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A Health Economist Analyzes Potential for 'Crowd-Out'

In a panel presentation at the recent AcademyHealth National Health Policy Conference, University of Pennsylvania Wharton School health economist Mark Pauly discussed the decisions employers face as they adjust and react to the Affordable Care Act (ACA) implementation. There has been some concern about "crowd-out" -- the idea that many employers would drop coverage and send their employees to the new individual exchanges. What employers will actually do, Pauly explained, will depend on the number of employees they have, their employees' income levels and health status, and the tax exclusion of employer-sponsored insurance.
Pauly set the stage by noting that cost pressures have eased a bit on employers, and that the employer mandate to provide insurance had been postponed (for one
Loren Robinson
Mark Pauly, PhD, is a Professor of Health Care Management at the University of Pennsylvania's Wharton School and a Senior Fellow at Penn's Leonard Davis Institute of Health Economics.
year at first, and then for two years for companies with 50-99 employees). That gives employers some time, Pauly said, to re-think how they should react to, and interact with, the ACA. Under the employer mandate, companies with 50 workers or more must provide coverage or pay a penalty of $2,000 per employee.

Company models
So how will employers decide what to do? Pauly modeled the behavior of three different companies of varying sizes and employees. He assumed that each employer would consider total compensation, including wages and benefits, and would realize that all of the compensation package is the employee's money. Dropping coverage would mean increasing money wages (in the long run, by the same amount as the benefit cost); adding coverage would mean reducing wages. The goal would be to structure the package as the worker would prefer, taking possible ACA subsidies on the exchanges into account. A quick look at Pauly's "cases":

Case 1: Hiwage Wood Products: 100 workers, all earning 500% of poverty line, (tax rate 30%). Individual policies and average risk, employer contributes $4,000 to a $4,000 silver plan (same premium on the individual exchange).

  • If Hiwage now offers coverage, continue it because you will have to raise wages by $5,700 ($4,000 after taxes).
  • If Hiwage does not now offer coverage, do so because workers will want coverage at a $4,000 or larger wage reduction, there's a tax break, and you can avoid any employer mandate.
  • Even if Hiwage has 40 workers (thereby avoiding the employer penalty), the tax exclusion makes coverage worth offering.

The bottom line, Pauly said, is that high-wage companies not offering coverage should do so.

Case 2: Lopay Café and Wine Bar, 40 workers, all employees middle-aged with incomes at 200% of poverty line, (tax rate 10%). Exchange premium would be $4,000 but the ACA subsidy is $2,500; thus, the worker pays $1,500.

  • If Lopay now offers coverage paying $4,000, in the short run, it could drop coverage, increase wages by $1,650 ($1,500 + 10% taxes), send workers to exchange, and pocket the difference. In the long run, money wage will rise by $4,000 and workers gain $2,500.
  • If Lopay does not now offer coverage, do not offer it and in the short run reduce compensating differential (the amount paid in wages rather than benefits) by $2,500. In the long run, workers gain more.
  • If Lopay were large enough for a penalty, do not offer since increase in per-worker subsidy ($2,500) is more than the $2,000 penalty plus additional taxes.

The bottom line, Pauly said, is that low-wage companies should drop or not offer coverage and send people to exchanges. The one exception is if the company is small enough to get a low-wage small employer subsidy.

Case 3: Melange Scientific, 100 workers with a mix of low wage and high wage earners.

  • See if the value of the tax exclusion is greater than the value of subsidies in the exchange.
  • If so, do not drop and offer if not offering.
  • If not, think about it. Which workers will gain the most?

The bottom line, Pauly said, is that this employer might choose to offer coverage because of its benefit to high-wage workers, leaving its low-wage workers unable to take advantage of subsidies on the exchange.

Pauly concluded from this exercise that the ACA will not lead most employers to drop coverage they now offer, even if their benefits cost is more than the penalty (if any). It would be advantageous for many low-wage companies to drop coverage and send their employees to the exchanges, where significant subsidies are available. He also noted that the ACA , as presently structured, is unfair to low-wage workers in high-wage companies.

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