Among the many and complex issues in the pending Supreme Court case Sebelius v. Hobby Lobby, there is one that should be a straightforward matter of fact. In the case, Hobby Lobby claims that it is forced to either offer health coverage that it finds morally objectionable, or else pay ruinous fines. During oral argument, Justice Kagan, picking up on a suggestion by Justice Sotomayor, claimed that Hobby Lobby has a third option: it could just stop offering healthcare coverage altogether, pay a $2,000 per employee “tax,” and not be significantly worse off. Could the solution really be that simple?
During this exchange, which occurred about a quarter of the way into oral argument, Justice Sotomayor asked “isn’t there another choice nobody talks about, which is paying the tax, which is a lot less than a penalty and a lot less than the cost of health insurance at all?” In response, Mr. Clement, co-counsel along with the Becket Fund for Hobby Lobby, pointed out that in addition to the $2,000 penalty, the company would also have to increase its employees’ wages to allow them to buy their own health insurance.
Justice Kagan then made the argument more forcefully: “Let’s say that they have to increase the wages a little bit. I mean, still we are talking about pretty equivalent numbers. Maybe it’s a little bit less; maybe it’s a little bit more. But this is not the kind of thing that’s going to drive a person out of business.” Therefore, she continued, the law “is not saying you must do something that violates your religion. It’s giving you a choice. You can do this thing [offer healthcare coverage] or if this thing violates your religion you can do another thing [stop offering healthcare coverage]. And that other thing is approximately the same price as the thing you don’t want to do.”
Is she correct? Are the two choices really financially equivalent? Once we make some assumptions for figures that aren’t publicly available, answering the question is just a case of simple math. The typical Hobby Lobby entry-level employee earns about $30,000 a year. In addition to paying this salary, Hobby Lobby pays its share of both employment taxes and the premiums for its employee healthcare plan. If the company were to take the advice of Justices Sotomayor and Kagan, and stop offering healthcare to their employees, then, as Mr. Clement noted, in order to remain competitive it would need to ensure that employees’ take home pay was increased, after tax, by the amount the employees would need to purchase their own plan.
This increase would have to be substantial, to cover the cost of the premiums and the higher deductible offered by most Affordable Care Act plans, both of which employees will have to pay from their after-tax earnings. This increased cost would be offset somewhat for Hobby Lobby by what it saves from not having to pay for its employees’ health plans, but these savings will be smaller, both because they are pre-tax expenses, and because Hobby Lobby, in buying health insurance for 13,000 employees, likely pays less than individuals do when shopping for insurance on their own. Hobby Lobby will also have to pay the $2,000 per employee penalty, which is also not tax deductible. Using data from healthcare.gov, for a hypothetical single employee based in Oklahoma (where Hobby Lobby is domiciled), we estimate that the total incremental cost to Hobby Lobby will be $4,650 for that employee.
For 13,000 employees, that’s about $60 million annually. And there are other reasons Hobby Lobby might not want to drop health insurance, including loss in employee morale and a religiously-based obligation to care for their employees. These were also discussed in the oral arguments. But just from a purely financial perspective, rather than being an option that is “approximately the same price,” this alternative is one that could cost the company millions of dollars each year. Hardly a cost-neutral alternative.
Andrew V. Abela, Ph.D. is the Dean of the School of Business and Economics at The Catholic University of America, where Irene Kim, Ph.D. is a member of the accounting faculty.