NCPA - National Center for Policy Analysis

Health Exchange Subsidies Will Reduce Employer Health Plans

November 16, 2011

The Patient Protection and Affordable Care Act (ACA) -- the new health reform law -- contains financial incentives for the states to establish health insurance exchanges where qualifying individuals and small businesses can purchase subsidized, individual health insurance, starting in 2014.  The structure of the exchange subsidies will encourage low-income workers to congregate in companies that do not provide insurance and high-income employees to work for firms that do provide it, says Devon Herrick, a senior fellow with the National Center for Policy Analysis.

Buying insurance through the exchange instead of receiving it through an employer is a wise financial move for low- and middle-income families. 

  • Indeed, families earning 133 percent of the federal poverty level without access to an employer-provided plan will pay no more than 3 percent of their income in premiums.
  • A family earning 400 percent of the poverty level will pay no more than 9.5 percent.

The ACA requires individuals to have insurance with certain mandated benefits likely costing $15,000 or more for family coverage in 2016.  Economists generally agree employee benefits are a dollar-for-dollar substitute for wages.  That implies the pay of a previously uninsured $30,000-a-year worker will be cut 50 percent to compensate for the cost of mandatory health insurance.  Further, the only tax subsidy this worker will receive is the ability of his employer to pay the premiums with pretax dollars.  That is worth about $3,000. 

On the other hand, if this worker can get the same insurance through the newly created health insurance exchange, the federal government will pay a total subsidy potentially worth more than $15,000.  It follows that every worker at this income level will want to work for a firm that does not offer health insurance and pays higher cash wages instead.  Thus, employers will have an incentive to drop their health plan in order to offer competitive wages. 

The potential loss of employer health coverage is just one of the unintended consequences of the ACA.

Source: Devon Herrick, "Health Exchange Subsidies Will Reduce Employer Health Plans," National Center for Policy Analysis, November 16, 2011.

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