Delaying Employer Responsibility Fines Is a Good Idea—the Real Problem Comes Later

SAN JOSE - JUNE 7: U.S. President Barack Obama speaks about Affordable Care Act at The Fairmont Hotel on June 7, 2013 in San Jose, California.

Photo by Stephen Lam/Getty Images

The “employer responsibility” fines under the Affordable Care Act that the Obama administration announced yesterday would be delayed have always been my least-favorite element of the law. So I’m not at all sad to see their implementation delayed a year. But the delay is just a delay, and raises the larger problem that there doesn’t seem to be a political path forward to a real solution here.

The problem here starts with what I think is ObamaCare’s original sin—the desire to keep the 10-year expenditures associated with the bill below an arbitrary headline figure of $1 trillion. Like most people, I have two hands each of which features five fingers so I appreciate the appeal of the base ten system and round numbers. But figures like “10” and “$1,000,000,000” have no real policy significance and that’s especially true when the ten-year scoring window includes several years during which the law in question isn’t even in effect.

But here’s how it works. If the government starts offering subsidies to help low-wage workers buy health insurance, then some firms that employ large numbers of low-wage workers are going to say to drop their workers’ health insurance coverage and then take the money they save and use some of it on higher wages and some of it on higher profits. Between ACA subsidies and higher wages, the typical worker should be better off. And as long as the firm raises wages by less than it cuts health insurance spending, the firm is also more profitable. This constitutes a de facto government subsidy to the hiring of low-wage workers, which I think is a good idea, but it would raise the headline cost of the law. So it’s authors decided that any large employer who doesn’t offer health insurance and whose workers end up collecting Exchange subsidies is going to have to pay a fine. The fine itself doesn’t raise very much money, but by reducing the number of low-wage workers who get insurance through the Exchanges it does a fair amount to reduce the amount of spending associated with the law.

But there are three problems with this. One is that to determine who should get fined and who shouldn’t, everyone has to engage in a fairly complicated reporting process to determine what health benefits are really being offered. This is the piece the administration is addressing with the one-year delay. It will give them time to work out a better, more streamlined process. A second is that though in the short-term these fines will take the form of reduce profit margins (profits are very high right now) in the longer-term, this is really a tax on low-wage labor that’s going to reduced working class people’s take-home pay. Third, in order to make this politically workable small firms with fewer than 50 employees have been exempted. That’s nice, but it means that the marginal cost of hiring that 50th worker is sky-high. In the long run, you’re going to see a lot of potentially promising businesses stall out at 49 employees with deleterious consequences for competition across the whole economy.

In my younger and more naïve days I thought “business hates this, Republicans hate it, many Democrats are well aware of the problems with this, and the long-term problems are much more serious than the short-term ones, so soon enough legislation will pass to modify the employer responsibility provisions.” But so far congressional Republicans have taken the Leninist line on ObamaCare that the worse the better, and any effort to improve the law will merely retard the arrival of utopia and repeal. So for now we’re left with executive decisions like yesterday’s delay announcement and more broadly the fact that smart states may try to use the waiver process to improve on these rules. But fundamentally what we ought to see is a piece of legislation that either reworks the employer fees in a more technically sound way, or else simply replaces them with money found elsewhere (sped-up implementation of cadillac tax, more rigorous IPAB, and somewhat less generous subsidies would be my choices).