The Massachusetts Experience: Reform shifts the healthcare landscape

Seven years ago, Massachusetts embarked on an ambitious journey to expand coverage to nearly every resident in the state. Through a mix of legislation, regulation and coalition building, the state has succeeded -- and provided meaningful lessons for healthcare companies along the way. In a two-part series, HRI examines how Massachusetts health reform impacted employers, insurers, and healthcare providers -- and what this may mean for the US healthcare industry under the Affordable Care Act.

Videos:

Cost containment under Massachusetts healthcare reform

In 2012, Massachusetts passed a law that takes aggressive action on cost containment. HRI assesses how effective the main provisions of the law will be in controlling healthcare costs.

The math on employer healthcare coverage

Even before the Affordable Care Act was enacted into law, policymakers, politicians and industry leaders have debated the impact it will have on employer-sponsored health coverage. Approximately 150 million Americans get their health insurance through their jobs. As implementation of the ACA moves forward, it has many people wondering about the fate of employer-sponsored insurance.

The math on employer-sponsored insurance

What it means for employers

When it comes to compensating their workers, businesses save money when they provide a combination of salary and health insurance due to federal tax exclusions. In the example below, the company that provides coverage to a worker earning $52,000 per year in 2014 saves $2,550.87 because of the tax deductiblility of the insurance.

What it means for employees

Take home pay for workers is higher when they obtain health insurance through their employer. In the example below, a family with combined income of $92,000 in 2014 that has employer-sponsored coverage takes home $3,097.50 more in pay by taking advantage of the federal tax exclusion for the insurance.

Employer healthcare coverage by occupation

In 2006, Massachusetts enacted a law that would eventually provide healthcare coverage to over 98% of its residents and serve as a model for the architects of the ACA. Seven years later, Massachusetts offers insights into how businesses and workers may respond to the ACA by assessing the impact that reform had on employer coverage in the Baystate.

Employer-sponsored insurance for select occupations in Massachusetts

Shifts in the share of workers holding EST plans varied by occupation

Employer provisions under the ACA and Massachusetts health reform

  ACA Massachusetts
Employer coverage requirement/penalty Businesses with 50 or more employees pay a penalty for not offering coverage, or if an employee receives a subsidy in an exchange. Penalties range from $2,000-$3,000 per employee annually. Businesses with 11 or more employees must make a "fair and reasonable" contribution towards insurance coverage or pay up to $295 per employee annually.
Individual coverage requirement/penalty Individuals must carry insurance or pay a penalty. The tax equals a flat dollar amount or a percent of income, whichever is greater. In 2014 the penalty is $95 per adult, $47.50 per child or 1% of family income. The penalty increases every year. Individuals must carry insurance or pay a penalty equal to 50 percent of the lowest health insurance premium for each month the individual didn't have insurance.
Small Business Tax Credits Provides tax credits between 35% - 50% of the cost of coverage for small employees with no more than 25 employees and average annual wages of less than $50,000. The state offers a 15% rebate to lower wage small businesses that adopt wellness programs.
Exchange eligibility for small businesses Businesses with 100 or fewer employees can shop for coverage on a state exchange. States can expand participation to businesses with more than 100 employees in 2017. Massachusetts' Health Connector is available to businesses with 50 or fewer employees.

Methodology

All tax liabilities are calculated assuming 2012 federal individual, payroll, and corporate tax rates under federal law. State taxes are not included in these calculations. The business is assumed to owe the statutory corporate tax rate of 35%, has more than 50 full time equivalent employees and bears the full cost of the ACA penalty for not offering health insurance to employees. The payroll tax, while normally split evenly between the employer and employee, was 5.65% for the employee and 7.65% for the employer in 2012. For individual income taxes, it is assumed that the employee and family take advantage of the standard deduction and personal exemptions.

The employee is married and filing jointly, thus claiming a standard deduction of $11,900. They also claim two personal exemptions of $3,800 each and a dependent exemption of $3,800 for their child. The household income used in this example falls slightly below the national average for a family with two full-time workers. $15,000 is the average premium for private sector employer-provided family coverage in the US according to the 2011 Medical Expenditure Panel Survey.

When employer-sponsored insurance is offered, the employee’s effective federal income tax rate, after accounting for the deductions and exemptions, is 9.3% on combined taxable income of $77,000. Under this scenario, take home pay for the household is: Total wages ($80,000) - health insurance premiums ($3,000) - payroll taxes ($4,351) - income taxes ($7,185) =$65,465. The employer owes payroll taxes ($2,831), but may deduct them and the full value of the employee’s compensation ($52,000) from its corporate taxes. Thus, the total effective cost for the employer to hire the worker is: Wages ($40,000) + health insurance premiums ($12,000) + payroll taxes ($2,831) - corporate tax deduction ($19,191) = $35,640.

When health coverage is not offered, the employee’s effective federal income tax rate is 10.3% on combined taxable income of $92,000. Under this scenario, take home pay for the household is: Wages ($92,000) - payroll taxes ($5,198) - income taxes ($9,435) - direct purchase health plan premiums ($15,000) = $62,367. The employer owes payroll taxes ($3,978), but can deduct them and the full value of the employee’s compensation ($52,000) from its corporate taxes. The employer now also pays a penalty ($2,000) for not offering health insurance. Thus, the total cost to the employer for hiring a worker is: Wages ($52,000) + payroll tax ($3,978) + penalty ($2,000) - corporate tax deduction ($19,592) = $38,386.

This illustrative example assumes that the family takes the standard deduction of $11,900 in both scenarios. In many cases, households at this income level itemize deductions and may deduct premiums and cost sharing that exceed 7.5% of Adjusted Gross Income in 2012 (10% of AGI in 2013 and beyond). In the extreme case, in which the couple itemize and are able to deduct the entire premium, they still pay $848 more in payroll taxes if the employer drops coverage. Regardless of whether the employee itemizes deductions, the employer continues to lose $2,746 in extra tax payments and penalties if coverage is discontinued.