December 31, 2009 10:17AM

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 bedriven by its average wages, heterogeneity within companieswould cause the subsidies for many individual workers to bemismatched with their level of need. Moreover, tax penaltiesand subsidies that depend on a company’s size would result infurther inequity among low‐​wage companies, because subsidiesfor workers with the same income would be larger if they workedfor small companies (which had to pay smaller penalties) thanif 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 thanlow‐​wage workers with identical productivity in a low‐​wage company.For instance, a single worker earning $21,660 — 200% ofthe federal poverty level for an individual — would receivea net subsidy of $3,574 through the exchange if he or she wereemployed at a low‐​wage company choosing to “pay” but would geta subsidy (a tax exemption) of only $1,887 if employed at ahigh‐​wage company choosing to “play.” The $1,687 differencerepresents about 32% of the premium and 8% of the worker’s income.

The same kind of inequities exist for higher‐​wage workers:

Forinstance, a worker earning $43,320 — 400% of the federalpoverty level for an individual — would have to pay $866(2% of payroll) in lower wages if he or she were employed ata low‐​wage company that opted to pay a tax penalty but wouldeffectively receive a subsidy of $2,407 if he or she were employedat a high‐​wage company that opted to provide insurance. Thedifference is about 63% of the premium and 8% of income…So high‐​wage workers would beworse 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.