Employment, Health Insurance and Means Testing

The CBO Budget Outlook (2014-24) is out today, and much of the focus is on their revised estimate of the ACA’s impact on the labor market (Appendix C, pp. 118-27). CBO is projecting that “the ACA will cause a reduction of roughly 1 percent in aggregate labor compensation over the 2017-2024 period, compared with what it would have been otherwise” (p. 117). This is basically CBO’s estimate of the impact of the marginal tax rate on labor income created by the various policy structures of the ACA that Casey Mulligan has written about. As I wrote in this post, you get less of something if you tax it, so if that is not your goal (it is with tobacco taxes, for example) then you are left to decide whether the reduction is worth achieving an alternative goal(s). That can be a difficult question to answer, because you are trading off important things–labor market participation, rates of uninsured, and the system reform provisions of the ACA.

Is reduced labor market participation a sign that we should move away from the structure of the ACA? If yes, to where?

Republican Senators Burr, Coburn and Hatch introduced their health reform proposal PCARE last week to much fanfare (this contains links to my previous four posts on PCARE). Many Republicans were understandably glad that key leaders in their party had finally taken this step of offering a coherent health reform strategy. While the focus last week was on what PCARE would do to the tax treatment of employer sponsored health insurance and coverage rates, the CBO report should prompt those who are critical of the ACA’s labor market impacts to ask how PCARE would impact the marginal tax rate of labor? I asked Casey Mulligan on twitter last Saturday about this:

ScreenHunter_01 Feb. 04 14.14

Casey answered:

ScreenHunter_02 Feb. 04 14.17

While the numbers haven’t been run yet, Casey says that the marginal tax rate of labor income in PCARE will be similar to those in the ACA. Why is this? It is primarily because PCARE provides tax credits from 100% to 300% of poverty (the ACA goes from 100% to 400%).

The intuition of wanting to target and not waste precious resources that leads us to design means tested programs creates higher marginal tax rates on labor income. This reduces incentive to work more hours, and you get results like what CBO predicts for labor compensation (Casey predicts even higher impacts than does CBO). Casey expects a similar impact from PCARE, because of its means tested subsidy structure (it is worth remembering that it was the income based means test structure of tax credits in the ACA [Table 1, p. 48]  that created the largest work disincentive in Casey’s paper, not the employer mandate). The Republican reform plan PCARE shares this means tested structure.

Where does that leave us?

  • A consensus that the pre-ACA status quo is not acceptable
  • An expectation that the ACA will reduce work incentives
  • Strong reason to believe (someone needs to run the numbers) that the leading Republican alternative, PCARE, will do the same

It is relatively easy to sketch a distant health reform approach, be it left, right or center, if you can control all of the variables. However, you cannot control them all, and we can only begin to transition from where we are now. If we decide that minimizing negative work incentives is paramount, then means tested subsidies are a bad idea, and some sort of universal approach, or flat financing mechamism seems warranted; but that will undermine employer sponsored insurance rapidly if flat subsidies are large, or lead to concerns about what can be bought with them if they are small (The Patients’ Choice Act from 2009 had flat subsidies, that were small as compared to the cost of insurance).

If we decide that we want to minimize crowd out of employer sponsored health insurance and to minimize disruption, then that favors means tested subsidies, while seeking ways to keep employer sponsored health insurance as stable as possible (employer mandates). However, today we are worrying about the impact on the labor market of the ACA, that does just these things.

I am drawn to the question “how do you want your children (or grand children) to get health insurance in 20 years?” I think that a distant system in which employment is not a means of obtaining health insurance would be a better way to do it, and could lead to more risk taking in the economy. And the ACA as eventually modified in some way by the Republican PCARE proposal can be the first steps to this, assuming near continuous tweaking for the rest of my life. The alternatives to this muddled through approach strike me as politically impossible (big bang single payer, ESI level of flat subsidy provided to everyone), or are unknown to me.

cross posted at freeforall

Author: Don Taylor

Don Taylor is an Associate Professor of Public Policy at Duke University, where his teaching and research focuses on health policy, with a focus on Medicare generally, and on hospice and palliative care, specifically. He increasingly works at the intersection of health policy and the federal budget. Past research topics have included health workforce and the economics of smoking. He began blogging in June 2009 and wrote columns on health reform for the Raleigh, (N.C.) News and Observer. He blogged at The Incidental Economist from March 2011 to March 2012. He is the author of a book, Balancing the Budget is a Progressive Priority that will be published by Springer in May 2012.

6 thoughts on “Employment, Health Insurance and Means Testing”

  1. I am somewhat befuddled by argument based on marginal tax rate differential. This assumes consumers are fully rational actors making fully rational decisions with perfect information, and making those decisions based on expected value, rather than some other minimax criteria.

    I have known several people who have continued to work past the time when they would have otherwise retired, simply because that was the only way they could get affordable health insurance. Assuming that there are some number of jobs to be filled (certainly an oversimplification), then if ACA removes a certain number of employees from the workforce because they no longer need their jobs for insurance, the net impact on the nation's economy is beneficial, freeing up those jobs to be taken by folks who need them.

    This is a hugely complex area of interlocking economic issues and behaviors. I strongly resist stipulating the assumptions mentioned in my first paragraph.

    1. Apparently the reduction in work hours becomes visible only when the economy reaches full employment. Which is going to happen in just a few years, right after we all get ponies. Until we reach full employment, the effect you mention predominates.

      But perhaps more important than that is that any macro analysis like this ignores the fact that this is a tipping-point effect. It won’t be about individuals working fewer hours in the same jobs, but about people giving up jobs or switching from full to part-time. And that, even with perfectly rational actors, looks completely different.

  2. Re: “A consensus that the pre-ACA status quo is not acceptable”

    On May 16, 2013, the House of Representatives passed H.R. 45, a bill to return us to the pre-ACA status quo. It seems a bit odd to claim a consensus for a position that has been rejected by a majority of the House.

  3. Seems odd? Not to me.

    The fact that some House members voted to repeal what they term “the Socialist solution” does not exclude them from the consensus believing the previous status quo was unsatisfactory. After all, most of those Republicans give at least lip service to the meme “We’ve got to solve the health care problem, but just not with that awful Socialist legislation those evil Democrats passed.”

    So they claim they need to repeal the evil Socialist solution in order to implement their own better free market solution (details to follow soon).

Comments are closed.