There’s been much discussion on the blogosphere of whether or not repealing PPACA is fiscally responsible. I actually agree with a lot of what Ezra Klein says in this piece, in which he responds to conservative criticisms that Democrats manipulated the CBO to provide favorable projections for the new law.
However, I also agree with Kevin Williamson’s basic point: the government has a history of underestimating future spending, and overestimating future tax revenue. Hence, just because the CBO says PPACA will reduce the deficit doesn’t mean it will actually happen.
Indeed, as I write today for National Review Online, there are features of PPACA that are highly likely to result in far greater spending than PPACA anticipates:
David Brooks, in a recent New York Times column, highlighted Obamacare’s most serious flaw: PPACA incentivizes companies to drop health coverage for their employees. Employers who drop coverage have to pay a fine, but the fine is cheaper than offering health insurance, and even the employees can be better off — they buy their insurance on state-based “exchanges,” where they can take advantage of the law’s new subsidies. (Americans making less than 400 percent of the federal poverty level are eligible for subsidized coverage on the exchanges.) AT&T has calculated that it would save $1.8 billion a year by dumping its workers into the government’s lap.
Companies are keeping quiet about their plans for now, but make no mistake: If Obamacare remains the law of the land, nearly every corporation in America will do what AT&T has contemplated. So will cash-strapped state governments.
Last March, the CBO projected that 26 million people will take advantage of Obamacare’s exchange subsidies in 2019, at a cost of $109 billion that year. But that number is based on the assumption that of the 162 million people who have employer-sponsored insurance today, only 4 million — 2.5 percent — will switch.
In other words, the projection of $109 billion is absurdly low; it underestimates Obamacare’s cost by trillions of dollars.
In a recent Politico column, former budget officials Douglas Holtz-Eakin and James Capretta calculated what would happen if the CBO’s estimates were somewhat off. By their math, if the households below 250 percent of the federal poverty line ($55,125 for a family of four) that now have employer-sponsored health insurance were to migrate to Obamacare’s exchanges, spending on those exchanges would more than triple, resulting in trillions of dollars in additional liabilities.
Ezra responds to this issue in a more recent post:
Let me talk about employer dumping, which I’ve left out until now. The basic concern here is that employers will stop being such nice guys and giving people health care and instead dump them into the exchanges so they can buy it at subsidized rates. I don’t think this will happen: If we were going to see it, we’d have seen it in Massachusetts, which, like the ACA, makes it much cheaper for employers to dump workers into the exchanges. But there’s no evidence (pdf) that it’s been happening. Employer coverage has been shockingly resilient given the recession.
That said, I can see the argument that it’d be good if it did happen. Basically, it would mean that employers stop paying employees with health-care insurance and begin paying them with cash. That’s basically how the Wyden-Bennett bill worked, and both Brooks and I liked that bill. If it happens in an unstructured way in the ACA, it could cause more disruption, but it could also be a positive step that makes the bill look more like Wyden-Bennett.
Austin Frakt also came out with a detailed post on the subject, in which he responds to the work of Holtz-Eakin et al.:
One thing I believe is not included [in Holtz-Eakin’s estimate] are the income and payroll taxes levied on the higher wages those additional exchange-enrolled people will receive…I don’t know how much in income taxes would be collected, but it is something Holtz-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.
Let’s summarize the counter-arguments raised by Ezra and Austin and go through them one-by-one:
1. Employers in Massachusetts didn’t dump their employees, so it’s unlikely to happen nationwide.
It’s not as straightforward as Ezra may believe to extrapolate the Massachusetts experience nation-wide. There are several reasons for this. Most importantly, most large employers have offices in multiple states; they are unlikely to dump coverage in one state while maintaining coverage in another. Also, the cost of insurance continues to increase, to a point that is increasingly unsustainable for companies; that, combined with PPACA’s “Cadillac tax,” increases the incentive for more employer dumping in the future.
2. Even if dumping did happen, it would be a good thing, because it would help foster more of an individual market for health insurance.
As to fomenting an individual market: yes, it would be better if we had a market for health insurance in which individuals purchased insurance for themselves, rather than receiving it willy-nilly from their employers. However, the individual market under PPACA will be heavily subsidized by the government, dramatically increasing federal spending—which is the whole point of the Brooks/DHE critique. If the exchanges weren’t subsidized, or at least subsidized less heavily, Ezra and Austin would have a stronger argument.
3. The fiscal impact of employer dumping is less than DHE and others estimate, because DHE’s estimates leave out the regained payroll taxes that would accrue to the government.
Austin is right to point out that there is at least some revenue that would flow back to the government from payroll taxes. But it’s not clear that this offset would be significant; indeed, whatever its size, it is guaranteed to get smaller over time, because health care costs rise far faster than wage growth. The PPACA subsidies are designed to guarantee that individuals pay no more than 10 percent of their income for health insurance; hence if wages stay flat and health care grows, the government’s liability grows over time.
4. Maybe employer dumping wouldn’t happen firm-wide: firms will outsource their low-wage work, and continue to offer coverage to their higher-wage employees.
It’s possible that some employers might try the strategy that Austin suggests of using outsourcing to maintain health coverage for their employees. As Austin himself points out, this is something that firms can do today. Furthermore, increasing unemployment, by incentivizing firms to outsource peripheral capabilities to lower-wage countries, leads to higher welfare spending and lower tax revenues: i.e., increased deficits.
To me, this is the real debate we should be having about the fiscal prudence of Obamacare. And then, we need to ask: how would the CBO score Obamacare if it were required to make more realistic assumptions about employer dumping? Here’s hoping that someone in Congress asks the CBO to do just that.