ACA's Unintended Consequences

It is hard to write legislation that is free of unintended consequences. It's that much harder for larger bills and it gets even more difficult for bills that are debated quickly and passed using backroom deals to secure key votes. Enter the 906 pages of the Affordable Care Act (ACA), or Obamacare.

Consider the employer mandate. The ACA says employers with more than 50 employees must provide affordable and comprehensive coverage to all full-time employees (i.e., 30+ hours per week). What does affordable coverage mean? According to the ACA, it means that insurance premiums must not exceed 9.5% of an employee's family income. If the premiums exceed the 9.5% level, the employee may purchase insurance through a Health Insurance Exchange, where the employee might be eligible for subsidies.

Let's say you are an employer who wants to provide employer-sponsored insurance (ESI) to your higher income employees, but not to your lower income employees. Obamacare provides you with the perfect solution. You simply need to ensure that the insurance you provide is sufficiently expensive so that it is above the 9.5% threshold for at least the lower income employees. (Note: this doesn't fit with the bill's "affordable" moniker, does it?)

The ACA allows for employees who face this expensive coverage to opt out of their ESI and purchase insurance through an exchange, but only the lower income employees will receive a subsidy, so they will be the only ones who will likely opt out, leaving the higher income employees to remain with the ESI. You, the employer, will need to pay a $3,000 annual penalty for each of these employees who drops out, but that's far below the approximately $10,000 that ESI would have cost you.

So the employer who wants to provide ESI to the company's top talent only has found an easy way to do so. Interestingly, even the employer who wants to provide ESI to all employees will find that the economics are strongly against him or her. Those employees who earn less than 400% of the federal poverty level may save money on the exchanges courtesy of subsidies from U.S. taxpayers. The economics of Obamacare may force the employer's hand in this matter.

Did Congress consciously design this provision of Obamacare to entice employers to select more expensive employer-sponsored insurance and force out lower income employees? We will never know for sure, but I certainly doubt it. This looks like yet another unintended consequence.

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