February 23, 2010 7:49AM

ObamaCare 3.0: Higher Implicit Taxes, Quicker Death Spiral

In a recent paper, I showed that the health care legislation passed by the House and Senate would impose punitive implicit tax rates on low‐ and middle‐​income workers. Those bills would also result in higher health insurance premiums over time because they would create large financial incentives for healthy people to drop coverage and only purchase it when they become sick.

The health care proposal that President Obama released yesterday essentially splits the difference on most areas of disagreement between the two bills. But a preliminary analysis shows that ObamaCare 3.0 would make these perverse incentives even worse. Families of four earning $22,000 under the Senate bill (100 percent of the federal poverty level) or $30,000 under the House bill or the Obama plan (133 percent FPL) would face the following effective marginal tax rates as they climb the economic ladder:

  • Senate bill — Average: 62 percent. High: 73 percent.
  • House bill — Average: 74 percent. High: 82 percent.
  • Obama plan — Average: 72 percent. High: 90 percent.

In other words, over broad ranges of income, families of four would see their take‐​home pay rise by an average of 28 cents of each additional dollar earned. In some cases, it would rise as little as 10 cents for each additional dollar earned. Using smaller changes in income reveals the Obama plan would create EMTRs as large as 200 percent or higher. That is, earning more money would leave many families worse off financially.

In addition, by requiring insurers to cover all applicants without regard to illness, each of these health plans would remove any penalty on waiting until you are sick to purchase coverage. Therefore — even after accounting for all relevant taxes, subsidies, and penalties — these plans would create large financial incentives for healthy people to drop out of the market, which would cause premiums to rise for those who remain. That would in turn encourage more healthy people to drop out, which would cause premiums to rise further, and so on. Those perverse incentives are much worse under the Obama plan than under the House or Senate bills. Here are the maximum financial incentives to drop coverage that each plan would create for families of four:

  • Senate bill: $8,000
  • House bill: $7,800
  • Obama plan: $9,900

By increasing the financial incentives to drop coverage, the Obama plan would cause private insurance markets to unravel even faster than the House and Senate bills would.