Horizontal Inequities in ObamaCare

In this week’s New England Journal of Medicine, Mark Pauly and Bradley Herring show that the employer mandates passed by the House and Senate – where employers can either “play” by providing health benefits or pay a penalty – would result in grossly unfair treatment of similar individuals.  Regarding the House bill, they write:

[B]ecause each company’s decision to play or pay would be driven by its average wages, heterogeneity within companies would cause the subsidies for many individual workers to be mismatched with their level of need. Moreover, tax penalties and subsidies that depend on a company’s size would result in further inequity among low-wage companies, because subsidies for workers with the same income would be larger if they worked for small companies (which had to pay smaller penalties) than if they worked for large ones.

What kind of inequities are we talking about?

Low-wage workers in a high-wage company would be worse off than low-wage workers with identical productivity in a low-wage company. For instance, a single worker earning $21,660 — 200% of the federal poverty level for an individual — would receive a net subsidy of $3,574 through the exchange if he or she were employed at a low-wage company choosing to “pay” but would get a subsidy (a tax exemption) of only $1,887 if employed at a high-wage company choosing to “play.” The $1,687 difference represents about 32% of the premium and 8% of the worker’s income.

The same kind of inequities exist for higher-wage workers:

For instance, a worker earning $43,320 — 400% of the federal poverty level for an individual — would have to pay $866 (2% of payroll) in lower wages if he or she were employed at a low-wage company that opted to pay a tax penalty but would effectively receive a subsidy of $2,407 if he or she were employed at a high-wage company that opted to provide insurance. The difference is about 63% of the premium and 8% of income…So high-wage workers would be worse off in low-wage companies than in high-wage companies.

Here’s their graph showing how the House bill would penalize low-wage workers in high-wage firms, and high-wage workers in low-wage firms:

Note also that the falling subsidies for low-wage workers would discourage them from climbing the economic ladder.