NCPA - National Center for Policy Analysis

ObamaCare's Incentive to Drop Insurance

October 22, 2010

This past spring, the Patient Protection and Affordable Care Act (President Obama's 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 to reflect the values of the law's authors:  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 they failed to consider properly were the possible strategies of others, says Philip Bredesen, Democratic governor of Tennessee.

  • In 2014, when these exchanges come into operation, a typical family of four with an annual income of $90,000 and a 45-year-old policy holder qualifies for a federal subsidy of 40 percent of their health insurance cost.
  • For that same family with an income of $50,000 (close to the median family income in America), the subsidy is 76 percent 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.  The eventual penalty for not providing coverage -- $2,000 per employee -- is still far less than the cost of insurance, says Bredesen.

The authors of health reform primarily targeted the uninsured and those now buying expensive individual policies.  

  • But there's 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.

The consequence of these generous subsidies will be that America's health reform may well drive many more people than projected out of employer-sponsored insurance and into the heavily subsidized federal system, says Bredesen.

Source: Philip Bredesen, "ObamaCare's Incentive to Drop Insurance," Wall Street Journal, October 21, 2010.

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