Obamacare Leads States and Cities to Consider Dumping Employees, Cutting Back Hours

Published May 27, 2013

As the employer mandate of President Obama’s health care law goes into effect in the coming months, fiscally strained state and local governments are considering forcing some of their employees onto the new federal health insurance exchanges, while others will cut back hours and add part-timers to avoid hefty penalties for failing to provide adequate insurance.

Chicago Dumps Employees

The city of the Chicago is the most prominent entity shifting retired workers from the city’s rolls and onto the exchanges, effectively moving them from the rolls of city taxpayers to the federal government. Mayor Rahm Emanuel’s move, slated to go into effect January 1, 2014 at the same time as Obama’s exchanges, is an attempt to address a roughly $20 billion gap between funds and liabilities in city pensions and retirement plans plus an additional $805 million shortage in retiree health care funds.

Public employee unions have resisted the move, which would shift tens of thousands of retired state workers from their current health plans and doctors to new coverage via the exchanges.

“This uncertainty will cause anxiety and fear for tens of thousands of seniors who gave their working lives to public service,” Henry Bayer, American Federation of State, County, and Municipal Employees Council 31 executive director, told the Chicago Tribune.

Sen. Ron Johnson, a Republican from Wisconsin, also criticized the move.

“Not long ago, Rahm Emanuel worked for a president who told Americans, ‘If you like your health care, you can keep it.’ Unfortunately, the way Obamacare is designed incentivizes employers to cancel coverage, change health care plans, or simply dump workers into Obamacare exchanges against their will,” Johnson said. “While White House Chief of Staff Emanuel may have denied that, Mayor Emanuel’s actions demonstrate it.”

Other States Consider Steps

Other states have taken steps to dump employees or cut back hours. Virginia, for example, is requiring all part-time employees to work fewer than 30 hours, the threshold at which the state can avoid penalties for not providing health insurance coverage according to Donna Holt, executive director of the Virginia Campaign for Liberty.

“A letter has gone out to every state agency stating that all hourly employees are prohibited from working more than 29 hours a week on average over the course of a year,” Holt said, in order to “avoid the implementation of Obamacare for state employees.”

Dr. Roger Stark, a health care policy analyst at the Washington Policy Center, said his state is likewise trying to cut its costs.

“Washington state provides health care benefits to its full- and part-time employees. The state has a budget shortfall of between $2 and $3 billion,” Stark said. “It would be financially better for Washington state to put its employees into the state exchange and let the federal taxpayers subsidize the employees health benefits.”

There may be contractual obligations that could get in the way, Stark said, though the state employee unions have not yet taken a position on the idea.

Stark said the plan makes the situation worse for employees—”potentially much worse financially, and worse as far as the specific plans are concerned.”

Work Time Cut Back

Devon Herrick, a health care policy analyst at the National Center for Policy Analysis, said state and city governments are responding just as any employer would, “by analyzing the marginal costs of their workforce.”

“You have someone who works 31 hours a week, and you suddenly realize you have to pay $4,000 or $5,000 more for an extra 50 hours worked over the course of a year, you think the marginal hours, say it’s 52 hours versus $5000 in additional benefits, well, you just jacked up the marginal cost of compensation to $100 an hour,” Herrick said.

Herrick said some employers may soften the blow by adding compensation through another benefit, such as increased vacation time or higher 401(k) matching.

“It’s a little mindboggling to me,” Herrick said, “that the architects of the ACA didn’t stop to think, back three years ago, that these kinds of things would occur. Common sense would dictate that they would have thought about that. They must not have, because supporters seem to be expressing wonderment, or surprise, or amazement when they hear about firms scaling back, fast food restaurants trying to scale back their workforce, especially their part-time workforce, fromm say, 32 hours to 29.” 

“It may not seem like much, a couple of hours a week, but it makes a huge difference to someone on a meager income,” Herrick said.

Governments Are Employers Too

Ed Haislmaier, senior research fellow for health policy studies at the Heritage Foundation, said states are simply behaving rationally.

“I would not be at all surprised for states to do that. They have all the same incentives as private sector employers,” Haislmaier said. “All of this comes down to a calculation on the employer’s part: Can I get the workers I want, for a cheaper price? Cheaper doesn’t do you any good if you lose the workers, but on the other hand, if you can pay less and still get the workers you need, cheaper is better.”

Haislmaier said small municipalities with less than 50 workers will face some of the most difficult decisions about dropping coverage.

“People in that situation are likely to be in some sort of multiple employer arrangement for municipal government, run by the state or some other entity, where they all sort of pool together,” said Haislmaier. “Under Obamacare, Andy and Barney are going to lose their plan, because Mayberry is going to drop them into the exchange.”