The Hidden Cliffs in Obamacare

by Steven Brill,

As the Affordable Care Act becomes reality, so do some of its little-known inequities.

A hypothetical couple whom we’ll call Barbara and Harry Jones are 52 years old and have two children, and their household income is $94,200. She’s a freelance marketing consultant and he’s a plumber, so neither has health insurance from an employer. They live in Lancaster, Ohio, and they signed up for Obamacare just in time to make the deadline at the end of March.

Great news: based on their income, Barbara and Harry will get an annual $2,904 subsidy from the government to help pay an insurance bill that will be $12,288 a year for moderately good coverage. Obviously, the Joneses are not poor. But health care is now so expensive that President Obama’s law was designed to give even them help buying insurance.

Alice and Bob Smith (another hypothetical couple) and their two children live next door to the Joneses in Ohio. They too work in jobs–day care for her, light construction for him–that don’t provide health insurance. Their income is $94,300–meaning they’re keeping up with the Joneses and, in fact, beating them by $100. The Smiths will get no subsidy at all.

Now that enrollment in Obamacare has ended for the year, some of the quirks–maybe they should be called potholes–embedded in the complicated and heavily lobbied law are going to start to become visible. First among them may be the “cliff” problem that penalizes the Smiths to the tune of $2,904 for making $100 more than the Joneses. I can already see the headline on Fox News: “Obama’s Health Care Bureaucrats Tax Ohio Couple 2,904% for Making $100 More Than Next-Door Neighbors.”

It will be true. That’s because the Smiths’ income is just slightly more than four times $23,550, the amount defined by the government as living in poverty for a family of four. Under the Affordable Care Act, families like the Joneses who earn up to but not more than four times the poverty level get subsidies. After that, there is no subsidy. Sorry, Mr. and Mrs. Smith. Going over $94,200 is like going over a cliff. Unlike the way the federal graduated income tax is calibrated so that the Smiths never lose money by earning more, the subsidy doesn’t decline step by step. It plunges to zero.

Even steeper cliffs are possible. Suppose the Johnsons, each 63 years old, live in Florida and their kids are grown. They make $62,040 (four times the poverty line for a family of two adults) from the charter-boat business they run. They’ll get a subsidy of $9,024 to pay for their insurance. But they will lose it all if in 2014 they sell just one extra charter. If they make a dollar more (or $100 or $1,000 more) the entire $9,024 federal subsidy goes away. If their over-the-ceiling earnings are $100, that’s like a 9,024% tax on that $100.

“For hourly workers or freelancers who cannot predict their income with complete accuracy, this could be an anvil that comes down on them next year,” says Barry Cohen, an insurance broker in Lancaster who helped me model various scenarios.

Obamacare took a complex new law with complicated formulas involving big dollars moving in and out of peoples’ wallets and grafted it onto a health care system that was already impossible for most people to understand.

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