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Pay or Play – Unequal Treatment

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One of the proposed changes in the health care insurance reform bills is the “employer mandate”, a requirement that employers of a certain size either provide health insurance to their employees or pay a fine. If the employer provides insurance, it can be provided before taxes in most cases, providing a tax benefit (or, subsidy) to help the employee afford the share of premium. If the employer doesn’t provide the insurance and pays the fine, the employees can then use the “insurance exchange” to buy their own coverage. To help people afford it, subsidies would be given to the employee based on their income.

Either way, the employee is being subsidized for his health insurance premium, either by his employer or by the rest of us.

In an examination of this scheme in the New England Journal of Medicine, the point is made that the House legislation penalizes people based not on their individual income level, but on the average wages at their company.

The graph shows the pattern of subsidies under the Affordable Health Care for America Act passed by the House of Representatives in November. We consider a hypothetical low-wage company that chooses the “pay” option and is subject to the 2% payroll assessment applicable to companies with a payroll of $500,000 to $585,000 (e.g., a 20-person company with average wages of $27,500). An 8% assessment would be applied to companies with a payroll of more than $750,000. The “pay” option’s pattern of subsidies, which decrease with income, would be similar under the Senate’s Patient Protection and Affordable Care Act, although the Senate bill uses a $750 penalty per worker on companies with more than 50 workers, rather than a percentage of total payroll. We also consider a hypothetical high-wage company that chooses the “play” option.


subsidy chart

A low wage earner would be treated differently, and receive different subsidies, based on what his employer did and where he worked. High wage companies would probably provide health insurance, netting the $22,000 per year employee a tax benefit of about $1,887 a year. The same wage earner in a company with total payroll under $585,000 would probably see the company cancel its group plan and pay the small fine. In that case, the low wage earner would go to the insurance exchange and receive a subsidy of $3,574. The low wage worker in a company that provides health insurance is out of luck, receiving less of a benefit than a comparable paying job at a smaller company:

The $1,687 difference represents about 32% of the premium and 8% of the worker’s income. For low-wage workers who are currently uninsured, such a difference might have a substantial effect on compliance with a mandate to obtain insurance.

Well, we can always throw the bums in jail if they don’t buy insurance. The IRS is good at dealing with those who flout the rules.

The authors don’t simply point out the problems and walk away. They propose a solution that, if you are going to subsidize health insurance, seems to avoid the (possibly) unconstitutional unequal treatment:

Ideally, the subsidy for private insurance should depend explicitly on total family income. Such a program would be described as one in which workers (not employers) pay for coverage, but the employer might arrange for group insurance and collect wage-related taxes and premiums. The current inequitable tax subsidy would be replaced, and the concept of a penalty for companies not offering coverage would be abandoned. The proposed subsidy would instead be inversely related to income, and people would receive the same size subsidy for the same coverage regardless of whether they obtained their insurance through an exchange or their employer. For people with employment-arranged insurance, the premium’s value would become taxable income, but the additional tax cost borne by workers would be offset by a progressive income-related subsidy toward the premium, administered as a tax credit either directly to employees or indirectly through employers and exchanges.

Or, we could call the whole massive-all-in-one Frankenbill off, start over with some realistic goals that would actually solve the problems, and pass some bi-partisan solutions to improve the system.

Cross posted to FrankHagan.com