Bill Clinton Is Right: Obamacare is Crazy for Workers
(A version of this Health Alert was published by The Hill.)
Bill Clinton’s pre-election criticism of Obamacare reflected a good understanding of labor economics. In October, he explained:
So you’ve got this crazy system where all of a sudden 25 million more people have health care and then the people who are out there busting it, sometimes 60 hours a week, wind up with their premiums doubled and their coverage cut in half. It’s the craziest thing in the world.”
Clinton was referring to high marginal income tax rates that Obamacare imposes on workers through the design of its tax credits, which get clawed back in a very unfair way. The Administration recently confessed premiums for the benchmark Obamacare plans are going up 25 percent, on average. Trying to appease angry enrollees, the Administration feebly claims tax credits reduce net premiums people pay.
Nobody is satisfied by this excuse. However, even if Obamacare premiums were reasonable, they would still punish the people for whom Bill Clinton claims to speak. The more you work, the more you earn; and the more you earn, the higher net premium you pay. This is not a characteristic of the employer-based group market in which most of us participate.
And it is not as if the tax credits decline at a constant rate as a worker’s household income increases. Indeed, the way they get clawed back makes it almost impossible for workers with somewhat unpredictable incomes to figure out the value of their tax credits until they do their tax return the spring after the enrollment year.
Scholars at the Kaiser Family Foundation estimated half of Obamacare beneficiaries who received tax credits in 2014 would have had to repay some. For beneficiaries in a family of four with an income less than $23,550, the average amount clawed back was estimated at $667. If that persists in 2017, almost six million people will have to repay tax credits back to the IRS, likely because they worked more hours than they had initially expected. Is that the kind of behavior we want the government to punish?
Here is how it works. The Kaiser Family Foundation estimates the 2016 annual Obamacare premium for a family of two adults and two children is $9,178. If the family’s modified adjusted gross income (MAGI) were $25,000, the family would benefit from a tax credit of $8,671 paid to its health plan. Its net premium (if it bought the benchmark Silver plan) would be $508. If the family’s income rose to $30,000, the tax credit would shrink by $101. Effectively, the family has had a two percent income tax levied on its raise ($101 divided by $5,000).
That is likely bearable. However, if the family’s income increases by another $5,000, to $35,000, the tax credit is clawed back another $696. That comprises an effective marginal income tax rate of 14 percent. This might make the family members think twice about whether the extra hours are worth it.
And it gets worse from there. Suppose the family members could work a few more hours during the year to bring the household income up to $37,000. In that case, $855 of tax credits get clawed back. For a two thousand dollar raise, the family is taxed 43 percent!
For a family of four, this perverse and confusing effect riddles Obamacare’s tax credits all the way up to a household income of almost $100,000. No wonder large numbers of workers are apparently uninterested in working more hours. The proportion of workers who work part-time because they choose to limit their hours, rather than because employers will not give them more work, has increased from 71 percent of the part-time workforce in December 2013 (the month before Obamacare launched) to 78 percent this September.
The best solution to this problem would be a universal tax credit to finance medical spending. A second-best solution would be a tax credit that shrinks at a constant amount of the tax credit for every dollar increase in income (which would effectively be a flat rate of income tax). Although Hillary Clinton failed to win the election, President-elect Trump could use her husband’s argument to garner bipartisan support in Congress for such a reform.
My objection to the universal tax credit is that the premium for the same coverage can easily vary by 100% or even more from one region to another so the effect of the tax credit in helping to defray the cost of the premium would vary enormously.
One approach that I think has some appeal is the way Medicare Part B premiums are determined. In general, they are set to cover 25% of the full actuarial cost of the program and that number could be set by county for ACA exchange plans instead of having one uniform rate that applies nationwide. Higher income people under Part B pay an IRMAA surcharge which applies to single filers with a MAGI of more than $85K and couples with a MAGI of over $170K. There are four different tiers of the IRMAA which top out for single filer incomes above $214K and couples above $428K. At the top level, the beneficiary pays 90% of the actuarial cost.
CMS defines the MAGI on which the IRMAA surcharge is determined as the number from the individual’s federal income tax return two years earlier. So, the 2016 premium is based on reported income in 2014. We could also cap an individual’s contribution toward the premium for the benchmark plan at 10% of MAGI if their income is over 300% of the FPL with a sliding scale cap below that. Setting the beneficiary premium at 25% of the total actuarial cost is consistent with the average employee contribution from his pay check for employer provided insurance plan as well as the Medicare’s beneficiary’s contribution toward the cost of the Part B program for those with income below the level to which the IRMAA surcharge applies.
The cost of residential real estate varies a lot between, e.g. San Francisco and Indianapolis. What role for the federal government in addressing this?
John, you are a hoot. Trust me, these employees have no idea that their MAGI going up, in the future, decreases their Obamacare tax credit and a refund will be owed. This post must be designed just to make the confusing Obamacare tax credits more complicated than they are.
Now, if your example was the 64-year-old couple in Ames, Iowa, earning $64,000 a year getting $20,000 Obamacare tax credits — earning an additional $1,000 for the year and losing the entire $20,000 tax credit — this post would make more sense.
DON”T EARN THAT $1,000 PEOPLE – take the last week of December off!!
Barry’s comment is just as confusing. Barry, we don’t want to explain MAGI to uninformed consumers here in the 21st Century, geez.
Everybody knows their age and the tax credit should be tied to that and everybody here knows that is called — age-based tax credits. It’s called Republican healthcare reform. I know Barry thinks that because health insurance costs more in New York or New Jersey that it isn’t fair that the future age-based tax credit is the same coast to coast. If New Yorkers want lower premiums they should move to sunny Florida where the premiums are cheap and there is no State Income Tax.
I heard Bill Clinton say that if you are busting your butt and earning $50,000 a year then you get ZERO tax credits as a single person and the cost of your over-priced Obamacare insurance is now double (At least) and your deductible has exploded to $7,150 (increasing with the CPI) a year in 2017!
Of course Bill was wrong, figures, when he said that the coverage is cut in half because now these poor people are paying for mental health coverage to unlimited lifetime maximums making the mental health “professional” do cartwheels down the street with joy. Mental health parity is paid for by the insured you know.
President Trump said he will replace Obamacare with Health Savings Accounts (HSA)!! For a guy like me that comes in pretty handy. I wonder what Lee thinks.
“they should move to sunny Florida where the premiums are cheap”
You mean Miami-Dade County, the fraud capital of the United States? Give me a break.
Separately, everyone knows the cliff phase out of the ACA subsidy above 400% of the FPL was a dumb idea. That’s what happens with CBO budget scoring constraints. Age based tax credits would also have budget scoring costs that would have to be paid for (or not) as would any subsidy scheme.
I will tell my good friend, from high school, in Palm Beech that Barry says he should sell his boat and move. I will tell him that Barry says he can keep his airplane. There is a video of his boat. He says it was $2.3 million but I never believe him. What a hozer. I will never fly with him either. I can trust him on his boat. He has had his boat for a while. Those poor Floridians. Pray for us.
https://www.youtube.com/watch?v=BPCjC543llU
The age based tax credits will be paid out of the $660 Billion already being spent by tax payers on Employer based benefits and Obamacare.
As businesses slowly transition from employer based plans to individual plans the tax payer subsides transfer from the employer to the individual.
The transition will be slow over the first year and a half and then pick up steam and hit critical mass just as trump starts his reelection campaign
Lee, about that time the poor families on Medicaid, costing $26,000 a year, will switch to age-based tax credits and get $7,000, saving the taxpayers $19,000 a year, $6,000 will pay 100% of their health insurance and $1,000 will go into their tax-free HSA with a mutual fund option.
Of course if this family lives in expensive New York then the premiums will be more and the tax-free HSA deposit will shrink or disappear. People are going to have to consider living in those expensive BLUE states and all of those expensive mandates.
Then we can say – RE-ELECT President Trump because he targets wealth to the poor.
Maybe by then the tax payers of Barry Land will understand they are paying over $20,000 a year for state employee benefits.
So how do you cut taxes and grow the economy?
http://www.state.nj.us/treasury/pensions/hb_open_enrollment_2016/state-monthly-active.pdf
Wow a group eligibility clause in Barry Land. Who would have every guessed you would have to be a full time employee working 35 hours a week to qualify?
STATE EMPLOYEES
To be eligible for State employee coverage, you must work full-time for the State of New Jersey or be
an appointed or an elected officer of the State of New Jersey (this includes employees
of a State agency or authority and employees of a State college or university). For State employees,
full-time requires at least 35 hours per week or more if required by contract or resolution
http://www.state.nj.us/treasury/pensions/pdf/handbook/hb0505.pdf
Barry, I did a little research and found a video that explains how us Floridians think that people in New York are Fruitcakes, I kid you not. Notice how New York is described as Fruitcake City!
https://www.youtube.com/watch?v=wneCa_yIuzg
Well from Barry’s post I think he still dosent agree the employees pay 100% of the cost of their benefits. He also still wants to pick winners and losers.
Barry also says premiums could easily very by 100% in diffrent parts of the country. That would mean premiums would be 100% cheaper in some parts of the country.
Why not figure tax credits on the rates in Barry Land and then people in less expensive parts of the country can take the savings and fund their HSA accounts. Damn still picking winners and losers.
It’s unfair that people pay less for insurance in other parts of the country. It’s also unfair that houses cost more in other parts of the country. Personally I want to buy my house for the Nebraska price but sell it for the Beverly Hills price. Is that to much to ask?
Lee, as I’ve noted numerous times, most economists will tell you that the employee pays for the cost of his health insurance in the form of lower wages than he would have otherwise been paid. He also pays for the employer’s share of FICA taxes based on the same reasoning.
The rub is that in the vast majority of cases the employee is not able to tell the employer that he would rather have higher cash wages, even if taxable, instead of the health insurance and the social security benefit.
He can decline employer health insurance when he first signs on if he is covered under a spouse’s plan but even then, more often than not, he will not be paid what employer coverage would have cost in higher wages. I said in the past that my employer, when I was still working there, would give you an extra $80 per month or $960 per year for forgoing family coverage that was worth $15K.
So, while you’re right in a technical sense, you’re not right about the value of these benefits being fungible and translatable into higher wages by forgoing them under current practices that most employers adhere to.
Note too that if you decline employer coverage when hired without having alternative coverage you will need to pass underwriting if you want the employer coverage later.
Barry,
You said:
“I said in the past that my employer, when I was still working there, would give you an extra $80 per month or $960 per year for forgoing family coverage that was worth $15K”.
Obviously you are an articulate educated individual.
My questions to you are:
1. Why do you think the employer was only offering $960 for something that had a value of $15K?
2. How much compensation did you give up to lease your benefits from your employer all those years $300,000 -$400,000 or more?
3. Having spent all that money for benefits through your employer what choices or ownership did you have in the plan design?
4. If you could have declined the coverage from your employer and claimed the tax advantages the employer was receiving on the $15 grand would you have looked at alternatives?
Lee, I don’t know why my employer only offered $960 per year to forgo family coverage worth $15K. If I had to guess, my answer would be something like this: I worked for a small subsidiary (23 people) of a large, old line manufacturing company with thousands of employees of which roughly 80% were unionized. The union members place an extremely high value, both financially and emotionally, on generous, comprehensive employer provided health insurance. It’s a paternalistic mindset that is pretty common among large companies that have been in business for a long time whether they are unionized or not.
I don’t know how much compensation I gave up in exchange for the health insurance. In my case, though, I had five surgical procedures during the 18 years I worked there including a CABG in 1999. So, I probably incurred more in claims than the aggregate premium value of the policy. My wife, by contrast, had minimal claims during the whole period.
I and other employees didn’t have any choice of ownership. There was only one option in our small subsidiary but there were several insurance choices in the areas where the company had large concentrations of employees. Aside from being able to get an $80 per month supplement to your salary if you declined the insurance when you were hired, there were no other options.
What choices or behavioral changes with respect to health insurance employees might make if they had a choice to decline the insurance and take the full cash value of the policy in the form of higher wages is open to debate. I’m sure those with significant health issues within their family would want the most comprehensive coverage possible while healthy people would want the cash. But that’s not the way the system works today. It would take a change in the law to change the system.
By the way, even president-elect Trump wants to keep the popular ACA pre-existing conditions rule which would ensure that health insurance remains relatively expensive. If you, Ron and other insurance agents can offer some constructive ideas about how to take care of the unhealthy and already sick, you might be able to win some better options for young and healthy people. Age-based tax credits won’t cut it for the former group so what other ideas to you have to offer? High risk pools? How do those get paid for when those we had in the past were grossly inadequate and 15 states didn’t offer them at all?
Barry,
Thank you for your candid and direct response to my questions. Your history gives me a lot of insight and understanding of your views.
Tax advantages aside, there are several reasons that an employer will not and cannot change benefits compensation to cash compensation.
1. The group will have a % of participation requirement mandated by the insurance carrier in order for the group contract to be issued. Most are around 75% of the eligible employees but I have seen them range from 60% to 80%
2. If an employer did match dollar for dollar let’s say $10,000 in pay to forego $10,000 in benefits how many healthy individuals would take the $10,000 in cash compensation?
I’m also sorry to hear about your health issues. Unfortunately you experienced firsthand what the insurance industry called job lock. Because employees lease their health insurance from their employer, if they have an illness that made them uninsurable in the individual market the employee was forced to continue employment with anyone that offered benefits. (How insane is that)
We can’t change the past all we can do is try and learn from the mistakes and try not to repeat them.
I have talked with thousands of individuals over the course of my carrier and every sick person I talked with was healthy up until they day they got sick.
With the Benefit of hindsight going back in your carrier when you were young and healthy. Would you have chosen a tax credit that would have paid for your individual premium that you had ownership in and followed you from job to job instead of renting insurance from your current employer?
I understand you didn’t have any choice in the past but we are talking about the future and wouldn’t it be nice to actually have a choice? After all it is your compensation.
Lee, thanks for your most recent comment.
Happily for me, I loved the job I had with my last employer. I always enjoyed the money management business which I worked in for 40 years for four different employers. The pay was pretty good and the people were wonderful. It was a very collaborative, supportive and collegial environment with excellent work-life balance. By Wall Street standards, I thought it was about as good as it got.
Over the last 20 years or so, defined benefit pension plans have been rapidly disappearing from the private sector. My own employer froze its plan for new employees in 2003 and replaced it with a defined contribution 401-K plan for them. I can envision the same thing happening with health insurance at least outside of the unionized employee groups. Whether we get age-based tax credits for people who buy individual coverage or not, I’ll bet many, if not most, employers would like to get out of the business of providing health insurance for their employees and their families. The problem is most employees like the coverage and no employer wants to be the first mover. It will take a brave large employer with a pioneer, risk taking spirit to attempt such a move. If people just entering the workforce knew there was no such thing as employer provided coverage and salaries were increased to reflect its discontinuation, there would probably be a very different mindset among employees about both the need for and willingness to purchase health insurance in the private individual market.
Suppose, for example, an employer with 40,000 employees provides health insurance covering 100,000 lives, including family members. Total cost is $500 million per year or $5,000 per covered life. In theory, it should be feasible to carve that $500 million up into an age-based defined contribution that the employee could use to purchase health insurance privately assuming he or she can pass underwriting. If there were only three age groups – 18-34, 35-49 and 50-64 it would be administratively easier than raising the premium by a little bit on the member’s birthday each year.
We would still have the problem of what to do about the unhealthy and already sick today and we have never really had a satisfactory solution for that problem. High risk pools make sense conceptually but they are far more costly than most states have been willing to fund through their political process. That’s the 800 pound gorilla in the room. Even if these folks comprise just 5%-10% of the population, they need to be taken care of somehow. Otherwise, it’s like a house that’s 90%-95% built with some critical work remaining to be done. It won’t be issued a certificate of occupancy until it’s done. That summarizes how I feel about the type of health insurance reform you, Ron and others are talking about.
I think high risk pools can and will work.
One of reasons high risk pools had a hard time being solvent is because they were not supported by the masses. The Individual market has had to absorb the sickest and unhealthiest the last 50 years.
The self-employed and the small business will be the early adapters of age based tax credits and larger and larger employers will follow. The high risk pools will be funded in each state by a 1% (negotiable) premium tax on individual policies sold in the state.
As the 200 million insureds transition from group to individual the funds will grow from the taxing of the individual health plans. It places all insurance into the same pool instead of separating group and individual.
The problem as you stated is educating the public that the current system they like is really a bad idea.
Lee, you say, “The high risk pools will be funded in each state by a 1% (negotiable) premium tax on individual policies sold in the state.”
I think the employer-based group plans should be taxed your 1%, or whatever, for the High Risk Pools (HRP) too. After all, they are the biggest reason we need HRP and it will also make groups throw in the towel quicker and get out of Dodge.
Lee,
A couple of years before I retired, I attended a conference session about high risk pools. The presenter was a state insurance commissioner, I think from Alabama if I remember correctly. He said at the time there were high risk pools in 35 states plus DC. On average, the medical cost ratio for these plans was between 250% and 300%. Funding came one-third from member premiums, one-third from surcharges on insurance premiums and one-third from general state revenues. At their peak, they never served more than 200,000 people and most of them they didn’t serve very well because of relatively low benefit limits and incomplete coverage. The estimates at the time were that there were between 4 and 5 million people who needed high risk pool coverage.
So, the issue becomes how much will it cost in total to serve the 200 million insureds (your number) if and when employer coverage is phased out or disappears. If it all happened at once, insurance underwriters might decline coverage to the 10% of that population they consider to be the worst risks including those who are already sick with cancer, heart failure, ESRD, COPD, MS, RA, Parkinson’s, depression, mental illness, etc. That 10% could easily account for 50% or even 60% of total medical claims. If even 50% of cost is in the ballpark, it would be a tall order to finance that expense from a surcharge on policies sold to the better risks alone. In theory, the surcharge might have to be as much as 100% less whatever the high risk members could afford to pay in premiums from their own income and assets along with help from family members if they can provide any help. If they can pay one-third of their medical claims in premiums, the surcharge would still have to be 67% assuming no contribution from general state or federal revenue. Like I said many times, I’m fine with high risk pools conceptually but the devil is in the details with respect to both scope of coverage and funding.
Barry, I have told you that the Free and Open Markets will take care of a lot of the under-writing problems with rate-ups. For those that require a High Risk Pool they should pay through the nose, maybe 3 times as much as healthy people.
So, if a 50-year-old woman in fly over country has tax credits of $3,000 and she is healthy, she will be able to get insurance with a $5,000 deductible with no additional cost. If she is sick and uninsurable then she would have to pay $500 a month for her High Risk Pool coverage at 3 times more after tax credits.
People should ask on their 1st date about medical insurability. The last thing anybody wants is a spouse that costs 3 times more for health insurance in 21st Century America. That would be a heavy burden.
Most citizens to not believe that being up-rated is a solution.
Barry,
I would argue that the ACA has become a glorified high risk pool. if we eliminate the MEB from the ACA and dump another 200 million insureds into the individual insurance pool what will happen to the rates?
Ron estimated in the past that as many as 30% of the 150 million lives currently covered by employer provided health insurance might be declined in the private underwritten market. Even if it’s only half that, you’re still talking about 22.5 million people who would need high risk pool coverage. At $9K each, that’s over $200 billion and it could easily exceed that by a considerable margin.
If you converted the ACA exchanges into an explicit high risk pool with no mandate to buy coverage, that’s probably another $100 billion a year minimum.
Anyway you slice it, that’s a lot of money.
Plus, “high-risk pool” is a misnomer. They are low-risk, high-cost pools.
The way to gain wages by forgoing employer healthcare benefits is to work as an independent contractor or consultant, or on a “corp-to-corp” arrangement. You can’t get out of FICA taxes, but you can negotiate an hourly rate that is double that of your “captive” colleague.
I have done that for years as a computer engineer.
Breaking News Barry – Tom Price for HHS!
The orthopedic surgeon chairs the House Budget Committee and sits on the House Ways and Means Committee, which has jurisdiction over healthcare policy.
Like Trump and conservative Republicans, Price supports the use of health savings accounts as a way for consumers to pay for healthcare. He is also in favor of capping the tax break for employer-based coverage and [[providing refundable tax credits adjusted by age, not income, to buy health insurance]], according to published sources.
So it is not just Lee and I who want REFUNDABLE age-based tax credits — it’s Tom too.
http://www.healthcareitnews.com/news/trump-considering-tom-price-head-health-and-human-services
The best solution to this problem would be a universal tax credit to finance medical spending.
The key here is “to finance medical spending” which is a lot different from “to finance medical insurance.” There are lots of Amerikans from the Amish to me and others who are non-risk-averse and who have no use for insurance of any kind.
Only the Amish are given a pass on the Obamacare mandate, because they don’t believe in insurance. Neither do I. So a universal tax credit for medical care would even the playing field. The Amish might even participate, since they’re not averse to medicare, just insurance.
Several quick points:
1. The Amish it is true do not buy commercial health insurance. But they self insure with a dedicated group bank account, not unlike the Christian ministry plans which I think are great.
Paying for health care always relies on some form of shared savings. You might get away with paying all cash for health care in a poor country, but in the USA you need a savings pool somewhere.
2. The ACA tax credit clawbacks are hideous as John describes. Some of this could have been avoided by basing one’s tax credit on last year’s income.
Of course this is not perfectly precise. But in many social programs, the cost of reaching precision is very high and not worth it. Spend any time in a Social Security office with the SSI and Medicaid programs and you will see what I mean. Some people go on and off these programs two or three times a year as their incomes and assets change.
3. What Bill Clinton could have said (if he was a policy wonk at a conference, not on the stump) is that the ACA is heavily loaded to produce benefits for relatively poor persons. A person making $16,000 a year gets health insurance for nearly free, and then the CSR benefit lowers their actual deductible to about $450 a year. When premiums go up nationwide, in some cases the poor person pays even less than the year before because of how the subsidies are calculated.
But the ACA does nothing for the middle class that pays taxes and actually votes in greater numbers. In fact it feels to the middle class that they are paying for the poor.
This is political doom. But as John points out, the response of Washington incumbents was to ignore this anger and brag even more about helping the poor.
Several of the Repubican alternatives appear to have the middle class more in mind. Let’s see what happens when this goes into the sausage grinder of legislation.
The Amish, who are [unconstitutionally] exempt from Obamacare, have the good fortune to be able to buy healthcare without the effective 25% markup [with “loss-ratio” = 80%] implicit in healthcare insurance and, furthermore, to be able to spend their healthcare dollars overseas for better treatment at lower cost, something that Obamacare, Medicare and Medicaid do not provide to hoi polloi.
Furthermore, they need not cover contraception, sterilization or abortion if they don’t want to.