandate, the law is an uncontrollable vehicle with no runaway truck ramp in sight.
The individual exchanges—the only place for obtaining individual subsidies—were intended only for those who lacked an offer of affordable coverage from their employers. Without bogging ourselves down in details, “affordable” in this context is defined by a mathematical formula that takes into account an employee’s income, the size of his or her family, and the amount he or she must spend for the insurance premium (not including the amount the employer spends on the premium).
Here’s how the law is supposed to function. Let’s say that Jim earns $30,000 per year and lives alone. His employer offers him an $8,000-per-year insurance policy, and the offer specifies that the employer will pay $5,500 and Jim will pay $2,500. Working through the math, the law says that as long as Jim’s share of the premium is under $2,512, he is not eligible for exchange subsidies. Suppose he prefers a $10,000 policy offered in the exchange. With the employer mandate in place, the employer signals the exchange that Jim is not eligible for subsidies. Jim’s choice is to pay $2,500 for his employer’s policy or to go to the exchange and pay the full $10,000 for the policy he prefers. He’ll stay on his employer’s plan.
But the employer mandate will not function in 2014. The subsidies will have to operate on the honor system. Jim goes to the exchange and says he’s eligible for subsidies. Without the employer mandate functioning, the exchange has no way to verify whether his employer’s coverage is affordable or not. So Jim buys the $10,000 policy. He pays $2,512, and the U.S. Treasury picks up the remaining $7,488.
Will the federal government discover in a year or two or three that Jim was not really eligible for subsidies? And, if so, will the government demand the subsidies back? The disastrous rollout of the exchanges on October 1, 2013, suggests how difficult it will be to piece together all the disparate data streams and to make sense of them. Add to it that Jim may not really know for sure whether he is or is not eligible for subsidies. (The calculations are considerably more complex than the simple examples shown here.) Add further that there may be millions or tens of millions of people in Jim’s situation.
If Jim and some of his coworkers leave the employer’s plan incorrectly (and perhaps innocently), two things will happen. First, the employer will save tens of thousands of dollars (or more) per year, and those costs will be shifted to the U.S. Treasury (a.k.a. the taxpayers). Second, if enough employees jump to the exchange, Jim’s employer may fall below minimum participation rates, in which case the employer will not be allowed to offer coverage to anyone; in that case, all the remaining employees will leave the employer’s plan and get subsidized insurance on the exchange. U.S. taxpayers will have to pick up the tab for all of those employees as well.
Add to this another mostly unreported twist to Obamacare math. David Goldhill has noted that the subsidy rules may give insurers a virtually unlimited power to raise premiums inside the exchanges and to pass 100% of the additional costs along to taxpayers. (I’ll also have an article out shortly on this problem.) If Goldhill’s scenario unfolds, then Jim could be getting a $20,000 or $30,000 policy from the exchange rather than the $10,000 policy specified above. If that happens, the entire increase will fall on the Treasury. And the only thing that prevents it from happening is if insurers are fiercely and almost destructively competitive against one another.
No one, no one, no one knows how big a problem all of this will be for the Treasury and taxpayers. By launching the subsidies and individual mandate without the employer mandate, the government is playing a high-stakes gamble.
From a pure policy perspective, Congress and the President would be very wise to delay the subsidies and individual mandate until they have the employer mandate functioning as well.