WEDGES , LABOR MARKET BEHAVIOR , AND HEALTH INSURANCE COVERAGE UNDER THE AFFORDABLE CARE ACT Trevor

The Affordable Care Act’s taxes, subsidies, and regulations significantly alter terms of trade in both goods and factor markets. We use a multi-sector (intra-national) trade model to predict and quantify consequences of the Affordable Care Act for the incidence of health insurance coverage and patterns of labor usage. If and when the new exchange plans are competitive with employer-sponsored insurance (ESI), our model suggests that more than 20 million people will leave ESI as a consequence of the law. Behavioral changes that are captured in the model could add about 3 million participants to the new exchange plans: beyond those that would participate solely as the result of employer decisions to stop offering coverage and beyond those who would have been uninsured. Industries and regions will grow, decline, and change coverage on the basis of their relative demand for skilled labor. Trevor S. Gallen University of Chicago Department of Economics 1126 E. 59th St. Chicago, IL 60637 [email protected] Casey B. Mulligan University of Chicago Department of Economics 1126 East 59th Street Chicago, IL 60637 and NBER [email protected] An online appendix is available at: http://www.nber.org/data-appendix/w19770 Making healthcare affordable should profoundly affect the labor market, because the poor and unemployed can least afford health expenses and because employers have traditionally financed much of the economy’s health spending. A fully implemented Affordable Care Act (hereafter, ACA) has the potential of altering the composition of employers, the demographic composition of the workforce, the size of the workforce, the number unemployed, and the structure of wages. Presumably the ACA was intended to reshape the market for healthcare, but not the market for labor. Perhaps those intentions explain why, so far, forecasts of various effects of the ACA hold constant most, if not all, labor market outcomes. The purpose of our paper is to fill this gap by quantifying new incentives created by the ACA and modeling labor market behavioral responses to them. The ACA is a large and complex piece of legislation. This paper emphasizes four types of provisions in the law: the means-tested subsidies for health insurance premiums and out-ofpocket expenses for persons who are not offered affordable health insurance by an employer (hereafter, “exchange subsidies,” which go into effect January 1, 2014), the monetary penalties on employers who do not offer health insurance to their full-time employees (going into effect January 1, 2015), the monetary penalties on uninsured persons, and the major medical reinsurance assessment. We also consider the interactions of these provisions with pre-existing payroll, personal income, and business income tax rules, and the so-called “family glitch” with 1 For example, the Congressional Budget Office’s Health Insurance Simulation Model (Congressional Budget Office 2007) and RAND’s Comprehensive Assessment of Reform Efforts (Eibner and Price 2012) forecast effects on the composition of employee compensation and the overall cost of health insurance, but not the level of employee compensation, the size of the workforce, etc. See also the studies surveyed by Buchmueller, Carey and Levy (2013). 2 The ACA creates health insurance “marketplaces” or “exchanges” where individuals can purchase health insurance. The insurance premium subsidies created by the law are administered so that they reduce what participants pay for insurance plans obtained on the exchanges. the exchange subsidies. We model the possibility that various ACA provisions may not be fully implemented, enforced, or fully considered by households. Our model features a health insurance decision that depends on taxes, subsidies, and administrative costs, broadly interpreted. Aside from possible tax benefits, a producer may offer health insurance to her employees because employees demand a cash wage premium to work for an employer that does not offer insurance. In our model, producers are heterogeneous in terms of the skill-intensity of their production technology and their costs of administering health insurance. Because administrative costs are passed on to consumers through output prices, market forces induce the producers with low administrative costs to hire more employees, especially those with more skill. Household labor supply and factor prices are also endogenous in our model. Altogether, tax and subsidy rules affect factor prices and the number of people covered by employersponsored insurance (hereafter, ESI) through four types of behavioral responses: the ESI-offer decision, factor market comparative advantage, consumer substitution, and labor supply. Our model also features non-group health insurance in the sense that employers can choose to forgo the subsidy implicit in the exclusion of ESI costs from the personal income and payroll tax bases, and let their employees obtain health insurance in a non-group market in which the real administrative costs are related to what they would be if they had obtained insurance through their employer. Absent the ACA, our model offers little reason for workers to obtain non-group health insurance because of the implicit tax subsidy for ESI. In contrast, the ACA offers subsidies that vary by worker skill and thereby attract a specific part of the population into the non-group market. Under both regimes, a segment of the population prefers to be uninsured because they face administrative costs and insurance loadings that are too large to justify the purchase of either ESI or non-group coverage. Our model therefore has quantitative predictions as to the number of people covered by health insurance and the composition of that coverage. Our model features heterogeneous sectors, some of which can be interpreted as “entrepreneurial” or intensive in small establishments. However, we do not model the ACA’s 3 See also Mulligan (2013) on interactions between ACA provisions, unemployment insurance, and uncompensated health care.