What’s So Bad About Grassley's Obamacare Amendment?

Josh Barro is the lead writer for the Ticker, Bloomberg View's blog on economics, finance and politics. His primary areas of interest include tax and fiscal policy, state and local government, and planning and land use.
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Ezra Klein and Brian Beutler are writing about today's latest mini-outrage: Some Congressional offices are looking for a workaround for the Grassley Amendment to the Affordable Care Act, which states that Congress can't offer its employees health plans that are not on the Obamacare insurance exchanges. Grassley devised the amendment as a "gotcha" during the debate over health reform. It was intended to demonstrate that congressional staff would want to avoid the exchanges; instead, Democrats surprised him by agreeing to make his proposal law.

The "problem" some are trying to address is that there's no way to provide a tax-advantaged employer subsidy of such plans. Low- and middle-income congressional staffers would qualify for the same income-based subsidies as other members of the public, but higher-paid staffers would have to pay full price for the plans, which could mean a significant financial hit compared with their current insurance.

I don't think this is a problem.

The regime the Grassley amendment imposes on Congress is the one that we ought to be imposing on every employer. The tax subsidy for employer-provided health insurance is hugely inefficient; it encourages overconsumption of health care and provides a benefit that becomes more valuable as an employee's income rises -- so the biggest subsidies go to the people who need them least.

Employer-provided coverage does perform a valuable risk-pooling function, making it possible to cover people whose risky health status would otherwise make it difficult or impossible for them to buy individual insurance. But Obamacare's exchanges also perform that function, so once they are established, in 2014, the employer subsidy becomes much less necessary.

The Grassley amendment will also free up cash: Congress will save all the money it currently spends subsidizing employees' health insurance. It should take that money and put it into higher staff salaries, thereby demonstrating that employer-paid health insurance contributions aren't free but ultimately come out of employee wages. Congressional staffers could then take that extra cash to buy insurance through the exchanges. Some would choose the cheapest "bronze" level plans and shift their compensation away from health benefits to cash.

The Grassley amendment allows Congress to serve as a pilot program. In coming years, as the fiscal pressures from rising health costs continue to mount, Congress will be looking for new ways to contain costs. The experience of having been dumped into the exchanges -- especially if it's a satisfactory one -- may make Congress inclined to save public and private money by restricting the subsidy for employer-provided coverage.

Far from being a political gimmick, the Grassley amendment may be the Trojan horse that finally kills the tax subsidy for employer-provided health care.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.