Obamacare Will Decrease the Deficit? Yeah, Right!
Author: Richard Sherwood and Vivek Rajasekhar
The vote looming in the Senate to raise the debt limit should serve as a wake-up call that federal spending is out of control. Instead, Democratic leadership has tried to convince Americans that passing costly health care legislation is not only sensible, but requisite, and must be done now.
Neither is true. The bills use weak spending limits, weak tax provisions, and even weaker cuts to current spending to pay for reform. Democrats claim these provisions mean that the massive health bill will not only be paid for, but will decrease the federal deficit. In a recent testimony to the House Budget Committee, health care expert James Capretta outlines why this is contrary to Obamacare’s more likely fiscal future.
Weak Cost Control on New Entitlements. Both bills increase coverage by expanding Medicaid or offering subsidies to purchase insurance on the exchange. Lavish subsidies will be available to those who do not qualify for Medicaid but make under 400 percent the Federal Poverty Level. While 127 million Americans fall in this category, only 18 million are projected to receive the subsidy, due to a “firewall” to prevent those who are offered employer-sponsored coverage from receiving it. This creates gross inequity within income brackets. As is the way with Congress, lawmakers will likely give in to taxpayer pressure down the road to extend the subsidies and eliminate the inequity. Expanding this entitlement will cost billions, adding to the deficit.
The bills create another new entitlement via the CLASS Act, which provides community living assistance. Beneficiaries would pay premiums but would not receive benefits until years later, thus creating one-time savings at the programs onset. Obviously, years down the road this spending cushion would deteriorate, and the program would become insolvent. This is not accounted for in ten year cost projections.
Weak and Unpopular New Taxes. The Senate bill is paid for with a 40 percent excise tax on high-cost insurance plans. This provision is to deter Americans from purchasing unnecessarily extravagant health plans, but it is also responsible for about half of the revenue used to pay for the bill. This tax is widely unpopular, and Washington has already begun and will likely continue to carve out favored constituencies who balk at this tax. Union members have already been exempt through 2017, which eliminates 40 percent of expected revenue from this tax.
Presumed Cuts to Medicare. Finally, both bills are largely paid for by cuts to Medicare of approximately half a trillion dollars. These cuts will presumably be made to payment rates for certain care providers by decreasing inflation updates. The expectation that this will actually occur is almost laughable. At the same time that lawmakers are proposing to pay for health care form using cuts to Medicare, they are trying to pass the “doc fix” legislation to end cuts to Medicare that were enacted to—you guessed it—contain costs. Every year, Congress is supposed to decrease physician payment rates in order to control Medicare spending. And every year, Congress votes to suspend the doctors’ payment decrease due to pressure from the industry. The House recently passed legislation that would get rid of the payment cuts for good. And yet without blinking an eye, they propose to use the same failed method to pay for health care reform.
These cuts to Medicare are even more unlikely considering their full impact. As Capretta points out, “The Chief Actuary of the Medicare program has warned that these arbitrary reductions could have serious consequences for beneficiaries’ access to care, as [they] would push about one out of every five hospital facilities into insolvency.”
The House and Senate bills received positive cost estimates by the Congressional Budget Office based on these weak spending controls and the fact that the CBO analysis looks at the first ten year window, which for both bills, includes ten years of raising revenue, but only six years of spending. The country is facing a fiscal crisis as the population faces a demographic transformation of 30 million citizens entering old age within the next twenty years, Capretta points out. Lawmakers need to acknowledge the precariousness of America’s fiscal future and be honest about the true cost of Obamacare.
The Senate health care bill includes a well-known “employer mandate” provision that would require employers to offer “qualified” health plan and pay 60% of the premium, or pay an annual tax penalty of $750 per full-time employee.
What is less well-known is that the provision would also tax companies even if they do offer insurance – but only if they hire people from low- and moderate-income families who qualify for, and elect to accept, premium subsidies. And the tax penalty for hiring those employees – arguably the people who need jobs the most – would be a whopping $3000 per year.
Who would qualify for such a subsidy?
There are two criteria. First, family income – not how much this employee is paid by this company, but total family income – would have to below four times the federal poverty level (FPL). The FPL depends on family size; for 2009 four times the FPL would be $43,320 for a single adult with no children and $88,200 for a family of four (regardless of whether it’s a single parent with three children or two parents and two children).
Second, the premium share to be paid by the employee would have to be more than 9.8% of family income. Note that in both cases, whether a company has to pay the $3,000 tax depends not on how much that company pays its employee, but on the total income of all the employee’s family members from all sources. (Normally employers don’t know the income of their employees’ family members, but the Senate bill calls for the IRS to tell employers which employees fall into this category on a monthly basis.)
The combination of this tax penalty and the rules for determining who qualifies for premium subsidies would encourage companies to engage in some new and repulsive forms of employment discrimination. Here are some examples.
The Single Parent vs. The “Second Income”
Suppose an employer is faced with two applicants for the same job at the same pay: a single parent of three children, and a married parent with two children and a working spouse. In this case, the “4 times FPL” threshold is the same for both applicants, since they both have the same family size. However, once hired, the applicant with the working spouse will have a higher family income, so the single parents is more likely to qualify for a premium subsidy – which means the company is more like to face a $3,000 penalty if they hire the single parent. This means, of course, that they are more likely to hire the applicant with the working spouse.
The Teenager vs. The Adult
Now suppose company has an entry-level job, and the two applicants are a teenager and an adult. Suppose the teenager has one or two working parents, and is still a dependent on their tax return. In this case, the teenager may have a larger family size (unless the adult has children), but most likely has a much higher family income. The teenager may be covered under a parent’s health plan, but even if not, the teenager’s “family income” includes the parents’ income. The teenager is not likely to generate a $3,000 tax penalty for the employer, but the adult is – especially if the adult has children to support. So the employer’s incentive is clearly to hire the teenager rather than the adult – especially if the adult is a single parent.
The Illegal Alien vs. the Legal Resident
The bill contains provisions that bar illegal aliens from receiving premium subsidies. Putting aside the controversy over whether those provisions would be enforceable in practice, let’s take them at face value and assume that an employer faces two applicants, one of whom is an illegal alien and the other of whom is a U.S. citizen or legal resident alien. Of course, the employer is not supposed to hire the illegal alien in the first place, but the presence of millions of employed illegal aliens means we already know that this is not effectively enforced. However, if one must prove legal residents to receive a premium subsidy, the illegal alien is not likely to apply, much less receive, the subsidy. If there is no subsidy, there is no $3,000 tax penalty for the employer. If the job is low-paying and any (legal resident) employee likely to qualify for a subsidy, the employer’s incentive is to hire the illegal alien, rather than pay a $3,000 tax penalty for hiring a U.S. citizen or legal immigrant.
The Double Layoff
Suppose an employee has a working spouse, and their combined income is high enough for their family size that they don’t get a subsidy and don’t generate a $3,000 penalty for each employer. Then, suppose one spouse loses his or her job and with it the family’s health insurance – and the other spouse’s income is, by itself, low enough to qualify the family for a subsidy. In that case, the IRS will notify the other spouse’s employer that they now have a subsidize employee and they have to start paying the $3,000-a-year tax (monthly, at the rate of $250 per month). This sudden increase in employment cost will encourage the other spouse’s employer to lay off the second spouse as well, leaving both of them unemployed. The only way for the couple to avoid this outcome would be to go without insurance – but that would require them to pay an individual tax penalty of $1500 a year for both of them going uninsured (more if they have children, up to a maximum of $2250 per year) – and with one less job, they’d have less money available to pay the penalty.
The Marriage Penalty
In 2009 four times the FPL would be $43,320 for a single adult with no children, and $58,280 for a family of two. Consider a couple with no children, each earning $30,000 a year. If they marry, their income will exceed four times the FPL; they will not be eligible for a subsidy and will have to pay the full cost of health insurance, which could be over $10,000 for two single policies or over $13,000 for a family policy. On the other hand, if the “live in sin,” they would both be eligible for subsidies, and would be required to pay a maximum of 5.8% if their income for health insurance. This amounts to $3470 for the two of them. In other words, marriage cost them a health insurance penalty of over $6500 per year.