Protecting Small Business from the Effects of Obamacare: Opportunities after King v. Burwell

(A version of this Health Alert was submitted as testimony to the hearing, “King v Burwell Supreme Court Case and Congressional Action that can be taken to Protect Small Businesses and Their Employees,” held on April 29, 2015, by the U.S. Senate Committee on Small Business and Entrepreneurship.)

A number of independent sources confirm Obamacare is harming small businesses. According to a paper published by the American Action Forum last September, the increased burden of regulations and rising health insurance premiums have reduced pay in firms with 20 to 99 employees by at least $22.6 billion annually, and has led to 350,000 job losses. Employees who kept their jobs have seen a decrease in pay of just under $1,000 annually.

Relief for the smallest businesses alone is not helpful because it makes it more expensive to grow. Although businesses with fewer than 50 employees are exempt from the requirement that they offer their workers so-called “affordable” government-approved policies (the employer mandate), the mandate only imposes a high marginal cost to hiring a 50th worker.

Morgan Stanley found rates in the small group market jumped 11 percent last year. Many other surveys of employers conducted since the Affordable Care Act (ACA) was passed have discovered similar findings, as reviewed by my NCPA colleague, Devon Herrick, last June. Since then, more damning evidence has come out.

For example, the New York Fed’s August 2014 survey of businesses in that state reported 20 percent of employers expected to increase the proportion of part-time workers due to Obamacare, versus only five percent who expected to go the other way. About 22 percent planned to cut wages and benefits, versus only six percent who planned to increase them. With respect to benefits, 68 percent (two thirds) of business leaders planned to cut the range of services covered or the size and breadth of their provider networks. Customers will also pay: 25 percent (one quarter) of business leaders admitted they would raise prices because of Obamacare, versus only two percent who say they will cut prices.

The administration has implicitly accepted the case that the employer mandate harms businesses by delaying it twice, until January 1, 2016, for businesses with 50 to 99 employees. In other words, we have not yet seen the worst of how Obamacare will hit small businesses.

Perhaps more insidious is the way Obamacare punishes employees who want to work longer hours. Obamacare tax credits phase out as household incomes increase. The harmful effect on workers’ willingness to earn more money is reflected in the Congressional Budget Office’s (CBO) conclusion that Obamacare would reduce employment by 1.5 percent in 2017 and 2.0 percent by 2024 (amounting to 2 million to 2.5 million jobs). As the CBO summarized its conclusion: “Also, the ACA’s subsidies effectively boost the income of recipients, which will lead some of them to decide they can work less and still maintain or improve their standard of living.” Economist Casey Mulligan has shown that increasing hours will actually reduce take-home pay for millions of workers (Side Effects: The Economic Consequences of the Health Reform, JMJ Economics, 2014). This obviously hurts small businesses’ ability to grow.

Further, even if small businesses do not buy health insurance from Obamacare exchanges, they will have to pay for them. The federal government has no more authority to make grants to states to establish and operate exchanges. These exchanges are expensive to operate. So, states will have to raise taxes to pay for their exchanges. Some states are taxing health insurance premiums, while others are looking to other sources.

Fortunately, an opportunity to mitigate this problem may be at hand. This summer, the Supreme Court will decide King v. Burwell, a case through which the plaintiffs seek to stop the administration from paying tax credits to health insurers operating in the 34 states with federally facilitated exchanges. This would cause premiums in those states to increase dramatically. Although the employer mandate would also be permanently relieved in those states as a result of a decision for the plaintiffs, their residents and businesses would still be paying federal taxes that fund tax credits in other states. This outcome would be unfair and politically untenable.

Thus, there is an opportunity to amend the Affordable Care Act to minimize its harm to small businesses. Obviously, Congress cannot repeal the entire ACA, because President Obama must sign any amendment this summer.

Amendments that would specifically help small businesses include:

  • Complete elimination of the employer mandate nationwide.
  • Restoring insurance regulation to the states by eliminating the Secretary of Health and Human Services’ power to define “Essential Health Benefits” and other Obamacare regulations such as Minimum Loss Ratio for health insurers (which reduce the number of insurers competing).
  • The most important regulation to eliminate is the age band of 3:1. Section 1201 of Obamacare gives the secretary power to dictate this, which means an insurer cannot charge a 64-year-old more than three times as much as a 19-year-old. A more accurate age band would be about 5:1. This artificially increases the premiums of young people, making it more expensive to hire them.
  • Flatten Obamacare’s tax credits as much as possible to reduce the marginal income tax “cliffs” that harm the incentive to work.
  • Eliminate the mandate for individuals to buy health insurance through an exchange in order to have their premium reduced by a tax credit. This will allow state governments to get out of the health insurance exchange business and eliminate the risk that small businesses will be taxed to finance their operations.

Comments (19)

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  1. Beverly Gossage says:

    Agree with all your amendments.

  2. Bart I. says:

    With 5:1 age banding, a simple flat-percentage tax credit for anyone paying for qualified coverage would be workable, and could replace a large portion of the means-tested subsidy. A flat-percentage credit would be compatible with eliminating essential benefit reductions (since minimal coverage would merely result in a smaller credit).

    A fixed-percentage credit (of around 25 percent) is also fairly compatible with the existing employer tax exclusion, assuming employees would have to choose one or the other but not both. Low wage workers would tend to switch to the credit (with after tax premiums), while those with higher incomes would tend to want to keep the existing pre-tax coverage.

    With 3:1 age banding, a fixed dollar credit might be fairer for younger purchasers, but would require some sort of essential benefits requirement to qualify for the credit (but not needed for those who forgo the tax credit).

    The underlying assumption for both is that to qualify for one of these tax credits, one must be paying for coverage with after tax dollars and not be receiving one of the other tax breaks (e.g. ACA subsidies, self employment deductions, etc.)

    • Bart I. says:

      With my above caveats, I agree with all the amendments.

    • Thank you. On the other hand, a fixed percentage tax credit does not motivate patients to contain costs like a fixed dollar tax credit does.

      • Bart I. says:

        John, thanks for the reply.

        I’ll just note that (in my example) with a 25-percent credit, the individual is still paying for 75 percent of the premium out-of-pocket with after-tax dollars.

        I agree that if the credit percentage is too high, such as the 43 percent marginal rate for employer-sponsored coverage or the 65 percent Waxman credit of a few years ago, there would be more incentive to over-consume.

  3. Bob Hertz says:

    BArt, ca you give me a numerical example of a flat percentage taz credit? sounds promising. thanks

    • Bart I. says:

      I was just thinking of an example like the following 5-1 age-banded example:

      Age: 25 / 60
      Monthly premium: $120 / $600
      25% tax credit: $30 / $150
      Net cost: $90 / $450

      One assumption is that a fixed-percentage tax credit would help compensate healthy individuals for the added cost of community rating versus underwritten coverage, so the net cost is fairly close to the underwritten cost.

      Under 3:1 age banding, a fixed-dollar-amount tax credit would yield similar results:

      Age: 25 / 60
      Monthly premium: $180 / $540
      Fixed $90 tax credit: $90 / 90
      Net cost: $90 / $450

      Here, because the 25-year-old is already paying more to subsidize the older purchaser, the fixed-dollar credit does a more accurate job of compensating. But note the after-credit differential is once again 5:1.

      • Interesting arithmetic. Thank you. NCPA traditionally has not proposed an age-adjusted tax credit, and neither have you. This relies on people to save money to pay the higher cost of premiums as they age. The question is: Can we rely on people to save?

        You could also fix the dollars at $30 for a 25-year old and $150 for a 60-year old and reduce the risk of people not saving to pay for their future premiums.

        My only problem with fixed percentage is that it associates the tax credit with the price of health insurance and not with the taxpayers’ ability to pay, which does not increase with premium but with a measurement like GDP per capita.

        • Bart I. says:

          I guess I don’t understand the level of concern about young people saving to pay insurance premiums in middle age, when they should be in their peak earning years. It would make more sense to me if we were talking about old-age coverage as a replacement for Medicare.

          Higher insurance premiums are a burden in late middle age, but people starting out have their own burdens. And there are multiple ways of saving toward later years, such as building a career and buying a house. That’s not to say that there isn’t an argument for saving toward health insurance costs down the road, but it’s one that needs to be made.

          I’m not sure I understand your last point. Is it that you want the tax credit to remain fixed in order to starve medical inflation that grows faster than GDP? I guess my response would again be that the 75% the consumer pays after-tax would grow at the same rate as the tax credit (Dollar-wise, 3x as fast).

          • Or increase it according to a broader indicator of inflation (GDP deflator, CPI) so that the aggregate cost to the Treasury does not get out of control.

            That is what they tried to do with the Sustainable Growth Rate (SGR) for Medicare’s physician fees. That eventually proved politically unsustainable.)

  4. Bob Hertz says:

    have you worked out what the base is for calculating the credit?

    in other words, let’s say we go with a 25% credit.

    Is this 25% of the cheapest plan on the market, is this 25% of the average plan, is this 25% of a plan with guaranteed issue, is this 25% of a plan with guaranteed issue and maternity, etc etc.

    I am looking for some stability here. the ACA has no stability.

    • Bart I. says:

      25% of whatever plan the consumer decides to purchase. If a given consumer opts for a bare-bones plan (assuming Essential Health Benefit rules are relaxed), the dollar value of the credit would obviously be lower. If the consumer goes for a deluxe plan, the tax credit would be worth more but the consumer still needs to kick in the remaining 75%.

      But it would have to be a plan with guaranteed issue. My thinking was that to be eligible for the tax credit, the plan would have to conform to the same HIPAA Title 1 regulations that prohibit small employer plans from underwriting individuals. Presumably HIPAA would still be in effect even if the ACA is repealed. Of course at present the ACA eclipses most HIPAA requirements.

      If ACA were repealed and consumers allowed to shop for cheaper underwritten coverage, they could do so but not be eligible for the tax credit.

      You could always place a dollar cap on the tax credit, but I don’t think it’s essential. I don’t really care so long as the rules are simple and consistent.

      • It reads like you are endorsing some Republicans’ proposal to extend HIPAA protections to individual-to-individual switching of policies. That has a problem that I’ve written about elsewhere in the blog.

        We through around terms like “barebones” and “deluxe” but we don’t often define them. If you want to buy a policy that does not cover cancer treatment, be my guest. But if you feel a lump, you don’t get to buy the cancer coverage at next open enrollment as guaranteed issue.

        • Bart I. says:

          A legitimate point. The certificate of creditable coverage is one of HIPAA’s protections, but I guess there’d still need to be a minimum essential coverage standard to define which policies are capable of issuing that certificate.

          Are there such requirements (pre- or post-ACA) already in place for employer plans? Or does the existing system rely entirely on the fact that these are group plans that must be good enough to attract employees?

          Annual enrollment windows and such also help prevent gaming. Something like a six- or twelve- month delay, where the consumer signs up for a new plan but must wait to make the actual switch, would function similarly but be more consistent.

          • Pre-Obamacare group policies addressed the issue by virtue that the group policy has to have broad coverage, for obvious reasons. And HIPAA rules strictly limited the individual employees’ ability to pick up and drop coverage.

            (Couples with two bread-winners become skilled at understanding their group policies so that they can switch between one and the other’s employer’s policy during open season.)

  5. The Big Ham says:

    noting has changed. 1991

  6. Bob Hertz says:

    This was a fine post, John, but one paragraph is kind of a clinker.

    You assert that small businesses will have to pay higher taxes to cover the cost of the state and federal exchanges.

    If the total cost of the exchanges was $2 billion nationwide, (and that much in a setup year), then the actual cost in a state like Minnesota might be $50 million.

    The $50 million comes from all taxpayers. Almost all small businesses are S corps or sole props, so any taxes come from the business owners on their individual return.
    If Minnesota has 250,000 small businesses (and that is probably low), and some of these businesses lose money, and all other individual taxes are impacted, I bet the average cost to small businesses of running the exchanges is like $100 a year. Spent more than that on a company lunch yesterday.

    • On the other hand, if we pick out each individual item the government spends money on, we will always conclude that the individual item is too small to worry about. We’ll never shrink the government like that.

      $100 is greater than zero, which is what exchanges cost before Obamacare, and what they would cost if government allowed people to get their tax-preferred health plans off-exchange.