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Delay in employer penalties raises questions about budget forecast

Business groups are applauding the Obama administration’s decision to delay the requirement that employers with 50 or more full-time workers pay penalties for not offering adequate health insurance for one year.
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Business groups are applauding the Obama administration’s decision to delay the requirement that employers with 50 or more full-time workers pay penalties for not offering adequate health insurance for one year.

“The administration has listened to the National Restaurant Association about the concerns of our members, the complexity of the requirements, and the need for additional time to be able to comply effectively,” said Dawn Sweeney, president of the association.

But the delay -- and some speculation about repeal of the employer penalty -- calls into question the budget assumptions that the Affordable Care Act (ACA) was built on.

The Congressional Budget Office estimated in May that employers would pay $10 billion in penalties in fiscal year 2015, which starts on Oct. 1, 2014.

From 2014 to 2023, the CBO projected $140 billion in revenue from employer penalties, money that was supposed to help offset the law’s new costs of expanded Medicaid eligibility and tax credits to help the uninsured buy coverage.

“There’s no doubt in my mind that this is going to require a CBO re-score,” said Steve Bell, former staff director of the Senate Budget Committee and now senior director of the Economic Policy Project at the Bipartisan Policy Center.

One reason a re-score, or re-estimate, will be needed is that revenue from employer penalties will be missing for at least a year. Another reason is that workers who might have been covered by an employer plan in 2014, but find their employer doesn’t offer coverage that meets ACA standards will now be eligible to receive tax credits to buy their own coverage on the insurance exchanges, or electronic marketplaces, that are set to begin operating in January.

(On Friday the Washington Post reported that the administration will temporarily loosen the requirements that the exchanges verify consumers’ income and insurance status, relying instead for 2014 on self-reporting or "attestation" by individuals seeking the tax credits.)

“More people are likely to go uninsured by employers, and many more of them may head to exchanges where they will be able to qualify for taxpayer-subsidized coverage, which could substantially increase the cost to taxpayers,” said John McGowan, a lawyer and expert in employee benefit plans at BakerHostetler in Cleveland.

In effect, at least temporarily, the design of Obamacare has changed. “Take this piece of the Swiss watch out and you know it isn’t going to be the same,” McGowan said.

He said workers especially with any kind of chronic condition, or who have children, now have every reason to go the exchanges.

Open enrollment and determination of eligibility for tax credits start on Oct. 1.

The Obama administration has not yet provided an estimate of the number of additional workers who will be eligible for tax credits next year due to the delay in the employer penalty. Also yet unknown: the additional cost of providing those tax credits.

Despite the delay in employer penalties, those individuals who choose to go without buying insurance still face penalties, $95 for 2014, $325 for 2015 and $695 in 2016, to start.

Congress might not have passed the Affordable Care Act, or Obamacare, in 2010 if it were not for the official CBO estimate that the law would slightly reduce budget deficits in the first 10 years after its enactment. The revenue from employer penalties was one piece of a delicately balanced budgetary mechanism.

“By itself the effect of a one-year delay is relatively small,” said Charles Blahous, senior research fellow at the Mercatus Center, a conservative think tank at George Mason University. Blahous is also a public trustee of Medicare and Social Security.

“What's more significant is whether this is indicative of potential further slippage in the various provisions of the ACA that are intended to finance the coverage expansion: including not only the employer mandate, but the individual mandate, the ‘Cadillac’ plan tax, the Unearned Income Medicare Contribution, the Independent Payment Advisory Board, the medical device tax, and the Medicare reimbursement reductions, among others.”

Washington Post columnist Ezra Klein has called for a repeal of the employer penalty because he thinks it will discourage businesses from hiring low-income people.

Blahous said, “If the employer mandate proves unworkable and subject to possible repeal, even the optimistic representation of positive budgetary effects basically collapses.”

He pointed out that last year the CBO projected that from 2013 to 2022 the ACA would have a positive $109 billion effect on federal finances, and $106 billion of this was to come from penalties on employers. “So waiving those (employer) penalties would by itself basically wipe out even the most generous case that the ACA will be good for the budget.”

The larger lesson from the delay in the employer penalty is that while budget projections must be made and certainly have an effect on members of Congress when they vote for or against a bill, the projections may turn out to be wrong if subsequent unexpected events change the revenue numbers.