ECON 499: Senior Project

Health Care Reforms and the effect on employers

2014 Health Care Reforms and Provisions

Johnson Fu

Economic Senior Project

University of La Verne

INTRODUCTION

During March of 2010, Democrat Nancy Pelosi remarked, “but we have to pass the bill so that you can find out what is in it away from the fog of controversy.” (Capehart, “Pelosi Defends Her Infamous Health Care Remark.”) The Patient Protection and Affordable Care Act (ACA) otherwise known as ObamaCare, helped create several new ways to acquire health coverage. In this article, I will discuss whether or not the framework of ObamaCare is sound, meaning, is it set up for mass adoption, and the effects on employers.

Under the ACA the federal government, state governments, insurers, employers and individuals are given shared responsibility to reform and improve the availability, quality and affordability of health insurance coverage in the United States (“Facts on the Affordable Care Act”). A critical part, possibly the most important aspect of this Act, requires citizens of the United States to have health insurance in 2014 or be subject to a tax1.

“If individuals do not elect coverage offered by their employer, do not have other coverage and do not meet one of the narrow exceptions, there will be a tax penalty based on an individual’s income.” (“2014 Changes for Fully Insured Large Group Employers.”)

Depending on the individual’s income, it is possible that they may be eligible for federal assistance that will lower the premiums as well as reduce how much money must be paid out of pocket when seeking medical care.

ObamaCare now prevents insurers from denying coverage to people with pre-existing health conditions and/or pre-existing physical or mental illnesses. Insurers can no longer refuse to pay for medical care and services due to a pre-existing condition nor charge someone more for having a pre-existing condition in the family. Premiums can only vary in price based on the applicant’s age, the number of people in their family covered by the policy and whether or not the applicant uses tobacco. Plans are available for both in and out of the marketplace and are categorized by four levels as well as offered from a variety of insurers.

Bronze – Has the lowest premiums, but only pays 60% of your health care costs. Silver – Pays 70% of your covered medical costs, but the premiums are higher than the

Bronze plan. Gold – Pays 80% of your costs, premiums are higher than the Silver plan. Platinum – Pays 90% of your costs, but has the highest monthly premiums. It would

make sense to pick this plan if you have a chronic health condition.

(Amadeo, “How Much Will ObamaCare Cost Me?”)

The law requires that individuals must purchase coverage and stay covered or else, be penalized. Regardless if one purchases a health plan on their own instead of getting covered through an employer, there are still new options on getting health insurance through the new health insurance marketplace/exchange in their state. Under ObamaCare, health plans must cover doctor visits, hospitalization, prescription drugs and maternity care.

1 Individual mandate

The ObamaCare employer mandate/employer penalty originally determined to begin in 2014 but now postponed to be effective 2015/2016, is a requirement for all employers that own a business with at least fifty (50) full-time equivalent employees to offer affordable and minimum essential health insurance to all those employees or otherwise be required to pay a per-month “Employer Shared Responsibility Payment2” on their employee’s federal tax return. Applicable larger employers, employers considered to have 50 up to 99 full-time equivalent employees will be required to start insuring workers by 2016. Businesses with 100 or more employees will need to start providing health benefits in 2015.

If a business owner has 25 employees or less, the employer will receive a tax credit of 35% of the insurance provided (Amadeo, “How Much Will ObamaCare Cost Me?”).

Determining Full-Time Employees

The Internal Revenue Service (IRS) released Notice 2012-58, Determining Full-Time Employees for Purposes of Shared Responsibility for Employers Regarding Health Coverage (§ 4980H), which states:

“Generally, § 4980H provides that an applicable large employer is subject to an assessable payment if either (1) the employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and any full-time employee is certified to receive a premium tax credit or cost-sharing reduction (§ 4980H(a)), or (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage and one or more full-time employees is certified to receive a premium tax credit or cost-sharing reduction (generally because the employer’s coverage either is not affordable within the meaning of § 36B(c)(2)(C)(i) or does not provide minimum value within the meaning of § 36B(c)(2)(C)(ii)) (§ 4980H(b)). Under § 36B(c)(2)(C)(i), coverage under an employer-sponsored plan is affordable to a particular employee if the employee’s required contribution (within the meaning of § 5000A(e)(1)(B)) to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year. Section 4980H(c)(4) provides that a full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.” (Internal Revenue Service, “Notice 2012-58.”)

The IRS defines determining full-time status of employees in sections:

A. Ongoing employees are employees who have been employed by the employer for at least one complete standard measurement period. Employers will be permitted to use the Safe Harbor method based upon measurement and stability periods otherwise referred to as the “standard measurement period.” Under the stability period safe harbor method, an employer will determine each employee’s full-time status by looking back at a defined period of no less than three but not more than 12 consecutive calendar months3. If determined that the employee averaged at least 30 hours of service per week, then the employee would be regarded as a full time employee during

2 Unlike employer contributions to employee premiums, the Employer Shared Responsibility Payment is not tax deductible (“ObamaCare Employer Mandate”).3 Measurement period

the “stability period4,” disregarding the total number of hours of service provided per week of that employee throughout the duration of the stability period, so long as the employee remained an employee.

B. New Employees: Employers are not required to offer coverage or be subject to the employer responsibility payment under § 4980H for a period of up to the initial three calendar months of employment.

C. Variable and Seasonal employees: Employers are permitted to determine whether the new employee is a full-time employee using the same measurement period requirements as ongoing employees (between three and 12 months as decided by the employer). If determined that the employee completed an average of at least 30 hours of service per week during the measurement period, then the employer would have to consider the employee as a full-time employee for the stability period. The stability period requirements mirror that of the stability period for ongoing employees.

Employees will otherwise be considered variable hour employee if it cannot be determined based off on facts and data that the employee is reasonably expected to work on average at least 30 hours per week.

An employee is considered a full time worker under the ACA if, with respect to any month, the employee is employed on average for 30 hours per week, or 130 hours per month. Since the definition of a full time employee has now changed to 30 from 40 hours there are possible and also extremely likely consequences that will be discussed in the next section.

Part-Time

The law defines part-time as someone who works less than 30 hours a week. Employers have no obligation to cover part-time workers under the Affordable Care Act.

“Some employers that have offered part-time workers minimal coverage, such as Trader Joe’s and Home Deport, have dropped it on the grounds that those workers can now find coverage through the insurance exchanges.” (“FAQ: How ObamaCare Affects Employers And How They’re Responding.”)

Unfavorable outcome – Defining Full-Time

Now there are many potential outcomes that are yet to be felt by employers, employees, and the economy. Some are considered favorable and others unfavorable.

“ObamaCare's impact on jobs is hotly debated by politicians and economists. Critics say the Affordable Care Act gives businesses an incentive to cut workers' hours below the 30-hour-per-week threshold at which the employer mandate to provide health insurance kicks in. White

4 A period of at least six consecutive calendar months that subsequently follows the measurement period and is no shorter in duration than the measurement period

House economists dismiss such evidence as anecdotal, but BLS data show that the workweek in low-wage sectors sank to a record low in July — just before the Obama administration delayed enforcement of the employer mandate until 2015.” (Graham, “ObamaCare Employer Mandate: A List Of Cuts To Work Hours, Jobs.”)

Listed below is a portion of a list compiled in 2014 by Investor’s Business Daily, which contains more than 400 employers that report they will be implementing job actions that heavily imply that ObamaCare will cause work hours to be cut. It should be noted that among these 400 employers, there are approximately 100 school districts.

State Employer Public/Private Action Date of Action or Report

Alaska Mat-Su Borough Public Cut hours for part-time EMTs and firefighters to a maximum of 29.9 per week

Jan 2014

South Carolina Kelly Professional Cleaning Services

Private ObamaCare employer penalties “will have to be recovered from existing employees in the reduction of hours, wage rates and layoffs”

Jun 2013

Delaware Delaware state government

Public Cut hourly and seasonal employees to a maximum of 29.75 per week, affecting education, correction, and homeland security agencies

Oct 2013

Maryland Republic Foods (Burger King franchise operator)

Private All new hires capped at 29 hours per week

May 2013

Indiana Ivy Tech Community College

Public Limited hours for adjunct faculty at 23 campuses to avoid estimated

Jun 2013

$10 million in Affordable Care Act costs for those who work 30 or more hours

Utah Deseret Industries (work training for war refugees)

Private Cut hours of most workers below 30 per week

May 2013

Tennessee Regal Entertainment Group

Private Operator of 500+ movie theaters cut non-salaried worker hours below 30 per week

Apr 2013

Texas Pillar Hotels & Resorts

Private Stepped up hiring of part-time workers among its 5,500 employees

Nov 2013

Colorado Mountain Del (Del Taco franchisee)

Private Cutting full-time workforce by 100; capping part-timers at 28 hours per week

April 2013

Source: (Graham, “ObamaCare Employer Mandate: A List Of Cuts To Work Hours, Jobs.”)

All of these responses point toward an unfavorable outcome. The Affordable Care Act will result in many unnecessary costs such as having to pay more at the doctor’s office when the cost of the co-payment is increased. Many jobs will be lost as well as work hours being cut to reduce costs for employers. I speculate that there will be several companies that will decide to exclude spouses from coverage in addition to sending employees to find public health insurance at exchanges as well.

The combination of employer fees and minimum wage hikes will cause this interaction to result in employer actions that will cause low-skill workers to lose jobs, face big cuts in hours as well as income. Included below is a graph by Investor’s Business Daily, which illustrates this:

Source: (Graham, "ObamaCare, Wage Hike Costs May Hit Low-End Workers.")

New Policies

Health care reforms occurring in California that will be implemented in 2014 will be introducing several new policies. New policies include but are not limited to:

No annual limits on essential health benefits Medi-Cal coverage will expand to include all individuals under 133% of the federal

poverty level5 (FPL) Eligibility for premium subsidies from the federal government to help millions of

Californians pay for their health insurance coverage as well as tax credits available for small businesses as well.

All of these proposed policies sound good, but the question at hand is who will pay for all of it, and how will the costs be distributed?

Federal Poverty Level

In the United States, the federal poverty level is used by the U.S government to define who is poor. It’s based on a family’s annual cash income, rather than their total wealth, annual consumption, or their own assessment of well-being. “For 2014, the Federal poverty guideline is an annual income of $23,850 for a family of four. This is the most commonly used statistic. Add $4,060 for each additional person to compute the Federal poverty level for larger families. Subtract $4,060 per person to compute it for smaller families. For example, a single-person household is considered poor if his or her income is $11,670 or less. These are the guidelines for the 48 contiguous states. Guidelines for Alaska and Hawaii are a little higher, since it is more expensive to live there. The Federal poverty level is updated every year to keep up with price

5 For 2014, $15,521 for individuals and $31,720.50 for a family of four (Amadeo, “How ObamaCare Makes The Federal Poverty Level Relevant.”)

increases in the previous year.” (Amadeo, “How ObamaCare Makes The Federal Poverty Level Relevant.”)

Subsidy

If an individual makes 400% or less of the federal poverty level, they will receive a subsidy. Depending on income, the total amount of subsidy provided will vary. For example, say that we observe a single person who earns exactly 400% of the poverty level in the year 2014, their income would total $46,680. (“Federal Poverty Guidelines.”) ObamaCare promises that individuals will pay no more than 9.5% of their income for the second lowest Silver plan.

The 9.5% limit applied to $46,680 would equal to $4,435. The subsidy is the cost of the plan minus $4,435. Therefore if the plan were to cost $5,200, the subsidy provided would be $765. Since ObamaCare bases all subsidies on the cost of the second lowest Silver plan, if the individual were to want to purchase a more expensive plan, subsidy provided would stay the same and the individual would have to pay the difference.

How much ObamaCare will cost in 2014 if an individual makes...

133% or less of the FPL $15,521 (annually at 133%) ObamaCare cost you $0 because you qualify for Medicaid

Under 150% of the FPL $17,505 (annually at 150%) Pay no more than 4% of income for the Silver Plan

Under 200% of the FPL $23,240 (annually at 200%) Pay no more than 6.3% of income for the Silver Plan

Under 250% of the FPL $29,175 (annually at 250%) Pay no more than 8.05% of income for the Silver Plan

Under 400% of the FPL $35,010 (annually at 300%) Pay no more than 9.5% of income for the Silver Plan

(Amadeo, “How Much Will ObamaCare Cost Me?”) (“2014 Poverty Guidelines.”)

Extra taxes and fees

Employers and health insurers will be subject to extra taxes and fees that will serve to help pay for some of the health care reform provisions. Patient-Centered Outcomes Research Institute fee (PCORI), the Health Insurance Provider-fee, the Transitional Reinsurance Contributions fee, and the High Value Plan tax are all new taxes and fees that will be imposed. A brief explanation of each of these is given below.

Patient-Centered Outcomes Research Institute fee Provision 6301: The Patient-Centered Outcomes Research Trust Fund fee is a fee on issuers of specified health insurance policies and plan sponsors of applicable self-insured health plans that helps to fund the Patient-Centered Outcomes Research Institute (PCORI). The Institute will assist, through research, patients, clinicians, purchasers and policy-makers, in making informed health decisions by advancing the

quality and relevance of evidence-based medicine. The Institute will compile and distribute comparative clinical effectiveness research findings. The fee is effective for policy and plan years ending after September 30, 2012, and before October 1, 2019. (IRS, "Patient-Centered Outcomes Research Trust Fund Fee.")

The Health Insurance Provider-fee also known as the Insurer fee applies to health insurance issuers and does not affect self-funded coverage. Set to begin in 2014, “health insurance issuers will pay an annual fee based on net written premiums. The fee is permanent and will fund premium tax subsidies for low-income individuals and families who purchase insurance through Exchanges or Health Insurance Marketplaces. (United Health Care, “Insurer Fee.”) There are a lot of consequences to this.

The amount of this tax will be $8 billion in 2014, increasing to $14.3 billion in 2018, and increasing by the rate of premium growth thereafter. (United Health Care, “Insurer Fee.”) The majority of this tax will likely be passed on to consumers. Consumers will have to pay higher premiums as well as employers that decide to offer health care to their employees. Insurers that are near the break-even will also be required to pay for these taxes even if they were actually losing money. Furthermore, since the total amount of the fee is a fixed amount, insurance insurers will have no way to reduce tax liability by decreasing sales and increasing prices, since sales volume is disregarded.

The Transitional Reinsurance Contributions fee otherwise known as the Reinsurance fee is required from both health insurance issuers and self-funded group health plans. The rationale of the fee is to pay insurers in the individual market that cover high-risk individuals. “The reinsurance fee is a transitional fee to stabilize the individual market. The fee will be assessed on a per capita basis for both fully insured and self-funded members. Effective January 1, 2014, contributing entities must begin making payments on an annual basis, and the first payment is due January 15, 2015.” (United Health Care, “Reinsurance Fee.”)

This fee is imposed over three years: 2014, 2015, and 2016. The ACA has specified the total summed amounts expected to be collected for each year. In 2014, $10 billion is expected, $6 billion for 2015, and $4 billion for 2016. The fee is to be divided among the reinsurance fund, the U.S. Treasury, and toward administrative expenses. Furthermore, each year a portion is reserved for the U.S Treasury. The Reinsurance fee is an attempt to spread the cost of coverage for those considered “higher risk,” that will be purchasing insurance through exchanges.

The High Value Plan Tax commonly known as the Cadillac tax is set to begin in 2018. “A 40% excise tax will be imposed on the value of health insurance benefits exceeding a certain threshold. The thresholds are $10,200 for individual coverage and $27,500 for family coverage. The thresholds increase for individuals in high-risk professions and for employers that have a disproportionately older population.” (United Health Care, “Cadillac Tax.”)

“The 2018 tax that is motivating companies to adjust their health insurance plans also is prompting them to narrow the list of drugs they cover”, said Dr. Steve Miller, chief medical officer for Express Scripts Holding Co., the nation's largest pharmacy benefits manager. (Johnson, and Murphy, “How the Affordable Care Act affects insurance at work.”)

The money collected from these taxes and fees will be divided for several purposes. “Some of it will be used to fund the risk management mechanisms that support pricing stability for the new consumer marketplaces (public exchanges). This provision will offset the risks for insurers who enroll a higher number of people with high cost claims. The money will also help fund tax credits and subsidies for people with lower incomes who buy insurance on a public exchange.” (AETNA, “ACA Provisions 2014: Impacts To Large Groups.”) There are a lot of consequences to this that will be explained below.

Since these costs will be pushed onto health insurance companies, these companies will attempt to pass the tax to the government. The government will then be faced with decisions that are all undesirable. The government could push the tax to their employees, or eat the tax themselves. If they were to take the tax, that would result in budget cuts elsewhere to pay for this new law. Employees of the public sector are accustom to receiving good benefits, if the tax were to be levied onto workers, that compensation is taken away and without a good salary, there are no incentives for employees to pursue or to take on a job within the public sector workforce.

Tax on investment income

In addition to employers and health insurers subjected to taxes and fees, any person making more than $200,000 a year or $250,000 for married couples filing jointly, or $125,000 for married couples filing separately would have to pay additional ObamaCare taxes. An addition 0.9% Medicare hospital tax on the income above threshold and an extra 3.8% on the lesser of either (a) investment income like dividends and capital gains or (b) adjusted gross income that is above the threshold will be imposed on the person(s) and/or married couple that meet these criteria. (Amadeo, “How Much Will ObamaCare Cost Me?”)

It should be noted that this new surtax is not indexed to inflation. This means that each year, more people will fall under it, which will be strongly affecting people on fixed incomes and people with 401(k) plans. This is another case of income redistribution in addition to the Reinsurance fee.

Employer Mandate

For employers who are recognized and required to offer health benefits to full-time employees, the annual fee is $2,000 per employee if insurance is not offered. If at least one full-time employee receives a premium tax credit because coverage is either unaffordable or doesn’t cover and equate to 60% of total costs, the employer must pay $3,000 for each employee receiving credit, or $750 for each and every one of their full-time employees total. (“Facts on the Affordable Care Act.”)

Business owners with more than 50 employees must buy government-accepted health coverage otherwise they will be subject to pay a annual penalty of $2,000 per employee if at least one employee receives tax credits.

McKinsey & Company Commissioned Survey on Employer Decision Making

In February 2011, McKinsey & Company commissioned a survey of 1,329 U.S private sector employers to measure their attitudes toward the Health care reform. The survey was part of McKinsey’s proprietary research routine. Ipsos, the third largest market and opinion research company in the world, was commissioned by McKinsey to administer the survey that was developed by McKinsey. The respondents worked for companies that ranged in size from under 20 employees to more than 10,000 employees. They represent a cross section of employer size segments, industries and geographies. All of the results were weighted based on the U.S Census data of firms by industry. (Ungerman, et al.)

“To qualify as a respondent, the individuals were asked a number of screener questions to ascertain that they played roles in choosing which benefits their companies provide to employees either as primary decision makers or having influence in the decision-making process. All respondents indicated they had either primary decision making authority (51%) over medical benefits or influence over the decision-making process regarding employee benefits at their company. The top five reported occupations were: owner, head of human resources, head of procurement, CEO/president, vice president of compensation or benefits director/manager.” (Ungerman, et al.)

“The first portion of the survey focused on the level of benefits offered by the employer today and any recent changes to benefits or intended changes pre-2014. Respondents were then asked their level of awareness of nine key provisions of the Affordable Care Act such as the individual and employer mandate, subsidies and guaranteed issue.” (Ungerman, et al.)

The survey examined what respondents said they would do starting from the year 2014 and moving forward. To further the questions so that respondent answers would be more sophisticated, respondents received factual information on the major provisions such as employer penalty levels and subsidy levels by household income. There was no information provided on the impact of ACA provisions or actions for both the employer and the employee. Additionally, existing rules, regulations, and taxes were not offered to respondents.

“Respondents were then asked a set of questions on whether they thought they would maintain current coverage, offer alternative models such as defined contribution, offer mechanisms to provide employees the choice of accessing the future exchange market or cease provision of coverage. Respondents were also asked about their biggest concerns in ceasing coverage as well as how they would compensate employees if they did cease to provide coverage.” A defined contribution plan is when “the employer provides a fixed dollar amount and the employee can choose how to allocate it among a variety of benefit options.” (Ungerman, et al.)

“As the survey results reported, 30% of respondents who said their companies offered employer sponsored health insurance said they would ‘definitely’ or ‘probably’ drop coverage in the years following 2014, the year the Affordable Care Act takes full effect. A total of 9% said ‘definitely’ and 21% said ‘probably’.”(Ungerman, et al.)

The study also finds that among employers that are considered more aware of reform policies, “more than 50%, and upward of 60%, will pursue some alternative to traditional employer-sponsored-insurance.”(ESI) (Ungerman, et al.)

Though the survey only examined the current attitudes of employers, as employers learn more about reform policies, more employers will decide to drop health care coverage and in exchange pay the fee or adopt some other sort of alternative to traditional ESI. As employers gain more incentive to drop ESI, this will boost the consumption of individual health care plans offered at exchanges since these employees will now have to look to purchase their own coverage.

Input

The reform will generate many opportunities as well as offer many risks with all the new provisions that are already in action. It is common knowledge that the decisions and changes among employers will vary by industry. As employers become more aware and knowledgeable of the law, they will have to make decisions based on incentive. Furthermore, group insurance usually sold to companies and institutions, will be significantly affected and changed by the ACA.

There will be job opportunities as well as a newborn industry for companies that decide to offer services that will aid in the transfer and transitioning for companies that wish to shift from employer-sponsored-insurance to a different insurance market. Employees who suddenly lose coverage because of an employer’s decision to stop offering coverage will be attracted to health insurance services that are offering assistance and staff on site to help transition and choose different coverage options.

The part-time workforce should increase as employers decide to move away from traditional ESI and take alternative routes. For instance, employers could decrease the fulltime workforce considering that if they do receive economic benefit from downsizing and in return, they save money from the amount of potential fees and taxes associated with the law. But at the same time they end up with a less efficient and productive workforce. At the same time as employers shift away from ESI, health insurers will attempt to focus more on employees directly since the employees will all be potential customers that could contribute to the provider’s revenues.

Now that the law guarantees employees of large corporations the right to health insurance, low-income workers who could not afford health care would now have subsidies offered to help pay for health insurance. The ACA takes away ESI, which was previously considered an employee benefit and a common talent retention strategy. Corporations will now confront the problem of how to remain attractive as an employer to talented workers and how to provide benefits to their employees.

McKinsey states in their study, “ESI might also be less valuable than most employers assume. Among employers not likely to drop ESI, three of the top five reasons given (and two of the top three) were concerns about talent attraction, employee satisfaction, and productivity. Among

employees, however, McKinsey consumer research found that more than 85 percent—and almost 90 percent of higher-income ones—say they would remain with an employer that dropped ESI. Overall, employees value cash compensation several times more than health coverage. Further, many younger employees also value career-development opportunities and work–life balance more than health benefits.” (Ungerman, et al.)

Since McKinsey has found through their study how less attractie ESI potentially is, employers could turn towards dropping ESI without fear of losing talent and employee satisfaction. Employees can be compensated by increasing their annual salary/pay rate. Only the older aged employees would be slightly concerned at losing ESI but even then, if they were to be compensated exceptionally well, that could offset those concerns. If these employees were 65 years old or older, they may be eligible for Medicare.

Many things will also influence the future actions of employers such as medical cost inflation, new information regarding the health insurance exchanges, and employee attitudes. Traditional ESI is not longer as appealing as it used to be due to the ACA and many companies will start to develop new strategies to attempt to attract and retain talent. Since ESI is no longer considered a employee retention tool, employers will have to devise new job locks or improve existing ones, such as offering family health care benefits, retirement programs, and benefits.

Opportunity cost

As we continue forward, when these employers decide to drop health care in favor of other alternatives such as increasing the salary of employees as well as downsizing the full time workforce and increasing the part time work force, employees will have to make an important decision. Employees will have to determine whether or not the opportunity cost of another job that does offer health care outweighs the decision to stay at their current job where they have just lost health care. Another problem is, will there be other employers actually hiring? And if so, will they be paid the same salary, if not more?

There will be many questions that an employee will have to ask himself. Why would they hire me? What makes me a qualified candidate? Those are all questions that will need to be answered before an employee should make a decision. Another factor that affect an employee would be history with the employer. Someone that currently gets paid a six figure annual salary due to the fact that they have stayed with an employer for over a decade will have difficulty acquiring another job willing to offer the same salary and benefits.

If we were to take a look deeper into this picture, for employees that are currently making an annual income of six figures this would actually prove more difficult and problematic. Due to the high salary and pay rate, it is understandable that employers would actually start looking to downsize workforce among these employees that have the higher salary, if possible. These employees are usually paid well because their productivity is high.

For example, consider an employer who owns a business that currently employs approximately 100 employees. For simplicity sake, assume that the ratio of higher-salary employees and low-

skill employees were to be exactly the same at 50% each. Now consider that the higher-salary employee were to cost an employer $120,000 annually and the low-skill employees were to cost the employer only $40,000. The cost of cutting one higher-salary employee would mean that the employer would be able to employ three more low-skill workers at approximately the same cost as one high-salary employee though that does not ultimately mean that employers would be hiring three more low-skill workers. What employers would do is, distribute the workload among the other high-salary employees as well as increasing their pay rate.

Lets say that the workload of one employee were to be equally distributed among 3 other employees. If the employer were to pay each of the three employees an additional $25,000 annually, the employer would still be saving approximately $45,000 for that one employee that was let go. This is assuming that these low salary employees could take the place and do the job of the high salary employees.

With the understanding that employees will have a hard time getting another job in addition to employers looking to cut costs anywhere and everywhere they can, employment mobility just does not seem like a possible solution. Jobs are generally not readily available, and to find one that offer offers benefits as well as a high paying salary is difficult. A likely scenario is that employers will pay the employer mandate fine, increase the part-time workforce, and restrict the maximum hours worked per week for each employee.

Employer benefit decision options

There is a way employers could still offer ESI without completing dropping the health coverage offered. If they were to downsize the full time employees and increase the part time workforce, this would not violate the provisions of the health care reform because employers would not be required to provide coverage for the part-time employees. Employers would then, still provide coverage to staff who would be considered higher-income employees such as those generally found in management and corporate positions.

This will not fool the government. They will notice that there is an increase in the part time workforce as well as a reduction in the full time workforce. Whether or not the government will establish something to counter this alternative solution is the real question.

“In fact, employers indicating that they will definitely or probably drop (or otherwise shift from) ESI post-2014 are more likely to consider the impact on low-income workers (as opposed to other groups of employees) when making benefit decisions and they are two to three times more likely to view benefits as important to attracting talent in their industry and geography. These employers are considering shifting from ESI not because they don’t care about their employees but because they recognize that, after 2014, ESI may not be the most efficient way to provide health coverage” (Ungerman, et al.)

Employers will have to evaluate the full impact of providing ESI to every employee and likewise with dropping ESI completely. Employers that are in industries with extremely limited flexibilities will likely continue to offer ESI. If many corporations decide to drop health care coverage, it is possible that there will be government intervention through increased taxes as

possibly an increased employer penalty fee. Under the current ACA law, increasing the employer penalty fee is not possible though, that is why revisions were made in the first place. Given the problems with just implementing the ACA, the government would not dare of attempting further intervention.

Who benefits?

It is obvious that the lower-income employees will be benefitting greatly from the health care reform. Subsidies will be provided to lower-income employees so that they may purchase affordable coverage from an exchange. As for the higher-income employees who are not eligible for subsidies, employers will continue to or start to offer ESI for these employees. The needs, as well as expectations and attitudes towards benefit options, are extremely different between the two income groups of employees. Higher-income employees would be less sensitive to price change, but they will be expecting more value if they were to be paying extra for a health care plan. So if lower-income employees are receiving coverage through exchange subsidies and higher-income employees are receiving ESI, both groups would be benefitting.

For those individuals that are making more than $200,000 a year or $250,000 for married couples filing jointly, or $125,000 for married couples filing separately, there will be extra taxes and fees that they will have to pay. Due to these fees, it can be safely said, the lower-income employees will be benefitting the most.

White House

Though there are plentiful amounts of anecdotal evidence that point toward a reduction of work hours and a restraint from hiring workers due to the ACA, the White House released an analysis on July 29, 2013 that shows positive relationship between the ACA and job growth.

The analysis shows that restaurants have had the fastest job growth of any industry in the retail and food services sector since the ACA was signed into law. David Vandivier explicitly states in his article of the White House analysis, “Furthermore, workers in the restaurant industry have seen their average weekly hours increase since the ACA was signed, contrary to the notion that there has been a widespread shift to part-time hours.” (Vandivier, “What the Affordable Care Act Really Means for Job Growth.”) Interestingly, the White House was unclear and failed to mention whether or not this increase was due to the ACA or to economic recovery.

Not to mention, Vandivier’s article continues to elaborate more, “and while the number of involuntary part-time workers has declined roughly in line with previous recoveries, it spiked up 322,000 in June. However, nearly 30 percent of the June increase was due to federal employees. This suggests that furloughs contributed to the pickup in part-time employment.” (Vandivier, “What the Affordable Care Act Really Means for Job Growth.”)

The United States government was formed to serve the people. Instead under the new health care law, the roles are switched and it is the people who are serving the government. The government

cannot exist with the private sector, though it seems that the current governing body is seeking to squash and hinder the growth of the private sector. In this case, there is a solution that can serve as a viable alternative. Since businesses are job creators, what the government should do is to introduce business-friendly policies. These policies should focus on reduction of burden and taxation of businesses, which will inevitably increase jobs, growth, and indirectly, government revenues such as taxes. This was seen before under President Reagan, and proved successful.

Incentives and disincentives

The ObamaCare's employer mandate will hinder development and growth. For the small firms that do not employ 50 or more workers, they will have extremely strong disincentives to expand further due to the fact that they can avoid the new costs and burdens of growth. In this case, growth will only cost the employers more and they will want to avoid the new penalties.

Companies will attempt to evade the new mandate as much as they can even if that means taking a route that will be less efficient. A company that has just reached the 50-employee mark might possibly outsource work and turn toward contractors to avoid new costs and fees. The principles of business are to preserve and increase your profit margin. A business owner knowing that the additional costs of ObamaCare would be difficult to bear would look for ways to decrease overhead. Among reducing hours worked per week, an employer may possibly decrease workforce by replacing them with technology, if possible.

If all the routes above weren’t enough, a company may turn towards increasing the prices of their product or services. Hiring new workers would be an obsolete solution.

Congressional Budget Office Report

More than 2 million Americans who would otherwise rely on a job for health insurance will quit working, reduce their hours or stop looking for employment because of new health benefits available under the Affordable Care Act, congressional budget analysts said February 4, 2014 (Goldstein, et al.).

The CBO says that the full impact with result in 2.5 million fewer workers in 2024. They forecast that the impact will be minimal when unemployment is high due to massive amounts of people willing to sponge up the work that others are unwilling to do, but the impact will increase severely when the economy reaches relatively full employment. The report confirms that the health care law will have a tremendous negative impact on economic growth. The negative impact is attributed to the generosity of the law. When workers obtain health care under the law, workers may choose unemployment or reduce their hours voluntarily. This is based on the grounds that as income rises, insurance subsidies under the law will be less forgiving and generous so workers will have less incentive to work. This action in combination with employer actions such as cutting hours, hiring fewer workers, and offering fewer wages to new hires about sums up the negative impact’s cause and effects.

Conclusion

No one will truly understand the full depth and reach of ObamaCare until it has been fully implemented. By then, many employers would have dropped ESI in favor of other employee retention tools such as increasing pay rate of employees as well as offering retirement programs and benefits. If enough employers decide to drop ESI and pay the $2,000 fine instead, there may be possible government intervention in the future in the form of a higher employer mandate fee.

It is inevitable that workers of all skills and salaries will lose jobs and the economy will see an increase of part time workers and a reduction of the full time workforce. Companies will attempt to cut costs and retain profits as much as possible even if that means taking alternatives that are less efficient.

McKinsey’s study has evidence that proves losing ESI is not that big of a concern for employees as long as they receive compensation. Furthermore the study shows that employees value cash compensation more than health coverage. Some employees may decide to leave their jobs in search of another employer that does offer health care, but they will have to determine whether or not the opportunity cost of another job outweighs the job they currently have.

The ACA will also hinder growth and development. Small businesses that do not employ 50 or more workers will have strong disincentives to expand due to new costs and new burdens of growth. In this case, growth will only cost the employer more and they will want to avoid the new fees.

The ACA budgetary impact will grow to hundreds of millions, if not trillions of dollars if left untouched. If not for recent delays in implementation, most companies would actually be breaking the law. Over the next several years, many new fees will be implemented in addition to tax hikes. As these fees are slowly implemented, Washington will have to decide whether or not to implement revisions that could save employers millions of dollars. By doing so, employers would have a stronger incentive to hire, leading to economic growth and increases in government taxes and revenues.

Very good.

Final grade A

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