Health Reform: How Will Employers and Employees React to Differential Subsidies?

By :: April 6th, 2010

We’ve updated earlier estimates of how the various subsidies in the health reform law affect the insurance market for both employers and workers. And the results remain quite dramatic: It appears that the new law will make it beneficial for many employers to drop their insurance coverage. In 2014 and beyond, once federal money is available through the insurance exchanges, switching from employer coverage to the exchanges may benefit both employers and workers in a wide range of income levels.    

The employer-provided system subsidizes health insurance mainly by exempting from tax the health benefits offered by employers. Before reform, unless you were elderly, disabled, or poor, this exclusion was probably the only health care subsidy available. But under the new law, the subsidy tied to the insurance exchanges will significantly exceed the tax benefit that low- and middle-income households get now. Our analysis does not consider the implications for Medicaid, which creates a third subsidy system at the low-income end of the exchange.

How will the new law work? A worker whose household cash income is $60,000 in 2016 and who gets no health benefits from her employer would receive a subsidy equal to approximately $9,000. Because the firm provides no health insurance, it must pay a $2,200 penalty, leaving a net gain of about $6,800. By contrast, a worker earning equal compensation who receives employer-provided insurance would receive a subsidy around $3,500 from the exclusion of health benefits from his taxable wages, leaving him more than $3,000 worse off than his counterpart whose employer offers no insurance.  This pattern holds until compensation reaches about $84,000, at which point the two subsidies are about the same.  Workers earning more than $84,000 do better under the current employer-provided system than they will under the new system.

Except for the employer penalty for larger firms mentioned above, there are only limited mechanisms to stop employers from dropping coverage and allowing their employees to enter the exchange. Of course, some firms may be reluctant to switch because they are uncertain about changes to the health law or because some workers will insist on keeping their existing plans, at least until they see how the new exchanges work.  But new firms, which over time grow and absorb larger shares of the labor force, will not face the demands posed by longtime employees.  And the exchange doesn’t fully go into effect until 2014.

Congress could have avoided many of the problems that will result from this shift from employer-sponsored insurance to the exchanges by providing the same subsidy to all households with equal incomes.  Perhaps it will move in this direction as the law is refined over time.


  1. Anonymous  ::  3:23 pm on April 6th, 2010:

    This is also why there was such a hoohaw over abortion funding – because under the Stupak regime people who had abortion coverage through employer subsidized coverage won't have coverage under the exchanges.
    The other difficulty is in transition implementation. One wonders whether the government will inform small businesses of their new subsidies or whether insurance companies will feature the new credit in their sales pitch when marketing small business policies.

  2. Anonymous  ::  6:30 pm on April 6th, 2010:

    I'm not sure I get it. If I'm reading your commentary correctly, I believe you are saying that a person who gets their insurance paid for by their employer should get the same subsidy amount as a person who has to pay for their own insurance?

  3. Anonymous  ::  3:46 pm on April 7th, 2010:

    Health insurance provided by employers is currently subsidized because it is not considered income for income tax purposes. What Gene is saying is that in 2014 and beyond for those earning under $84,000 per year it is cheaper for you the employee, to have your employer pay you in additional wages what they are currently paying in health care insurance, minus the fine they would have to pay for not giving you health insurance, and send you to the exchanges, even though the additional wages would be taxed as income.
    Paul Trampe

  4. Anonymous  ::  1:26 am on April 9th, 2010:

    This Obamanation needs to be repealed. Apparently our president doesn't care that a majority of Americans detest not only the bill itself but the fact that the democrats lied, cajoled, intimidated and harassed their OWN people to get his thing passed. Obama should be indicted and tried for treason against the USA.

  5. Anonymous  ::  6:34 am on April 9th, 2010:

    You personally took a poll?

  6. Anonymous  ::  3:34 pm on April 9th, 2010:

    I very much doubt that the policies sold through the exchanges will have the same benefits and prices as the policies that large employers can negotiate. There is no true advocate in the exchanges that can push the insurance companies to offer better terms. Consumers, on their own, have no clout, and they are the only party in the exchanges that have a true interest in getting beneficial terms. Employers, on the other hand, have a lot of clout due to their size and can negotiate better terms.
    If the above holds, it will likely invalidate the argument that consumers will get a better deal in the exchanges than through employers.

  7. Anonymous  ::  4:37 pm on April 9th, 2010:

    The article implies that the insurance coverage will be cheaper. However, I'm concerned that the cheaper government insurance plan will provide LESS coverage and create longer wait times for medical services.

  8. Anonymous  ::  4:07 am on April 23rd, 2010:

    “Consumers, on their own, have no clout”
    It is entirely possible that consumers could quickly become quite discriminating consumers of health insurance.
    With a little good information, consumers could make health insurance as attentive to consumer preferences as auto makers, as lean as airlines, or even as competitive as the term life insurance business.

  9. Anonymous  ::  3:37 am on September 13th, 2010:

    Except for the employer penalty for larger firms mentioned above, there are only limited mechanisms to stop employers from dropping coverage and allowing their employees to enter the exchange.

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