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knowledge at Wharton would like to welcome mark Pauli who joins us today and mark is a Wharton professor of
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healthcare management and he's going to talk about a very a potentially very important aspect of
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Obamacare or the Affordable Care Act that it's kind of a sleeper issue that people haven't paid attention to
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but it's potentially really quite important and potentially quite expensive so I think the title of your
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new briefing paper on this topic puts it fairly succinctly you ask is there a future for employer-sponsored healthcare
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who knew that there might not be a future and I think it's a surprising question for a lot of folks and this has
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to do with the idea that there may be incentives to employers out there to give up some some health insurance plans
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because of the way that Obamacare affects at least some people and their companies or at least some companies of
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a certain size and generally smaller companies right let me leave it to you to spell this out so yeah so we've
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before the passage of the Affordable Care Act if you were not not a poor person eligible for Medicaid you
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basically could only get help from the government to get health insurance by getting insurance through your job and
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although you may not think of it this way that actually is potentially a way to provide substantial help because the
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fraction of your compensation that you would get as your employer's premium payment would not be subject to taxes
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then as most of us pay an explicit premium as well usually it's about a quarter of the total premium that's also
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excluded from taxation and if you have a creative enough employer that set up a flexible spending account you can
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exclude up to 2,500 dollars of spending not covered by insurance from taxation as well so before the ACA only people
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who got insurance through their job could get a help for the government from private insurance what the Affordable
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Care Act did was set up a system of subsidies related to income up to 400% of the poverty line income that a person
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could get if they got insurance through the exchanges that were set up by the by the law and the reaction to
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that in part was to say well this may be the end of the world as far as employment based insurance would go
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because especially if you are willing to believe despite so far I think evidence
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to the contrary that these exchanges will be terribly efficiently run and offer wonderful choices don't get me
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wrong there are some good exchanges but they're more the exception than the rule
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but if you thought they'd really be a wonderful thing maybe a lot of people would say gee I'd rather get my
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insurance through an exchange where perhaps I have more choice than I have in my job and then some employers said
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or even some consultants told them look you're now paying let's say an average
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of about $4,000 per worker for insurance there's a penalty if you're a large
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employer for not making that payment but the penalties only 2,000 2,000 being less than 4,000 why not drop insurance
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coverage and tell your employees to go to exchanges why is the penalty 2,000 there's a there's an explicit penalty in
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the law for employers while it was it's called the employer mandate and the employer mandate says if you're an
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employer above a certain size you have to provide insurance to your workers and contribute a certain fraction of your
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premium of their premium but if it but if you didn't the it's complicated like
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everything in the law but roughly speaking you you would be subject to a penalty of $2,000 per worker but the
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calculation was well $2,000 is less than what I'm paying now wouldn't I come out
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ahead by dropping insurance coverage what the point that I make in this article is well it's not quite so easy
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so there are some employers and their workers who would come out ahead and I guess the key issue here really is not
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what's in the interest of the employer but what's in the interest of workers
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can workers on balance be better off by in effect taking the money that employers were spending on them for
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insurance and going to the exchanges and the answer would be if you were a worker and I'm especially a small firm
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with mostly low-wage workers there would be an advantage the advantage would be you aren't getting much of a tax break
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before because your taxable income is not that high but now with the same amount of money
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you could go to an exchange and say if your income was 200 percent of the poverty line which would be about thirty
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eight thousand dollars for a person you you could get a 50 percent subsidy so that's a much bigger break than you were
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getting before so the news is that there would be some workers and some firms where there would be an advantage and if
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this was a small firm under ultimately under 50 workers although it starts off with a threshold of a hundred workers
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there would be no penalty for the employer the only reason though why that doesn't necessarily signal a revolution
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is that the fraction of workers who work in small homogeneous low-wage firms who
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currently get health insurance is actually quite tiny less than five percent of the overall workforce so
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although those people would gain a lot there are a lot of them and at the other extreme if you are working in a large
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firm and your upper middle income worker and most people in that firm are if that
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employer canceled in their insurance then you as workers could go to the exchange but you would have to pay the
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full premium without a subsidy and you wouldn't get the tax break anymore so
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you would actually plead with the boss boss please don't drop insurance coverage because we'd actually rather
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get our compensation the way we're currently getting it rather than the way we would have to deal with in exchange
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so from the employers point of view let's say I'm a large employer and I
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think you said the average premium is four thousand dollars yeah even for a large firm does that include is that
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like after the the tax breaks that I get now that's before that's before so it's
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actually not close to me four thousand it's costing me something less because
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wax advantages yeah so depends of course what's marginal bracket you're in but you know if if you
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were a 30 percent tax bracket it's costing you twelve hundred dollars less than four thousand right okay
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so then so the employee would not want their employer to do that because it would be almost like a pay cut wouldn't
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it would be like a pay cut just explain how it would be like a pay cut well effectively it is like a pay cut if if
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you even though it let's take the simple case where the employer drops insurance
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but gives you back the money the four thousand dollars they were spending well you're now going to have to pay twelve
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hundred dollars more in taxes because you have four thousand dollars more in taxable income you go to the exchange
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you say where's my subsidy they say sorry you learn too much to be eligible for a subsidy you get zero subsidy or
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you're out twelve thousand dollars and at least in my simple example there was
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no the employer was neutral because they just transferred the money from kit from
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paying for benefits to Kashkari I shall 1200 or twelve twelve hundred dollars you're out twelve hundred dollars by
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losing the tax break so that's I guess that's a lose-lose proposition well it
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doesn't take into the take account of the idea that an employer not saying they would but in theory they could say
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I'm not providing insurance which would be like a pay cut oh and I'm not giving
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you the for that yeah well they could they could of course say I'm not giving
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you the money either but then you'd wonder that would be like a pay cut and you'd wonder you know you're kind of a
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sorry excuse for a capitalist because you must have been overpaying me in the first place if I will continue to work
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for you after this big pay cut because now you're less competitive you know we
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usually assume it's probably easier to assume in the current labor market than
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in the labor market had prevailed in 2010 when the ACA was passed we usually assume labor markets are pretty
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competitive workers are not being overpaid but if their compensation takes a big hit the employer that does that is
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actually going to lose rather than win because the workers will know want to work there so whether your pay
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is cut or your healthcare benefits are cut it feels the same - it feels the same and really that's that's kind of
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the main economic message here that employers don't give you health insurance they just either pay you in
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the form of cash or in the form of benefits and one advantage as I started off by saying of getting my getting paid
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in the form of benefits is that that's something I get a tax break for whereas
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if I get paid in this cash I've paid tax on is does the employer for the Social
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Security part yeah so the big split here seems to be bigger companies and smaller
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companies and and I think you're saying that the percentage of smaller companies
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doesn't add up to a very big percentage yeah that's right or at least if you
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look at the fraction of people who are getting private health insurance through their job which was more than 90 percent
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of all people getting private health insurance the great bulk of those people are not working in small homogeneous
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low-wage firms they're working in large firms that either have high average wages which was the story I was telling
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a few minutes ago or even if hasn't many large firms there are some low-wage
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workers the great bulk of the workers are not low wage so if the firm cancels the whole deal it's going to do more
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harm to the larger number of high wage workers then it's going to benefit the
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small number of low-wage workers so and then if you add on top of that the fact that there's this $2,000 penalty it
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would seem like a money losing proposition all around for a large firm to contemplate dropping health benefits
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so there's another intriguing line in your in your brief which says that there
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could be some incentive for some large companies to think about creating a separate company for lower wage workers
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in order to eliminate some health care insurance so yeah so my position on this my econometrics professor told me when
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you forecast the future never attach a date if you present a number but I'll
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put a date here so my my view is that in the short run let's say over the next
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five years I don't see a massive reduction and the provision of health insurance by employers just for the
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reason I mentioned that the great bulk of workers now getting health insurance through their jobs are in these large
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heterogeneous firms that there isn't going to be a net gain from dropping coverage a lot heterogeneous meaning
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meaning there are some low-wage workers but a lot of high wage orders but with enough time and with enough ingenuity on
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the part of Americans which we definitely have an adequate amount of it's a a large firm could see although
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it might not be politically correct how to make it possible for their low-wage workers to get this juicy tax subsidy
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that they could get in exchange what they would have to do at least the most straightforward way would be to
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reconfigure the way the firm is organized kind of spin off the tasks that are performed by low-wage workers
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into a firm hiring only low-wage people and preferably even still a small firm and then there wouldn't be a penalty and
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those workers could potentially claim a fairly hefty tax break my assumption is that would take a while for that change
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to happen but I guess it could eventually happen because in some ways saying well if you're a low-wage worker
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who worked for a small firm or if you were a self-employed low-wage person right now you're eligible for this quite
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generous subsidy but if you're the janitor and Microsoft you're not eligible for this subsidy that's sort of
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intrinsically unstable in addition to being unfair are there any industries where that
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might where the cleavage between the two groups might be more natural and well that's a good question I guess I don't
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know I think the answer I mean the answer is if if it's possible to separate out the low wage workers into a
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separate entity with separate management and still have production take place efficiently that would be an industry
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where that would happen now thinking of the industry I work in which is the higher education industry we have low
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wage workers here administrative staff and so forth and there are notice they're literally our partners it would
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be hard for me to think of handing over my my calendar planning or preparation of
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materials for my classes to somebody who works for a separate company other than
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the errors do Pennsylvania so I don't see Penn actually engaging in the spinning off low-wage workers for for
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the bulk of what people do here I mean we actually have already of course spun off things like campus security and some
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of the food services to other firms so that would be possible what about something like a mass manufacturing firm
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an assembly-line operation right where you've got thousands of workers doing
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that and then you know a smaller management yeah well again I think it comes back to can you separately carve
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out the tasks in a manufacturing firm a lot of the low-wage workers are just because their seniority they're just
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workers who haven't been there as long and it would be kind of hard to say we'll have a separate firm for the
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starting workers and then for the permanent workers although you know here at the University we do have adjuncts
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and you could imagine spinning them off into a separate firm but but it doesn't
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seem as I as I think about the question in general I think there's a reason why
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firms are heterogeneous why they employ high wage and low wage workers because it's more efficient to manage them
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collectively rather than managing them separately but if there's enough of a
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carrot dangled in front of people to switch the method of organization well somebody's always on the margin somebody
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might do it but I guess I'm programmed to say but that doesn't sound like a
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good idea for society because you are in effect subsidizing an inefficient way of
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organizing production if it really was more efficient to have have workers high and low wage as part of the same firm
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what haven't we covered on this that would be important for viewers to know about well there is a kind of current
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way to make event ages for low-wage workers to be spun out or to be separated and that
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is there's a considerable debate about this the law opinion Eliza's firms when
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they don't provide health insurance to full-time workers but not when they don't provide health insurance to
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part-time workers so this has been a big debate and one of the I believe adverse
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incentives present in the law is to say to an employer look if you can split your work into twice as many part-time
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workers instead of full-time workers and if they are also low-wage that's important if they're low-wage anyway but
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you can split them into part-time workers then those part-time workers there's an there's no penalty for
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sending them off to the exchange now I'm back again on my sermonette about how
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that doesn't sound like a good way to organize production because usually it
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doesn't make as much sense to have part a lot of part-time workers as some is a
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smaller number of full-time workers if you're producing things in ordinary kind
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of production setting although of course we know for some things like fast food and things like that it may not Matt may
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not be so inefficient when some companies are already doing that we're already limiting hours yeah but the and
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some companies are saying and they're probably right that this incentive will
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cause us to emphasize part-time work more than full-time work minoo intrinsic merit to full-time or part-time work but
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having the reason why you choose to employ people as part-timers is because of this subsidy is not a good reason
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from a point of view overall efficiency well thank you for coming in ok sure all
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right you