Employers Will Drop Coverage If Obamacare Subsidies Are Extended

Washington is currently focused on whether to extend COVID-era Obamacare subsidy add-ons. Democrats demanded these supposedly temporary subsidies be extended, leading to the recent government shutdown, and as of last week, even president Trump is now saying “it may be necessary” to extend them. Continuing these add-on subsidies creates many problems, starting with the fact it forces taxpayers to subsidize a significantly larger portion of the premiums for people who buy on Obamacare’s individual health insurance exchanges.

However, one major, and overlooked, problem with these subsidies is how they harmed people with employer-sponsored insurance and created large incentives for small employers to not offer health insurance.

Americans choose where to work based on the compensation they receive, which often includes health insurance for themselves and their families. Yet, as a result of the Affordable Care Act, the federal government increasingly penalizes people with employer-sponsored health insurance, while rewarding those who do not get coverage at work. This structure causes employers to forgo offering coverage and workers to prefer jobs where they do not receive health insurance.

If you get employer-sponsored insurance, you get a tax advantage because you get to exclude the premium — a large portion of which is the compensation you earned — from your income taxes and payroll taxes. In contrast, under the ACA, the federal government sends subsidies to health insurers in the names of their enrollees, but these are unearned benefits.

Under the current system, Americans doing the exact same job equally well should ultimately earn the same compensation. But they won’t be treated equally if one gets employer-sponsored insurance and the other is on Obamacare. In a recent Paragon study, we show how workers in identical jobs creating equal value for society receive dramatically different after-tax compensation depending on where they get their coverage.

Consider a 50-year-old worker earning $46,950. With Obamacare, he would receive a $5,797 premium subsidy next year under current law — or $7,656 if the expiring COVID-era subsidy boosts are re-instated. If a worker with the same job and salary has employer-based coverage, his tax benefit from the premium exclusion is $2,760. The difference — $3,037 under current law and $4,896 with the COVID credits — is a penalty on the worker with employer-based insurance.

The disparities are even larger for families. A young family with two 35-year-old parents and two children, ages 7 and 10 years, is much better off without obtaining coverage at work. If the family’s income is $64,300, they will receive a premium subsidy of $19,059 for an Obamacare plan. The tax break for an employer-based health plan for the family would be only $5,904. That is a huge difference — it is a $13,155 federal preference for families who do not receive coverage at work, despite earning the same income.

If Congress resuscitates the COVID-era enhanced ACA subsidies, it gets worse. The family’s subsidy would be $22,017, and the net government penalty for earning coverage at work would increase to $16,113.

We looked at the penalties for people at other stages of life. The result is consistent: Obamacare punishes workers who earn their health benefits at work. By tying the subsidy to the absence of an employer-based health insurance plan, the government discourages people from working for employers who offer health coverage. Even worse, there is some evidence that people in their 60s are quitting work younger to get heavily subsidized Obamacare coverage while they wait for Medicare.

Because the ACA’s subsidies are so large, coverage is shifting from an earned workplace benefit to an unearned government welfare benefit. When employers drop coverage, compensation shifts from health benefits to wages — leaving taxpayers to pick up most of the cost of coverage.

This shift is visible in employer behavior. Small employers have steadily dropped coverage since Obamacare launched. In 2010, 92 percent of firms with 25 to 49 employees offered health coverage. By 2020, only 70 percent did, and by 2025 only 64 percent did. Large employers are discouraged from dropping coverage because Obamacare levies a large tax (called the employer mandate penalty) if they do not offer coverage.

Obamacare’s subsidy design distorts labor market decisions, encouraging people to choose jobs or work arrangements without coverage simply to qualify for larger government subsidies. Since people earn total compensation for what they produce, this encourages people to take jobs or opportunities that are cash wages without health benefits. This shift escalates federal spending. In fact, federal spending on ACA subsidies has more than doubled since 2021 and is projected to keep climbing as employer coverage continues to erode.

Unlike employer-based benefits, which employers use to attract workers and have greater tax benefits when income increases, Obamacare subsidies also punish upward mobility. Every extra dollar they earn triggers a reduction in their subsidy, effectively taxing added work. On average, Obamacare’s subsidy phaseout creates an implicit marginal tax rate of about 15 percent — so for every $100 in extra earnings, an enrollee loses roughly $15 in subsidies.

A key distributional part of Obamacare is forcing workers who earn their health benefits through work to subsidize coverage for millions of able-bodied adults. And it incentivizes subsidized workers to work less.

The recent government shutdown and soaring Obamacare premium increases have put the program under a magnifying glass. It isn’t just failing to lower health care costs and the deficit. It discriminates against workers with employer-sponsored insurance — one more reason to end the COVID-era enhanced subsidies, which worsen existing Obamacare problems.

Brian Blase is President of the Paragon Health Institute. John R. Graham is a Visiting Fellow at the Paragon Health Institute.