If you're in the middle class, Obamacare may add to health insurance costs, uncertainty.

At RealClearMarkets, AEI scholar and physician Scott Gottlieb makes an interesting point about the effect of the Affordable Care Act on middle class families who make too much to qualify for federal subsidies on health insurance exchanges beginning in 2014:

A family of four with an aggregate income of more than $88,000 annually or an individual earning around $44,000 could find themselves badly strained by healthcare costs under the Obama plan.

Many of these folks currently get their health coverage from work. They benefit from an implicit subsidy built into that workplace coverage that lets them spend pre-tax dollars through their employer to purchase health insurance. Depending on their tax rate, that subsidy helps offset some of the premium costs.

Under the Obama plan, many of these families could instead find themselves buying their health insurance on the new state-based exchanges that get started in January 2014. For a family of four, premiums on even one of the lower priced "silver" options could still cost more than $15,000 annually on the exchanges.

How would this work? The penalties for employers dropping coverage are modest to begin ($2,000) and many employers could wind up saving significant amounts of money by ending employer-based coverage and sending employees to the exchanges.

Gottlieb points out that the coverage on the exchanges is "broad, but not deep" requiring significant co-pays and deductibles that can add up fast:

A family of four earning $90,000 annually takes home about $60,000 after local, state, and federal taxes. If they lose workplace coverage, and move onto the exchanges, they could find themselves spending as much as 25 percent of the family's take home pay for an average policy ($15,000 for the "silver" plan).

That's just on premiums. If they get sick, they could be stuck with another $11,500 more in deductibles and cost sharing, and this doesn't include co-pays on drugs. .... While full coverage for a lot of routine care is mandated under these plans - raising the cost of the insurance policies - the overall co-pays on other stuff can still be steep.

All of this turns on how many of these middle class families end up in the exchanges. It's widely accepted that the individual and small group insurance markets will quickly move onto the exchanges. In short order there will be two principal places left that Americans buy coverage: On the new exchanges, or through large employers that continue to self-insure and offer group coverage at the workplace.

There's now an emerging consensus that many large employers will choose to drop workplace coverage, and instead pay the $2,000 per-employee penalty that the Obama plan levies on them. It will simply be a lot cheaper for large employers to put their workers into the health exchanges and pay the penalty.

The exact labor market dynamics are apt to be relatively complex; some employers may decide that keeping coverage for middle and high-income earners is a competititve advantage. Others will undoubtedly "do the math" and send people to the exchanges.

But even if just a fraction of employers send people to the exchanges - say 15% or 20% - millions of middle class families could lose employer-based insurance and find that they can't find afforable insurance coverage on the exchanges. (Especially since the Obama HHS isn't proving to be very friendly to lower cost plans like Health Savings Accounts.)

Since it is also widely acknowledged that the cost controls in Obamacare are relatively weak, costs for these middle class families (and for tax-payer funded coverage on the exchanges) will rise quickly.

Obamacare will expand the "safety net" for some of the uninsured (about 50% of whom will be covered through Medicaid, which raises more problems) - but it will also pull the rug out from under the middle class.

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by Paul Howard, Yevgeniy Feyman, March 2013

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