Obamacare's winners and losers
If employers drop their plans under the President's plan, some employees could be in for a major change in their health-care circumstances. We explore the possibilities.
NEW YORK (Fortune) -- This is the seventh installment in a series of health-care columns by Fortune's Shawn Tully.
As President Obama prepares for his historic address on health-care reform to Congress tonight, America's politicians and pundits aren't even mentioning the most glaring weakness in Obamacare: It creates a deep divide between "winners" -- those who will effectively get a big pay raise through federal subsidies -- and the "losers" destined to suffer a steep, shocking decrease in their incomes after paying for health care.
The biggest losers? White-collar professionals who form a big swath of the middle class. A computer programmer or personnel executive earning just $80,000 a year, for instance, could see his pay -- after covering the far higher medical premiums he'd face with the President's plan from his own wallet -- shrink by almost $9,000.
Through those higher premiums, Obamacare would impose what amounts to a large tax on the raises middle-class families are counting on to pay for everything from college tuition to property levies. Those employees could see around one-third of their salary increases go to bigger health-care premiums alone.
Hence, health-care "reform" could impose a stiff penalty on getting ahead.
The situation gets critical under a scenario where employers drop health insurance. What are the chances that companies -- which now insure 105 million workers, or nine in every 10 adult employees -- will eliminate their plans? The Congressional Budget Office reckons that most companies will keep coverage under the House bill. But many economists strongly disagree, for three reasons.
First, while the bills favored by the Administration contain a "pay or play" provision allowing employers to eliminate their medical plans in exchange for paying a penalty or tax -- with the most prominent bill in the House, America's Affordable Health Choices Act of 2009, imposing a payroll tax of 8% in these cases -- many large employers are already paying over 8% of their payrolls in medical expenses, especially if they have lots of low-earners benefiting from rich plans. As we'll see, many manufacturers could pay the 8% tax and actually give those low-earners a raise.
Second, health-care expenses are rising so fast that companies end up accounting for them in higher costs, fewer jobs, and eventually, lower pay for their employees. That's a difficulty many of them may want to do without: "Most companies will take the 'pay' option to get off of the health cost escalator and leave it to the government," says Ed Haislmaier of the conservative Heritage Foundation.
Third, more and more companies are already terminating their plans each year. Obamacare is simply likely to speed up that process.
With that in mind, let's examine the profiles of the possible winners and losers. For our analysis, we'll use the provisions of the House bill, virtually all of which the Administration strongly endorses.
In each case, we'll first calculate what the employee now earns after making his or her contribution to the health-care premium. We'll call that number the "Benchmark." Then, we'll calculate what they will earn after paying for coverage under Obamacare if their employer drops its plan. (It's important to note that the bill requires employers to either insure all of their workers, or drop their plans for everyone entirely and pay the 8% tax.) We'll call that number the "New Net." The difference -- or "Pay Gap" -- determines if the employees in our hypothetical examples would be winners or losers.
To make the comparisons simple, we'll look at families of four. Since the premiums employers pay are just another form of compensation, we'll assume that when they eliminate their plans, the employee gets a raise equivalent to the health-care contribution the company would've made. Many Americans worry that their employers will just keep the money saved from dropping a company health insurance plan, so they'd lose their coverage with no pay increase. But if employers try to stiff their workers, they will lose that talent to competitors who pay more. Bidding for labor should keep total compensation the same, even in today's slack labor market. So what employees sacrifice in benefits they should more or less recoup in higher salaries.
Whether an employee proves a winner or loser depends on large part of the size of the "Affordability Premium Credit" they qualify for under the House bill (page 137). The APC determines how much Americans can afford to pay depending on their incomes. The government then provides a subsidy for the balance of the premium for the plan, which would be purchased from a private insurers marketplace called a Health Insurance Exchange.
Obamacare also creates a new class of winners. Obviously, it's a great deal for the uninsured. Low-wage workers, including members of strong unions, would receive the equivalent of large pay increases while keeping their lavish policies. Consider a family of four earning $40,000 with no coverage, where the working spouse is employed by a landscaper or restaurant chain that doesn't offer coverage. The Benchmark is $40,000; after the payroll tax and the required contribution under the APC, the employee would still have a net salary of $35,400. So he or she would be getting a policy with a probable value of $13,500 -- the bill mandates rich coverage -- at one-third the cost.
By contrast, young, healthy Americans with small families who buy their own catastrophic care policies and have incomes in the $60,000-plus range will get hammered under Obamacare. The House bill would eliminate high-deductible plans, and force them to buy gold-plated policies, mainly with their own money.
Here are a few other examples of Obamacare's big winners and losers.
- Benchmark: $37,450
- New net: $42,703
- Pay gap: +$5,253 OR +14%
This employee benefits from the rich medical plan typical of many large companies -- with a total cost of $13,500 and $3,000 paid from his own pocket. The employee's contribution is deductible, so it really costs him just $2,550, after assuming a 15% tax rate. So the "Benchmark" is $37,450 (or $40,000 salary minus the $2,550 after-tax cost of the premium).
When the company drops its plan, the employee's pay should go to $50,500, as the employer adds its former contribution of $10,500 to the worker's paycheck. But remember the 8% payroll tax; that will knock pay back down to around $46,500. Hence, the employee now has $6,500 in extra cash to pay towards the new premium, over and above the $40,000 salary. That's worth $5,491 after taxes.
The APC shows that the employee can afford to pay just $2,788. So he has $2,703 left over to add to his $40,000 salary after paying for health care. So the New Net is $42,703 (or $40,000 plus $2,703).
So subtract the Benchmark of $37,450 from the New Net of $42,703. The Pay Gap is $5,253, in the employee's favor. He is getting an effective raise of 14%.
Outcome: Big winner
- Benchmark: $87,900
- New net: $78,555
- Pay gap: -$9,345 OR -11%
Workers with rich plans are winners up to around $65,0000. At that point, the New Net -- their new income after premiums -- quickly becomes far smaller than the Benchmark, or what they earned after coverage before Obamacare. A major reason is that the APC subsidies decline steeply before disappearing over $80,000 or so.
At $90,000, this employee is well above the APC level, so the hit to income is catastrophic. Instead of making $87,900 after medical costs, she's at $78,555. That's a loss of $9,555, the equivalent of an 11% pay cut.
Let's say we're now in the new world of Obamacare, and our employee just got a promotion from city to district sales manager with an increase from $70,000 to the $90,000 salary in our example. Because the raise sends the worker over the APC subsidy level, health-care costs would rise by over $7,000, absorbing over one-third of her raise.
Outcome: Big loser
- Benchmark: $56,600
- New net: $53,817
- Pay gap: -$2,783 OR -5%
In this typical small-company plan, the employee pays $4,000 a year towards an $8,000 premium, and the company pays the balance. This policy features far higher deductibles and co-pays than big companies offer, and pays for fewer benefits.
This time, our math shows that the worker's Benchmark is $56,600 and that, for a comparable policy costing $8,000, the New Net comes to $53,800. The employee is worse off by around $2,800, for a pay decrease of almost 5%.
Around this pay range, a persistent problem occurs: The 8% payroll tax more than wipes out what would be extra cash from the pay increase that comes when the company drops coverage. Hence, workers at lower pay levels under small company plans get hit hard. The problem is especially acute because the companies are making relatively small contributions to their plans,----so that those contributions get swamped by the payroll tax.
Outcome: Moderate loser
- Benchmark: $87,200
- New net: $72,980
- Pay gap: -$14,220 OR -16%
Small companies have millions of executive-level employees who earn medium-high incomes. They're star sales people, marketing managers, and assistant treasurers. Amazingly, they get pounded even harder than their counterparts in the Fortune 1000. The reason is two-fold: These folks have typically modest health-care plans to start with, so they don't get the big salary increase employees with rich plans garner when companies drop their coverage, and the 8% payroll tax actually ensures that this sort of small company executive starts even deeper in the hole than the $60,000 employee, simply because the payroll tax is assessed on a larger salary.
But the employee is earning far too much to qualify for a subsidy. Worse still, she's now forced to buy not the same $8,000 policy she had before, but something far more costly-- more like the $13,500 plans that big companies provide. Why? Because Obamacare mandates extremely comprehensive coverage with low deductibles and lavish benefits. Under the House bill, basic, high-deductible plans don't qualify for sale on the Health Insurance Exchange.
Outcome: Big loser
It's clear that the House plan will not work if companies drop their coverage. The result would be so cataclysmic for the middle class that only a public option with heavily subsidized coverage could bring even medium-income workers coverage they could afford.
To say that a public option in this scenario is inevitable doesn't mean it's desirable. A public option would simply add a new, enormous level of subsidies to those planned for low-income workers. That would severely deepen future deficits.
But whether or not the president demands a public option on Wednesday, it could become the only escape if the U.S. adopts the rest of Obamacare.
Read Shawn Tully's other installments in this series: