Obamacare's Original Sin

President Barack Obama made two big promises during his first term that have tied his economic agenda in a straitjacket.

President Barack Obama made two big promises during his first term that have tied his economic agenda in a straitjacket.

One was his mostly-kept pledge not to raise taxes on families making less than $250,000 a year -- that is, 98 percent of Americans. The other was his promise about health care reform: "If you like your health care plan, you can keep your health care plan."

The latter pledge forced Obama try to do two things at once: keep employer-based coverage for the 45 percent of Americans who have it, while getting coverage to the 17 percent of Americans who don't have any at all. To achieve the latter, you have to offer subsidies to people who don't get health care through work, which would ordinarily give employers a reason to stop offering coverage. So, Obama had to come up with a series of carrots and sticks to induce employers to keep offering coverage -- and those sticks and carrots are about to cause all sorts of economic distortions.

The main stick is the employer mandate: Large employers who don't offer coverage will have to pay a penalty of $2,000 per uncovered full-time employee. This will discourage hiring, encourage employers to limit employees to part-time work, and give small firms an advantage over large ones. This last distortion is the real reason employers like Papa John's are complaining about the law. Their beef is not so much that Obamacare will raise their costs as that it will do so without raising the costs of the small pizzerias they compete against, meaning they won't be able to pass higher costs on to consumers.

This week, the Wall Street Journal reports that small employers, with as few as 10 employees, are shifting away from small-group health plans to self-insurance. In a self-insured plan, the employer pays directly for employees' health costs, with a health insurance company acting only as a plan administrator. Self-insurance isn't really appropriate for most small businesses, which may be ill-equipped to cover an employee's catastrophic medical expenses. But because self-insured plans are more lightly regulated under Obamacare than small-group plans, some small employers are shifting to them anyway.

Policy wonks across the political spectrum knew what had to be done to avoid these problems: abandon employer-based coverage. Most liberals would prefer a single-payer system where everybody gets health insurance from the government. Senator John McCain, among other Republicans, has proposed abolishing the tax subsidy for employer-provided coverage in favor of a uniform tax credit, which would encourage people to buy health insurance on the individual market. Democratic Senator Ron Wyden and former Republican Senator Robert Bennett for years promoted a universal health coverage plan that would have thrown most Americans into Obamacare-like insurance exchanges.

Those plans would have very different fiscal and distributional effects (and the McCain plan would still leave a lot of people uninsured), but they have two important things in common: they would lead to fewer employment distortions than Obamacare, and they would deny a lot of Americans the option to keep a health plan they like. They are all approaches that recognize that our current system encourages employers to buy overly-expensive health plans, and that helping Americans keep those plans is a bad priority.

While there was no good policy rationale for promising Americans that they could keep their existing insurance, there were two clear political rationales. One was risk-aversion: most Americans already have health insurance and are inclined to view health reforms as a threat.

The other is that a system that relies on an employer mandate reduces fiscal cost by cutting the number of people who get direct government subsidies for insurance. Instead of levying taxes to pay for people's health insurance, the government orders businesses to provide health coverage or else face a fine. This reduces measured spending on Obamacare, much like a minimum-wage increase looks "less expensive" than an increased Earned Income Tax Credit. But shifting the cost of coverage expansion away from taxpayers toward businesses doesn't make it go away.

Over time, the portions of Obamacare that encourage employer provision of health care are likely to be vulnerable. Employers hate the mandate, and argue (correctly) that it discourages job creation. Republicans want to repeal it. And Democrats may not remain totally averse to weakening it, since doing so would move more Americans into portable, government-subsidized coverage -- that is, one step closer to the liberal single-payer vision.

If the employer mandate is weakened, Obamacare would become more expensive to taxpayers but less damaging to the economy and job creation. The health care exchanges would become the increasingly dominant venue through which Americans get insurance. Obama's promise that you can keep that health plan you like would become less and less true. And we would be better off for it.

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

    To contact the author on this story:
    Josh Barro

    Before it's here, it's on the Bloomberg Terminal.