If President Obama’s secret goal is to engineer a government takeover of healthcare, he’s hiding it pretty well.
Critics of the Affordable Care Act, Obama’s big health-reform law, have long argued it’s the first step toward socialized medicine, with quality of care plunging, wait time for procedures soaring and bureaucrats replacing doctors as medical decision-makers. Last year’s bungled rollout of Healthcare.gov, the federal portal for finding private insurance through an exchange, fed fears of government involvement wrecking, rather than improving, the healthcare system.
But a new rule established under the ACA seems to shut the door on socialized medicine, while potentially strengthening the existing system of employer-provided health insurance. Critics of the ACA have worried that some companies will cancel or forgo insurance for their employees, forcing more people to get coverage through government-backed exchanges. Over time, the thinking goes, more and more people would be insured through exchanges while employer-based coverage would erode, until the government controlled such a large portion of the health insurance market that it simply swallowed the rest.
The new rule, however, will strongly deter large companies from using one common way to avoid providing insurance. Some companies, instead of offering insurance, give workers a tax-free stipend they can use to pay for health insurance purchased in the individual (or “nongroup”) market. Until now, that seemed like it might be one way for companies with 50 workers or more to avoid having to pay penalties for firms that don’t offer insurance. But the Internal Revenue Service, which is responsible for enforcing the “employer mandate” that begins in 2015, has now said such payments won’t satisfy the requirements of the ACA. So firms that offer their workers such stipends in lieu of insurance would still have to pay the penalty on top of that, or else face onerous fines for failing to comply with the ACA.
Strengthening the incentive
In effect, that will raise the cost of not offering insurance for larger firms and perhaps do the opposite of what ACA critics have feared. “It strengthens the incentive to offer health insurance,” says Paul Fronstin of the Employee Benefits Research Institute. “Especially in the economic environment we’re in.” If so, the new rule would would solidify the current two-pillar system in which nearly 60% of Americans under 65 get insurance through an employer and the rest rely to varying degrees on government plans (or go without insurance).
Companies with 50 workers or more will still be free to cancel insurance plans they offer and pay the penalty, which starts at $2,000 per person. Some workers, especially those with lower incomes, might even be better off shopping for insurance on an exchange, because of the government subsidies they’ll qualify for.
The key factor for companies, however, is whether they’ll want to take away a benefit their employees value, or degrade the value of that benefit. Until now, paying workers a stipend instead of providing insurance seemed like a win-win option for some companies, since workers would still get coverage and the employer might save money. The new IRS rule, however, would make such payments taxable, just like income. So in addition to raising the cost of such an arrangement to the employer, it would also devalue the payment to the worker, unless the company increased the payment by enough to cover taxes that will be taken out starting in 2015. That basically makes it a lose-lose proposition for the company and the worker both.
Some firms, theoretically, could still offer workers a stipend while also paying the ACA penalty fee of $2,000 per worker. But an improving labor market, combined with the new IRS rule, could be a powerful incentive not to. Even though the unemployment rate is still at an elevated 6.3%, workers in some fields are scarce and companies are beginning to have trouble filling some jobs. Companies that cancel coverage outright could lose key workers as they jump to firms with better benefits. Some companies still may not care, but others will choose not to risk a disruptive move that could create personnel problems and degrade their competitiveness.
It’s even possible a tightening labor market could help improve the healthcare benefits companies offer, regardless of Obamacare. Fronstin points out that, in the late 1990s, when the unemployment rate declined and good workers became hard to find, small businesses that didn’t traditionally offer health insurance started to, simply as a way to recruit workers and hold onto them. Some firms may find they need to do that now.
As with everything related to the ACA, there are political implications. Republicans have been hoping to exploit the disastrous rollout of Obamacare and other bad publicity it has gotten to help them win seats in the upcoming midterm elections and perhaps take control of the Senate from Democrats. Any further controversy related to the ACA — such as companies canceling insurance — would surely aid their cause. Yet the Obamacare headlines have mellowed of late, and Republicans now seem to have other ideas for how to woo voters in November.
Fear-mongering over socialized medicine is a harder sell than it used to be.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.