Some Unions Will Hate Obamacare... Because Its Cost Containment Measures Work

A lot of unions are going to end up hating Obamacare

By Ezra Klein, Published: August 5 at 2:29 pmE-mail the writer

In 2018, the Affordable Care Act will begin levying a tax on unusually expensive health-care plans. The tax will be 40 percent on each premium dollar over $10,200 for individual plans and $27,500 for family plans.

It’s one of the most powerful cost control provisions in the bill. It’s so powerful, in fact, that there’s real evidence that it’s already working, despite the fact that it won’t go into effect for four years. But because it’s working, it’s going to make a lot of people who get good employer-based benefits really unhappy — including some of the law’s supporters, like labor unions.

The basic idea is simple. Due to some weird decisions we made during World War II, employer-provided health benefits aren’t taxed, even though wages are. That means it’s a much better deal for a worker to get health benefits through their employer than to get the wages and buy the health care themselves.

Pretty much every health economist believes this is a disaster. It’s put employers in charge of health insurance decisions, which doesn’t make a lick of sense, and it’s made it so workers don’t know the true cost of their health insurance, as their employer is picking up the tab. The damage is evident even in the language we use: employer-provided health care is called a “benefit,’ as if the employer gives it away for free. Really, it’s coming directly out of worker paychecks.

But with about 150 million Americans getting health insurance through their employers, ending it would be too much disruption, too fast. So the Affordable Care Act only taxes the really expensive health plans, and even then, it only taxes part of them. But there’s a bit of a trick here: The tax grows really quickly, so with each year that goes by, more and more health plans are exposed to it — at least unless they’re able to hold down costs.

That’s the point of the tax: Give employers both an incentive and an excuse to get really serious about holding down costs. If workers complain, the HR department can just blame Obamacare.

And it’s working. In New York, for instance, “the administration of Mayor Michael R. Bloomberg, in its final months in office, is asking municipal unions to agree to seek new bids for the city’s health insurance business, hoping to lower premiums. It has already achieved one small victory, getting the city’s current primary insurer to freeze premiums for one year if it keeps the city’s business, the mayor said on Friday.”

All that cuts costs. But it also infuriates workers — and, in some cases, the unions that represent them. After all, they’re getting something for all that health-care spending. Their plans feature vast networks, low out-of-pockets costs, and much else. Some of that will be ratcheted back. And in a state like New York, some of a plan’s costs have less to do with its generosity than the fact that New York is a really expensive health insurance market.

All this was known back when the tax was first being considered, which is why many labor-affiliated groups opposed this provision in the law. But ultimately they cared more about passing the bill than eliminating this bit, and the Obama administration managed to keep the tax around. As the tax comes closer and more employers and local governments begin assessing their benefit plans to try and avoid it, however, the effort to fight the tax will be fierce.

That sets up one of the recurring problems in health-care policy, which is that the more you do to control costs, the more people will hate you. Insurers found this out in the 1990s, when HMOs managed to save a lot of money without doing any measurable harm to care, but the American people loathed them for it. Various provisions in the Affordable Care Act — or any serious cost-control effort — will end up proving it again.

This will present a useful test for seeing who’s serious about controlling health-care costs. Conservative economists, for instance, almost universally hate the fact that employer-provided health benefits aren’t taxed, and that public-sector workers have bargained so aggressively for generous benefits. John McCain’s 2008 health plan relied on ending the employer deduction entirely and converting it to a capped deduction for individuals — which is a much more violent version of this kind of change.

But as the excise tax comes closer, it’s going to lead to a fair amount of anger at Obamacare — and it’s going to be hard for Republicans to pass that up strategically. Back during the debate over the law many conservatives dealt with this tension by simply claiming the tax wouldn’t go into effect. But that’s clearly not what corporations and municipalities think, and really, the only plausible way in which the tax gets repealed is that Republicans work to repeal it.

So here, as with much else in the law, they’re going to face a choice: Their policy goals or their political ones?