Much of Obamacare’s success hinges on whether a pair of new taxes can compel more Americans to have health insurance.
For all the carrots in the 2010 law such as tax credits and subsidies, there are two big sticks of the big sticks meant to change the behavior of a projected 58 million uninsured. There are other taxes on medical devices and gold-plated insurance plans that all told will raise $1 trillion over the next decade.
The two big ones are taxes that will hit employers and consumers directly—a critical element of a law that remains a political hot button. House Republicans are banking on its unpopularity, putting forward a budget that strips away all of the spending attached to Obamacare while some GOP lawmakers demand it be defunded as a condition for raising the government’s borrowing authority in May.
The most recent Congressional Budget Office projections estimate that 14 million Americans will opt to become insured next year rather than pay a penalty that for individuals starts as low as $95. Companies that decline to provide coverage would pay a $40,000 fee.
By the time the penalties are fully ramped up in 2017, 27 million uninsured Americans would receive health coverage, but 29 million would still go without. The combined taxes, designed to raise $202 billion through 2023, were designed to cover the cost of insuring 90 percent of the U.S. nonelderly population. But that intention may be undermined by what could be a growing swarm of insurance dropouts. .
The CBO has all but acknowledged that the economic impact of the law is a crapshoot. The nonpartisan agency adjusted its forecast this year, under the assumption that state-run exchanges providing subsidized health coverage will be slow to get off the ground, meaning that more Americans will initially have to rely on private insurers.
Organizations such as the International Franchise Association—which represents the owners of hotel, fast food, and moving company chains among others—also see the affects of the taxes as somewhat unpredictable. Too high a penalty creates a new financial burden, while one that’s too low likely preserves the status quo.
“No one really knows how an employer or employee is going to react until the law gets implemented,” said Judith Thorman, senior vice president for government relations and public policy at the International Franchise Association.
So, how would these taxes work?
For individuals without health insurance, the penalty would start next year at $95 a person, $285 for a family of three or more, or 1 percent of their income—whichever is largest. The size of the penalties would increase through 2016 to $695 a person, $2,085 for a family, or 2.5 percent of income. The tax would raise $52 billion through 2023, the CBO forecasted.
The U.S. Supreme Court ruled last year that this individual mandate made Obamacare constitutional. President Obama reacted to the ruling in a speech where he said the tax would hold down the costs of medical treatment.
“First, when uninsured people who can afford coverage get sick, and show up at the emergency room for care, the rest of us end up paying for their care in the form of higher premiums,” Obama said. “And second, if you ask insurance companies to cover people with preexisting conditions, but don’t require people who can afford it to buy their own insurance, some folks might wait until they’re sick to buy the care they need -- which would also drive up everybody else’s premiums.”
But the concern among insurers is that the penalty fee might be too low for the first two years.
Their perspective is that younger Americans with fewer medical problems will decline to enroll, because a $95 or even a $300 fee is likely a fraction of what they would otherwise pay for coverage. And there may be a reason for that decision. In the past, a healthy twenty-something could buy “catastrophic insurance” for a very low monthly fee. Under the new law, they would have to buy a more expensive policy, which helps pay for the new class of insured, including those with chronic diseases.
New payments from healthy individuals who don’t need medical services would in theory enable insurance to be cheaper for everyone. So it’s not just about how many people enroll in health insurance, but who they are.
“These first couple of years are going to be critical,” explained Robert Zirkelbach, a spokesman for America’s Health Insurance Plans, the association representing the industry. “If only older people buy coverage in the first couple of years, then the cost of coverage becomes less affordable.”
If the program does not control costs, then the benefits promoted by Obama won’t happen.
On the corporate side, it can be confusing just which companies would be hit with a penalty. Only companies with more than 50 full-time employees would be required to provide health insurance, or pay a $2,000 per person penalty fee.
The penalty would not apply to the first 30 employees, so this would mean the fee would starting being assessed on the next 20 workers and be at least $40,000. For many, that could be a drop in the bucket. The average cost to insure a family of four for a year is 20,000. Based on CBO projections, the tax would generate $5 billion next year and a total of $150 billion in the decade to follow.
The Hudson Institute, a conservative think tank, calculated in 2011 how many International Franchise Association members would face a penalty. Almost 60 percent would not, since the vast majority of their members own one or two locations. But the penalties would likely start for a franchise business that controls more than three—for example—McDonald’s.
For 63 franchisers who own more than 250 stores each, their bills could exceed $8.5 million and in total would account for $2.5 billion in fees.
But the wildcard is who counts as a full-time employee. Obamacare defines it as anyone with a 30-hour workweek—and employers are using this year as a look back to determine how many of their workers count as full-time over the course of six months to a year, since shifts can vary during busy seasons.
This could mean that more workers find themselves stuck with fewer hours.
“The intent was to cover a lot of people under the law by making the definition 30 hours,” said Thorson at the International Franchise Association. “The unintended consequence is a shift in employment—not just with our members—toward part-time. Businesses that have to manage their costs are going to have to look at that option.”