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Obamacare Begins To Derail

Although the major provisions of the Affordable Care Act won’t take effect until next year, the first cars are already beginning to derail in this legislative train wreck.

Unions, for example, are starting to realize what many employers have seen coming since the law passed: The legislation will drive up the cost of health insurance, rather than drive it down. Though labor groups enthusiastically backed the Affordable Care Act at the time, the reality of rising costs has driven them to press the Obama administration for government subsidies to union workers. Such subsidies, which the law never envisioned for the employees of small, unionized employers who provide insurance, would drive up the cost of the law.

The unions are belatedly recognizing that without the subsidies, employers will either drop their insurance altogether as costs rise or risk losing business to non-unionized competitors with lower overhead.

The Obama administration thus far has declined to provide the subsidies, but it risks alienating a key Democratic ally if it holds firm. And the unions are unlikely to back down. Union leaders point out that for workers, losing union-negotiated health insurance would undermine one of the central points of joining a union in the first place. (Of course, the central purpose of the new law was to make health insurance available to everyone, union or not, so the only thing unions can try to offer their members is better or cheaper coverage than the rest of us enjoy. Now they want the rest of us to subsidize this for them.)

Meanwhile, the Treasury has issued regulations applying the Affordable Care Act’s rules regarding affordability of workplace-provided insurance to only the cost of covering the employee’s health care, not to the cost of covering other family members. The Internal Revenue Service, meanwhile, has proposed a workaround to the fact that employers generally don’t know their employees’ total family income by suggesting an “affordability safe harbor.” This would only require employers to act on information they actually know, which is much more practical, but which means workers’ children and family members, who would not be eligible for subsidies, may be left without an option they can afford. The result, as the law’s advocates are finally realizing, is that families that do not qualify for programs like Medicaid may remain uncovered. So much for universal health coverage, unless we further expand government-paid programs like Medicaid and Medicare.

These problems are only the beginning. Since the law requires insurers to accept practically all applicants regardless of their health, sick people will always seek coverage, while healthy ones will often opt to do without the expense. This phenomenon of “adverse selection,” as actuaries call it, will simply drive insurance premiums still higher, leading even more people to choose to go without coverage and more employers to abandon it, even if doing so triggers penalties.

As I have written before, the law’s penalties for individuals who choose to go without coverage are effectively toothless. For many people it will just make good economic sense, at least in the short term, to risk the penalty.

Employers, like individuals, will face penalties under the new law for failing to provide coverage - but only employers with more than 50 full-time employees. We are already hearing of instances in which employers are limiting hiring or reducing employees’ hours to avoid the mandate. And even when employers decide to shoulder ever-rising insurance costs, those same employers will have less money for other forms of compensation. It’s a trade-off many employees are beginning to notice. Professor Nicole Huberfeld of the University of Kentucky told The New York Times, “Many Americans believe [health insurance] is something they get free. But employers pay lower wages because they provide insurance.”

The former director of the Congressional Budget Office, Peter R. Orszag, told Congress the same thing when it considered requiring employers to report insurance costs on employees’ W-2 forms. “The economic evidence is overwhelming, the theory is overwhelming, that when your firm pays for your health insurance, you pay through reduced take home pay,” he said.

As Americans prepare for the full force of the Affordable Care Act to take effect next year, many are only now beginning to realize how profoundly wrong the “affordable” part of the name will prove. Wishful thinking was enough to get the law passed in 2010, but it won’t change the reality when the law takes effect in 2014.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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