A Non-Partisan Case For Obamacare Reform

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Pundits are saying that even if Republicans win control of the Senate in Tuesday's elections, gridlock would continue. Senate Democrats would block major legislation, and, even if bills passed, President Obama would veto them.

But congressional Republicans and Democrats, as well as President Obama, have an interest in terminating the disincentive effects on employment of the Affordable Care Act. By ending the employer mandate to provide health insurance, employers would be free to hire more full-time employees.

The employer penalty is estimated to bring in $139 billion over 10 years to the U.S. Treasury. But the damage the penalty is doing in the long run is far greater in terms of lower employment and reduced incomes, which result in lower tax revenues.

The structure of the Act has altered patterns of employment. Hiring levels remain low more than five years into the recovery. The non-partisan Congressional Budget Office has estimated that the Act will lower the size of the labor force by 2.5 million full-time-equivalent workers by 2024.

Large employers, those with over 100 employees, who do not offer an ACA-compliant plan, will owe a penalty of $2,000 per full-time worker per year beginning in 2015. Small employers, those with between 50 and 100 full-time equivalent workers, will owe the fine beginning in 2016. This penalty is already discouraging hiring, especially of low-skill full-time employees. The tax rises to $3,000 if the worker gets subsidized care from the health care exchange.

Employers can avoid these penalties by using more part-time workers, those who work fewer than 30 hours weekly. Employers do not owe the fines if they do not offer health insurance to their part-time workers. And, no surprise, part-time employment has been rising. There are now 3 million more people working part time than there were before the recession.

President Obama is fully aware that the employer penalty is burdensome and interferes with hiring, because he has already postponed it twice. In the statutory language of the Act, the employer penalty was supposed to take effect for all companies in 2014. On July 2, 2013, it was postponed for all companies to 2015. Then, on February 10, 2014, it was postponed again for small companies until 2016.

For example, a firm with 60 full-time employees would pay a penalty of $60,000 a year (the first 30 employees are exempt) if it did not offer qualifying health coverage to its full-time employees. But if it cut 22 workers' hours to 15 a week, it would not owe a penalty, because it would have 49 full-time equivalent employees. If the firm wanted to keep its total work hours constant, and instead moved 10 workers to part-time and hired 10 more part-time workers, it would still be liable for the fine but the total penalty would fall to $40,000. This is because, though the firm would still have 60 full-time equivalent employees, it would only have to pay the $2,000 fine for 20 full-time employees (the first 30 workers are exempt). Keeping only 30 full-time employees, regardless of the number of part-time employees, would exempt a firm from penalties altogether.

Or, the firm could lay off 11 workers and hire contractors or seasonal employees, since the hours of contractions and seasonal employees do not count for full-time equivalent calculations.

Companies such as Papa John's, Forever 21, and Walmart are already hiring part-time workers instead of full-time workers. Other companies, such as Chili's, are putting in place technology to replace employees, such as tablets for food ordering to replace servers.

In a new study, University of Chicago economics professor Casey Mulligan concludes that total employment hours will fall by about three percent due to the ACA. More employees will be working 29 hours a week when they would prefer full-time jobs, a group he calls "29ers." The term "29ers" refers to those who will have their weekly work hours cut to 29 so their employers can avoid paying penalties.

Some other 29ers may try to keep their hours low in order to qualify for subsidized health insurance on the exchanges. This is because if a full-time employee receives affordable single health insurance coverage from his employer, then his family is not allowed to receive subsidies on the exchange. The way around this restriction: a part-time job or one that does not offer health insurance, so that the entire family qualifies for subsidized insurance on the exchange.

This is one reason that even though layoffs have slowed, and first-time unemployment claims have been under the benchmark 300,000 for 7 consecutive weeks, people are still not returning to the labor force. The labor force participation rate, those working or looking for work, has declined for three months in succession, and now stands at 62.7 percent, 1978 levels. New data for October will be released by the Labor Department on Friday.

Ending the employer mandate would eliminate one of the disincentives to hiring. Employers are not required to provide food, clothing, or housing to employees. They should not be required to offer health insurance. The $140 billion in employer penalties over 10 years could be raised through some other means. Both parties favor expanding employment, and the next Congress and President Obama should work together to change the law.

 

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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