We do not have to rely exclusively on just a few years of data to understand the effects that the health reform will have. We can also look at the size of the taxes and disincentives in the Affordable Care Act, and their timing, and benchmark their likely effects against a long history of taxes and disincentives.
Incentives are affected by the ACA’s insurance-premium tax credits, cost-sharing assistance, employer mandates, Medicaid expansions (in the 32 states that did expand their program under the ACA), insurer risk-mitigation provisions, new Medicare taxes, the excise tax on “Cadillac” health-insurance plans, the medical-device tax, and by helping to reduce uncompensated care.
The new incentives operate on a variety of margins, but for the purposes of understanding jobs and productivity two important margins are employment and incomes. That is, the various provisions change the reward to creating and keeping jobs, and change the reward to efforts for obtaining greater incomes.
In some cases, as with the Medicaid expansions from the perspectives of the low-skill workers, the incentives are in direction of working more and working more productively (perhaps by encouraging industries and occupations where health insurance was traditionally not provided). But for each incentive there are a number of other disincentives.
Specifically, the major disincentives are:
The employer penalty, which has been in effect only since last year, is as costly as a $275 monthly salary for each full-time employee at a large business that does not offer ACA-approved health insurance. This is a $275-per-month disincentive for having full-time employees on the payroll.
Small businesses are discouraged from becoming large businesses. By hiring one more full-time employee, a business at the threshold between small and large (about 50 employees) would, in addition to that employee’s salary and benefits, add $5,500 to its monthly penalty expenses. This extra expense in many cases will exceed the salary itself.
Most full-time employees and their families are, by virtue of their employment status, prohibited from receiving the new subsidies. This is a major new disincentive for working full time, and will grow over time as households and employers become familiar with ACA health plans and how to use them to their advantage.
We should expect these changed incentives to manifest themselves with respect to both overall economic growth and hours worked.
Since 2012-13, economic growth has missed its historical average by approximately 0.6 percent per year, reducing GDP by $170 billion in 2015 and suggesting the annual loss could top $300 billion by the end of the decade.
While analysts might attribute slower growth to any number of causes, it is consistent with the historical experience of dozens of incentive changes, including changes to the Earned Income Tax Credit, personal income-tax brackets, public pension rules, unemployment benefit rules, and regulations regarding the length of the workweek (primarily in Europe). These studies typically show that, although a great many people do not change their work habits for any one tax change, the substitution effect of a work disincentive is, on average, in the direction of working less or ceasing to work.
The incentive changes embedded in the ACA, based on past incentive changes, are expected to ultimately reduce employment by 3 percent and GDP by 2 percent. That would be about 4 million jobs and more than $300 billion per year.
It is critical to understand how the ACA would affect work schedules and the number of part-time workers, because there are two rescheduling methods that would allow a job that normally is 30-plus hours per week to avoid the employer penalty and other full-time-work disincentives. One is to reduce the weekly schedule to below 30 hours — the now infamous “twenty-niner” schedule — and perhaps have additional employees make up for some of the lost work.
But the second method is to have fewer employees and have them work longer schedules in order to make up for some of work lost. Because market participants have an incentive to economize on the costs of avoiding the penalty, jobs that are normally above, but close to, 29 hours per week will tend to adopt the former method whereas jobs that normally have a long work week will tend to adopt the latter.
As a result, when we measure part-time employment from the usual data sources that count any schedule less than 35 hours as part time, the effect should be close to zero. What the law should do is to reduce the hours worked among part-time employees, such as reducing a 32-hour schedule to a 28-hour one. The usual data sources would not show such a change as a shift from full-time to part-time, and we do not yet have enough data to conduct an accurate study of gradations of part-time work.
Schools and food-service businesses are disproportionately reporting that the ACA induces them to limit employee work schedules to 28 or 29 hours. Restaurant News reported that David Barr, an owner of 22 Kentucky Fried Chicken locations, is “looking at employees who work between 30-33 hours per week and will likely be reducing their hours to below the 30-hour threshold,” but that he would not cut back the hours of those employees working closer to 40 hours per week.
School district No. 1 in Sweetwater County, Wyoming, said in a press release that staff members with 30-34 hour schedules would be cut to 29 hours and that, in some of those cases, new opportunities would be available for more weeks of work per year. Hundreds of other examples have been compiled by Jed Graham of Investor’s Business Daily.
Because there is more than one adjustment strategy, it is easier to predict the number of full-time equivalent jobs than the number of jobs per se. As noted above, the history of taxes and disincentives suggests that there will ultimately be 3 percent fewer full-time equivalent jobs as a consequence of the ACA.
The jobs-per-person metric is calculated by dividing total hours worked in the economy each week by 40, to create a number of full-time equivalent jobs, and dividing that figure by the number of Americans over the age of 16. Because the ratio is the equivalent to calculating the total number of jobs but giving long-hours jobs more weight than short-hours jobs, it best accounts for the ACA’s expected effects of pushing down the hours for already-part-time employees and replacing multiple part-time employees with one employee working more hours, presenting a clear picture of whether the total amount of work is keeping pace with population growth.
What about Massachusetts?
The Obama administration and other advocates of the ACA have insisted that the federal law’s negative effects (that is, in the direction of a smaller economy) will be hardly visible, based on the experience in Massachusetts. The Bay State’s 2006 health law, aka Romneycare, specified that state residents must have health insurance, or potentially face a monetary penalty; created a couple of health plans with means-tested subsidized premiums; and penalized those employers that did not provide health insurance for enough of their employees.
Because the Massachusetts labor market did not noticeably contract relative to the rest of the nation after Romneycare went into effect, the U.S. Department of Health and Human Services said, “The experience in Massachusetts … suggest(s) that the health care law will improve the affordability and accessibility of health care without significantly affecting the labor market.” An Urban Institute study also said that “the evidence from Massachusetts would suggest that national health reform does not imply job loss and stymied economic growth.”
These assertions assume that the Massachusetts reform increased tax rates on employment and incomes in the state by roughly the same magnitude that the ACA is increasing them across the country. The assumption is incorrect, as shown by application of the same incentive-measurement methodology to both health reforms.
Not surprisingly, Massachusetts reduced incentives to work as it attempted to target assistance to low-income families. However, the state-average disincentive added by the Massachusetts law was about 11 times less than it will be nationwide with the ACA. For example, Romneycare charged an employer penalty of less than $25 per month per full-time-equivalent employee and, unlike the ACA’s penalty, this payment was deductible for the purpose of determining the employer’s income tax.
The obvious conclusion from these data is to expect the ACA to depress labor markets substantially more than did the Massachusetts health law. If Romneycare had depressed the Massachusetts labor market by 0.2 percent or 0.3 percent, that would simultaneously be difficult for econometricians to detect in the Massachusetts data and be right in line with my estimates of the nationwide labor market consequences of the ACA.