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President Obama promised that the brunt of any financial reckoning will fall mostly only on those making more than $250,000 annually. Under his healthcare plan, the economic agony starts at income levels that fall much lower than that.
Middle class families take note. A family of four with an aggregate income of more than $88,000 annually or an individual earning around $44,000 could find themselves badly strained by healthcare costs under the Obama plan.
Many of these folks currently get their health coverage from work. They benefit from an implicit subsidy built into that workplace coverage that lets them spend pre-tax dollars through their employer to purchase health insurance. Depending on their tax rate, that subsidy helps offset some of the premium costs.
Under the Obama plan, many of these families could instead find themselves buying their health insurance on the new state-based exchanges that get started in January 2014. For a family of four, premiums on even one of the lower priced “silver” options could still cost more than $15,000 annually on the exchanges.
Only their incomes will make them ineligible for the “premium assistance credits.” that are meant to offset some of the cost of buying the pricey comprehensive coverage that the Obama plan mandates. These families will also no longer have the benefit of being able to defray some of these costs by spending pre-tax dollars.
People aren’t forced to carry health coverage on the exchanges if the cost of these policies exceeds 8 percent of their pre-tax income. But many families may find that the exchanges crowd out other low cost insurance options. Even if these families aren’t forced to buy one of these exchange policies, they may find few alternatives.
Do the math: A family of four earning $90,000 annually takes home about $60,000 after local, state, and federal taxes. If they lose workplace coverage, and move onto the exchanges, they could find themselves spending as much as 25 percent of the family’s take home pay for an average policy ($15,000 for the “silver” plan).
That’s just on premiums. If they get sick, they could be stuck with another $11,500 more in deductibles and cost sharing, and this doesn’t include co-pays on drugs. The upshot is that the exchange-based insurance is broad but not very deep. While full coverage for a lot of routine care is mandated under these plans – raising the cost of the insurance policies – the overall co-pays on other stuff can still be steep.
All of this turns on how many of these middle class families end up in the exchanges. It’s widely accepted that the individual and small group insurance markets will quickly move onto the exchanges. In short order there will be two principal places left that Americans buy coverage: On the new exchanges, or through large employers that continue to self-insure and offer group coverage at the workplace.
There’s now an emerging consensus that many large employers will choose to drop workplace coverage, and instead pay the $2,000 per-employee penalty that the Obama plan levies on them. It will simply be a lot cheaper for large employers to put their workers into the health exchanges and pay the penalty.
For some low-wage workers, getting insurance on the exchanges might also turn out to be a better deal for them as well. For example, under the Obama plan, if a family of four earns about $46,000 annually (200% of the Federal poverty level) they’d get about $12,000 from the federal government to buy the $15,000 “silver” health plan.
That $12,000 grant is better than the implicit tax subsidy the same family would receive if they’d bought the identical policy at work. Employers could also make some of the lost workplace health benefits up in the form of higher wages.
But what about Americans who take home too much money to qualify for subsidies, but not enough to afford the mandated plans? Most of the insurance policies that used to be sold directly to consumers will move onto the exchanges. These families may have few options then to pay up for one of these pricey plans, or take a chance without insurance coverage, and enter the market only after they get sick.
Either way, under the Obama health plan, the proportion of income that these middle class families spend on healthcare could rise, perhaps dramatically.
American Enterprise Institute (AEI) Resident Scholar Scott Gottlieb, M.D. is a practicing physician. He previously served in senior positions at the Food and Drug Administration (FDA) and the Centers for Medicare & Medicaid Services (CMS).
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