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A Health Reform Critic Flunks Math

Tennessee Governor Phil Bredesen takes to the Wall Street Journal editorial page on Thursday to attack health care reform. Bredesen has been critical of the Affordable Care Act for a while. This latest missive suggests that the law is a bad deal because it gives employers incentive to drop health insurance coverage. It’s a claim a lot of critics are making, particularly after reports that some employers might be scaling back coverage in anticipation of reform. But those reports have mostly turned out to be false or misleading. The same is true of Bredesen’s op-ed.

The gist of Bredesen’s argument is pretty simple: Some firms will find it more attractive to stop offering insurance and let employees get coverage through the new insurance exchanges, where generous subsidies will be available. But the Affordable Care Act, which I've long supported, imposes strong penalties on firms that do not offer insurance, as well as sizeable tax credits for smaller firms that encourage them to offer. And in most firms, the majority of employees will make too much money to be eligible for large subsidies anyway. It is for this reason that the Congressional Budget Office estimated that PPACA will reduce employer sponsored insurance in the U.S. by only about 2.5 percent by 2019. In other words, the effect on employer sponsored coverage will likely be small.

CBO projections aren’t perfect, of course. But this particular projection is consistent with the best evidence we have--evidence that, once again, Bredesen completely ignores. In 2006, the state of Massachusetts put in place a system much like the one the Affordable Care Act will create nationally--with subsidies for low income groups (subsidies that are even more generous than those in the Affordable Care Act) and an individual mandate, but without the small group tax credit or meaningful penalties on firms that don’t offer insurance. The result? Employer-sponsored insurance has risen in the state by more than 100,000 persons.

Bredesen does talk about another state--his home, Tennessee--and does some calculations to suggest it would save money by dropping insurance for its public employees. But his math is way off. First of all, Tennessee state employees generally make too much money to get big subsidies through the exchanges. Forty percent have incomes higher than 400 percent of the poverty lines, which means they’d be eligible for no tax credits at all; even for those with incomes below that level, the average tax credit would offset just a third of their premium cost. Second, if these individuals lost their public employee insurance and went into the exchanges, they would want to receive the same very generous benefits they get now–coverage comparable to the platinum plans offered in the exchange. Working from CBO’s estimate of the cost of less generous plans in the exchange in 2016, those plans would cost about $6650 for an individual and $17,400 for a family in 2014.

Using the Governor’s estimates of 40,000 state employees, and accounting for the low subsidization and high cost of the very generous benefits they would need to get in the exchange, I estimate that it would cost state employees about $425 million out of their own pockets to replicate in the exchange what they get today from the state. Accounting for the amount already paid by employees ($63 million after tax), that is a net increase in cost to them of $362 million. Providing a raise to state employees sufficient to offset that cost would cost the state about $496 million, which is itself an understatement since the higher wages would lower the employees’ subsidies and require additional raises. Add to that the $80 million the state would have to pay in free rider assessment, and the cost to the state is $576 million. Thus, by dropping insurance, the state wouldn’t save money, as Bredesen claims. It would incur a new cost of around $230 million--and, along the way, displace state employees from their existing source of insurance. I find it hard to believe Bredesen--or any sane governor--would even think about doing that.

Bredesen ignores one other important point: Employer-sponsored insurance in the U.S. is already eroding, on its own. The share of individuals with employer-sponsored coverage has declined by almost 15 percent over the past decade. These individuals have to turn to a broken and dysfunctional non-group market, resulting in higher premiums, growing rates of uninsurance, and increased medical bankruptcy. These are exactly the individuals who will be assisted by the market reforms and tax credits put in place by Affordable Care Act.

Bredesen, in other words, has it backwards. The Affordable Care Act will not lead to widespread erosion of employer-sponsored insurance. Rather, it will provide the necessary protection for those who are suffering from the erosion that is already taking place.

Jonathan Gruber is a professor of economics at MIT and member of the Massachusetts Health Connector Authority Board. He has served as a paid technical consultant to the Department of Health and Human Services and continues to advise policymakers about health care reform.