Tuesday, April 30, 2013

Hoisted On Their Own Petard

Early in my career as a tax attorney I worked on the sale of a large portfolio of commerical jet aircraft that my company owned.  It was a complex transaction that involved the sale and leaseback of about 25 jet aircraft that would be financed by one of the big money center banks to an experienced charter operator.

The President of the air charter operator was a great guy but there were a lot of issues that had to be negotiated to the satisfaction of both parties.  We were in New York City for weeks on end ironing out the deal.  One night our negotiations spilled over to a late dinner in one of Manhattan's eateries.  We were going back and forth when I realized that Bob had left himself open on one of the negotiating items.  He had pushed hard on a smaller point not realizing that he was undoing himself on an even bigger issue with the logic of his argument.

I jumped in and agreed with him on the small point he was making and then I immediately went to the bigger issue and pointed out that he must also agree with me on that one.  It took him a moment but he soon realized that he had been undone by his own words.  He looked up at me with a smile and said,

"You just hoisted me on my own petard!"

I had never heard that phrase before but I knew he was saying that he had just been skewered by the device he was intending to use on me.  Hearing the reference I wrongly thought that a "petard" was a small sword.  I thought being hoisted meant that you got lifted into the air on the point of your own sword.  I later found out that a petard is actually a firework or small explosive used to break into doors in Shakespeare's time.  Hoisted by your own petard means getting blown up by your own explosive or caught in your own trick. Shakespeare used the line in Hamlet.  You do learn something every time you read BeeLine!

I couldn't help but think of this story as I read the news from Washington last week that our legislators are in full panic mode as it has dawned on them that they and their staff members must use the Obamacare healthcare exchanges to access their healthcare coverage in 2014.  There was talk last week that a bipartisan effort was quietly underway to repeal this part of Obamacare until howls on both the right and left caused both John Boehner and Harry Reid to distance themselves from the idea.

Being required to get their health care in the exchanges presents two problems for Congress.  First, it puts individuals who have been getting their coverage on a group basis into what is essentially an individual marketplace.  It takes what have been group community rates for that coverage and makes it individually-rated coverage based on age.

The bigger problem is that the legislation as passed does not appear to allow the healthcare exchanges to accept any employer subsidy money to purchase healthcare coverage.  Government employees generally pay only 25% of the cost of their health care coverage currently. The remaining 75% is paid (tax-free) by the federal government as employer-provided health coverage.  Therefore, the concern is that Congress and their staffers may have to pay for the entire cost of their health care coverage with their own after-tax dollars.  Ouch!

Avik Roy of Forbes magazine provides the background on this story.
As Obamacare was winding its way through the Senate in 2009, Sen. Chuck Grassley (R., Iowa) slipped in an amendment requiring that members of Congress, and their staff, enroll in Obamacare’s health insurance exchanges. The idea was simple: that if Congress was going to impose Obamacare upon the country, it should have to experience what it is imposing firsthand. But now, word comes that Congress is quietly seeking to rescind that provision of the law, because members fear that staffers who face higher insurance costs will leave the Hill.

Sen. Grassley’s original idea was to require all federal employees to enroll in the exchanges, instead of in the Federal Employee Health Benefits Program, where most gain coverage today. Indeed, a previous Senate Finance Committee amendment proposed putting members and staffers on Medicaid. But “fierce opposition from federal employee unions” sank Grassley’s effort, and he had to water his amendment down to only apply to Congress and congressional staff.

Of course, the Democrats were totally in control so they could have banded together and just ignored Grassley's amendment.  However, being the great politicians that they are, they decided they better embrace the amendment since they were arguing that Obamacare would be so wonderful for everyone.

This is where their problem begins as it appears that someone did not read the entire bill before they passed the law.  This is how the law reads:

The only health plans that the Federal Government may make available to Members of Congress and congressional staff with respect to their service as a Member of Congress or congressional staff shall be health plans that are — (I) created under this Act (or an amendment made by this Act); or (II) offered through an Exchange established under this Act (or an amendment made by this Act).

That is pretty clear and simple.  The problem arises because the exchanges do not have any procedures for handling premium contributions from large employers.  Therefore, the implication is that those in the exchanges must pay the full cost of their health care cost coverage individually.  Oops!

There is no doubt in my mind that this is a drafting error.  I think it is clear that Senator Grassley merely intended that the employer contribution would follow the employee to the exchange.  However, there is a very real practical problem here as well.

Employer-provided group coverage is what is called community-rated.  Everyone in the group plan pays an average blended rate.  The 64-year old employee and the 24-year old employee pay the same rate for simplicity's sake.  In the individual market, coverage is age-rated.  Those older pay a higher rate than those younger because the actuaries will tell you that, on average, those older will have higher health care costs than those younger.  In fact, someone in their 60's will generally cost about 5-6 times someone in their 20's, according to the actuaries.

For example, let's assume a small employer has five employees in a group plan with the ages of 24, 34, 44, 54 and 64.  The actual projected monthly health care cost for each is $100 (age 24), $200 (age 34), $300 (age 44), $400 (age 54) and $500 (age 64) for a total of $1,500.  This would be the age-rated cost in the individual market. The community rate is $300 per employee.   If the employer pays 75% of the cost of coverage, each employee pays $75 per month.

The individual health care market today is generally age-rated.  Those older pay more than those younger. However, Obamacare turns this on its head a bit with a community rating provision that limits the rate differential from young to old at no more than 3X. This means that the young will pay more and the old will pay less than today.  Using the example above, the 64 year old might only be charged $450 but the 24 year-old would have to pay $150 with the other age cohorts being adjusted accordingly to reach the $1,500 per month total required for the entire group.

Why is this a problem for Congress?  Most Congressional staffers are in their 20's and 30's.  They potentially are going to get a real rate shock in the exchanges compared to what they could get in the individual market today.   Of course, this problem could be mitigated by the employer subsidy if it is allowed.  However, to insure no chaos, the subsidy will have to be customized to each age cohort.  That is no small task administratively to set up and manage.

The bigger problem is the potential loss of the tax-free employer contribution to the staffer's (or Congressman's) health care coverage.  There is a big difference between paying 25% of something and 100% of something.

Of course, all of this is caused by the disparate tax treatment between health care coverage provided to an employer (tax-free) compared to coverage purchased by an individual (taxable).  This potential problem would go away if Congress made all health care coverage tax deductible or, alternatively, did away with the tax preference for employer-paid health care coverage.  Neither solution seems to be in the cards.  As a result, Congress is in a real bind.

However, I am not going to feel the least bit sorry for Congress and their staffers.  Any way you look at it, they are responsible for their problem.  They passed Obamacare and they also wrote the tax law that discriminates against the individual who purchases health care coverage on their own.  They made their bed, it is time to sleep in it.

Said another way, they have been hoisted on their own petard!  That should bring a smile to many people across America.

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