The goal of the Affordable Care Act was to help several large classes of people who had been excluded from the insurance market because of rising prices and previous insurance practices. Those consisted mainly of people who could not afford to pay for insurance, and people who could not buy insurance at any price because of present or past health problems.
But most Americans already had insurance. According to a recent NBC News report, 32 percent of Americans get government-sponsored insurance such as Medicare or Medicaid. Among those too young for Medicare, 58 percent get health insurance through an employer.
Employer-provided insurance typically offers more choices and better coverage options than policies available on the individual market. The ACA was never intended to disrupt or undermine that market, so the ACA specifically excludes individuals who are eligible for employer-provided insurance from subsidy eligibility.
There is one exception: if the cost to the employee of the employer-provided subsidy is more than 9.5% of the employee’s income, then that person can shop on the exchange instead and receive a subsidy if the income is low enough.
That makes sense logically: those whose employer-provided insurance is affordable within the law’s definition will stay on those plans; those who cannot afford to buy into the employer plan will have another option. And this probably will work well for lower-paid workers whose employers do not heavily subsidize the plans that they offer to their employees.
But because of the way the law is worded and has been interpreted, many middle class families are finding that they are stuck with extremely high premiums and no way out.
Here’s why: the test of affordability is whether the employer-provided insurance for the single employee is more than 9.5% of that employee’s income. The test works fine as long as only the employee has coverage. But most employer plans also allow the employee to include a spouse and dependent children (and sometimes a domestic partner). However, employers will often heavily subsidize the cost of the employee’s coverage, but sell the dependant coverage to the employee at full cost or with only a minimal subsidy.
So here is a typical example. The employer pays 80% of the premium for the worker, keeping his premium well below the 9.5% level, so the employee is not eligible for a subsidy on the exchange. However, the employee would have to pay full cost to put the spouse and children on the employer-sponsored plan, and that cost is astronomical in relation to the employer’s salary. The spouse and kids are free to buy insurance from the exchange, but they will not be eligible for subsidies, because they are eligible to be on that employer plan, and the low cost of the employee’s own coverage prevents the family from claiming a subsidy.
These families can get insurance — no problem — but it may be very, very far from “affordable.”
This is one of those legislative goofs that could cause real harm if not properly addressed. The problem is that it creates a powerful incentive for some people to quit their jobs. In the past, employees would choose to stay with an employer in order to retain insurance. But now there is going to be a subgroup of employees who may find they are better off to seek work with an employer who does not offer insurance at all, perhaps exchanging the insurance benefit for higher pay or other alternative benefits. Of course this group would only include those whose incomes are low enough to qualify for subsidies — but for a larger family, that upper limit could easily be a six-figure salary.
These types of legislative glitches are not uncommon. Usually, the solution is that after original passage of a bill, there will be “cleanup” legislation passed to fix the little problems that have become apparent. Unfortunately, the partisan politics of ACA has not allowed that to happen.
I think this is an area where many employers will have to step up to the plate and increase the level at which they subsidize dependent care. They may need to explore different options for employee health care to make it economically feasible — for example, by offering alternative plans with lower premiums and higher deductibles for families who cannot bear the cost of the premiums for the preferred plans.