By Philip Bredesen The Wall Street Journal
My state of Tennessee could reduce costs by over $146 million using the legislated mechanics of health reform to transfer coverage to the federal government. One of the principles of game theory is that you should view the game through your opponents eyes not just your own.
This past spring the Patient Protection and Affordable Care Act (President Obamas health reform) created a system of extensive federal subsidies for the purchase of health insurance through new organizations called exchanges.
The details of these subsidies were painstakingly worked out by members of my own political party to reflect their values: They decided who was to benefit from the subsidies and what was to be purchased with them. They paid a lot of attention to their own strategies but what I believe they failed to consider properly were the possible strategies of others.
Our federal deficit is already at unsustainable levels and most Americans understand that we can ill afford another entitlement program that adds substantially to it. But our recent health reform has created a situation where there are strong economic incentives for employers to drop health coverage altogether.
The consequence will be to drive many more people than projectedand with them much greater costinto the reforms federally subsidized system. This will happen because the subsidies that become available to people purchasing insurance through exchanges are extraordinarily attractive.
In 2014 when these exchanges come into operation a typical family of four with an annual income of $90000 and a 45-year-old policy holder qualifies for a federal subsidy of 40 of their health-insurance cost. For that same family with an income of $50000 (close to the median family income in America) the subsidy is 76 of the cost.
One implication of the magnitude of these subsidies seems clear: For a person starting a business in 2014 it will be logical and responsible simply to plan from the outset never to offer health benefits. Employees thanks to the exchanges can easily purchase excellent fairly priced insurance without pre-existing condition limitations through the exchanges.
As it grows the business can avoid a great deal of cost because the federal government will now pay much of what the business would have incurred for its share of health insurance.
The small business tax credits included in health reform are limited and short-term and the eventual penalty for not providing coverage of $2000 per employee is still far less than the cost of insurance it replaces.
For an entrepreneur wanting a lean employee-oriented company its a natural position to take: We dont provide company housing we dont provide company cars we dont provide company insurance. Our approach is to put your compensation in your paycheck and let you decide how to spend it.
But while health reform may alter the landscape for small business in unexpected ways it also opens the door to what is a potentially far larger effect on the Treasury.
The authors of health reform primarily targeted the uninsured and those now buying expensive individual policies. But theres a very large third group that can also enter and that may have been grossly underestimated: the 170 million Americans who currently have employer-sponsored group insurance.
Because of the magnitude of the new subsidies created by Congress the economics become compelling for many employers to simply drop coverage and help their employees obtain replacement coverage through an exchange.
Lets do a thought experiment.
Well use my own state of Tennessee and our state employees for our data. The year is 2014 and the Affordable Care Act is now in full operation. Were a large employer with about 40000 direct employees who participate in our health plan. In our thought experiment lets exit the health-benefits business this year and help our employees use an exchange to purchase their own.
First of all we need to keep our employees financially whole. With our current plan they contribute 20 of the total cost of their health insurance and that contribution in 2014 will total about $86 million. If all these employees now buy their insurance through an exchange that personal share will increase by another $38 million. Well adjust our employees compensation in some rough fashion so that no employee is paying more for insurance as a result of our action.
Taking into account the new taxes that would be incurred the change in employee eligibility for subsidies and allowing for inefficiency in how we distribute this new compensation well triple our budget for this to $114 million.
Now that weve protected our employees well also have to pay a federal penalty of $2000 for each employee because we no longer offer health insurance; thats another $86 million. The total state cost is now about $200 million.
But if we keep our existing insurance plan our cost will be $346 million. We can reduce our annual costs by over $146 million using the legislated mechanics of health reform to transfer them to the federal government.
Thats just for our core employees. We also have 30000 retirees under the age of 65 128000 employees in our local school systems and 110000 employees in local government all of which presents strategies even more economically attractive than the thought experiment we just performed. Local governments will find eliminating all coverage particularly attractive as many of them are small and will thus incur minor or no penalties; many have health plans that will not meet the minimum benefit threshold and so theyll see a substantial and unavoidable increase in cost if they continue providing benefits under the new federal rules.
Our thought experiment shows how the economics of dropping existing coverage is about to become very attractive to many employers both public and private. By 2014 there will be a mini-industry of consultants knocking on employers doors to explain the new opportunity.
And in the years after 2014 the economics just keep getting better.
The consequence of these generous subsidies will be that Americas health reform may well drive many more people than projected out of employer-sponsored insurance and into the heavily subsidized federal system. Perhaps this is a miscalculation by the Congress perhaps not.
One principle of game theory is to think like your opponent; another is that theres always a larger game.
Mr. Bredesen a Democrat is the governor of Tennessee and the author of Fresh Medicine: How to Fix Reform and Build a Sustainable Health Care System just out by Atlantic Monthly Press.
