David Gamage: ObamaCare's Costs to the Working Class

By DAVID GAMAGE

It is time to move past the debate over whether ObamaCare was a good or a bad idea. I count myself as an ObamaCare supporter, but this doesn't blind me to the law's flaws. Regardless of who wins the presidential election, bipartisan compromise will be necessary to reform health care in a constructive way.

The most important provisions of ObamaCare are scheduled to take effect in 2014. I have been researching ObamaCare and assisting with its implementation, and have come to this realization: Without further reforms, the law will create unnecessary costs for working-class Americans.

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Consider a low-income American supporting a family of four deciding whether to take a part-time job that pays $36,000 a year or a full-time job that pays $42,000 a year. According to my research, accepting the higher-paying job could result in the family losing over $10,000 a year in health-care subsidies.

Moreover, by switching low-income employees to part-time positions, rather than offering them health insurance, an employer will be able to save over $3,000 a year by avoiding ObamaCare's employer-mandate penalties. Without further reforms, many employers and employees will jointly benefit if employers make low-income employees part-timers rather than offering them health insurance. The losers will be taxpayers, who will need to fund the subsidies that these employees will be eligible for.

These perverse incentives won't be as extreme for employees with higher incomes, for dual-income families, or for single employees. For instance, a worker supporting a family of four deciding between a job paying $54,000 a year without health insurance and a job paying $72,000 a year with insurance would lose only about $7,000 in annual subsidies by accepting the higher-paying job. And a single employee deciding between those two jobs wouldn't lose any subsidies by accepting the higher-paying job. Nevertheless, many employers will face incentives not to offer health insurance to lower-income employees so those employees can qualify for federal health-care subsidies under ObamaCare.

For employees whose only job option comes with health insurance, ObamaCare's new subsidies may also create penalties for marriage and incentives for divorce. Under rules proposed by the Treasury Department, if an employer offers health insurance for which the cost of self-only coverage is affordable to an individual employee, that employee's entire family will be disqualified from receiving the new federal subsidies.

Consider a couple with children in which one of the parents earns most of the family's income. If the couple marries, the family would lose thousands of dollars of subsidies that could otherwise be used to pay for health insurance for the children and the lower-income spouse. If the couple is already married, divorce may be their only option for obtaining affordable insurance for their children and the lower-income parent.

We cannot predict with confidence how these perverse incentives will affect the behavior of individuals or employers. In Massachusetts, which in 2006 enacted reforms similar to ObamaCare, most employers have continued to offer subsidized health insurance, although there is some (mostly anecdotal) evidence of employees moving to part-time positions.

Yet ObamaCare's subsidies and penalties are sufficiently different that it is unclear how much we can learn from Massachusetts. Individuals and employers may change behavior gradually over time as they learn about the incentives created by new reforms. Even if these perverse incentives affect only a limited number of individuals, lawmakers should still strive to mitigate them through further reforms.

In light of these flaws, many Republicans want to repeal the law and replace it with something new. But what? There is near-universal agreement that the individual health-insurance market is dysfunctional. Americans who don't have the option of employer-sponsored insurance typically face excessively high costs in the individual market. And Americans with pre-existing conditions often have no realistic options in the individual market even if they are willing to pay far more than what insurance costs on the employer-sponsored market.

ObamaCare's subsidies, along with the new individual and employer mandates, are designed to fix the problems in the individual market. Assuming that key provisions of ObamaCare do take effect in 2014, insurance on the individual market should no longer cost dramatically more than in the employer-sponsored market. And Americans with pre-existing conditions will be able to buy health insurance on the same terms as other Americans.

There are alternatives that might also address the problems of the individual market. But realistic approaches must either embrace the direct government provision of health care (true "socialized medicine") or rely on government subsidies to make private insurance affordable. Hence, whether we want to "repeal and replace" ObamaCare, or "improve ObamaCare through further reforms," is merely a question of semantics.

Addressing the perverse incentives will also mean tackling a defect in health-care policy left intact by ObamaCare: By far the largest federal subsidies currently available for health insurance are the tax exclusions for employer-sponsored coverage. ObamaCare didn't end these subsidies, and their cost will be much greater than ObamaCare's new subsidies.

Conservative and liberal economists have long criticized the tax exclusions for employer-sponsored coverage on the grounds that they drive up health spending and provide far more tax benefit for higher-income than for lower-income taxpayers. Sen. John McCain proposed replacing these subsidies with better-designed tax credits when he ran for president in 2008. Yet ObamaCare failed to reform these older subsidies for employer-sponsored insurance.

ObamaCare's perverse incentives result mainly from creating a mismatch between the subsidies for individual health insurance and those for employer-sponsored insurance. Beginning in 2014, lower-income Americans will be eligible for far greater subsidies if they aren't offered employer-sponsored coverage, qualifying them for the new subsidies available for individual insurance. In contrast, higher-income taxpayers will be eligible for far greater subsidies if they get employer-sponsored coverage.

To resolve these perverse incentives, we should adopt a variation of Sen. McCain's proposals and replace the tax exclusions for employer coverage with tax credits. To the extent possible, we should provide the same subsidies for employer-based insurance as for individual insurance.

ObamaCare is far from perfect. Yet there was widespread agreement that the health-care system before ObamaCare needed reform. If Republicans and Democrats will work together, they can build a system better than either ObamaCare or what we had before. Partisan warfare should not stand in the way of improving health care for all Americans.

Mr. Gamage is an assistant professor of law at the University of California at Berkeley. During the academic years 2010-12, he worked at the Treasury Department on the implementation of the tax provisions of health-care reform. The views expressed here are his own and are unconnected to the Treasury Department.

A version of this article appeared October 31, 2012, on page A15 in the U.S. edition of The Wall Street Journal, with the headline: ObamaCare's Costs to the Working Class.