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A New Twist on Labor Arbitrage: The Impact of ObamaCare to Promote Offshore Outsourcing
In considering talent management strategies, employers inevitably consider the relative costs of hiring employees and complying with labor law. Such considerations include the regulatory regime governing minimum wages, unionization and, now, health care compliance. For example, in the 1980’s, Japanese automakers chose to set up manufacturing plants in non-union “right to work” states in the South, rather than in states where unions are strong. Enacted in July 2010, U.S. healthcare reform (“ObamaCare” or the “Patient Protection and Affordable Care Act”) will force employers large and small to consider sending jobs offshore. ObamaCare also promotes medical tourism for cosmetic surgery.
Reforms. The Patient Protection and Affordable Care Act, H.R. 3590, 111th Cong., 2nd Sess., restructured the tax and regulatory conditions governing healthcare for all Americans. The act requires all Americans to be covered under healthcare insurance under standard underwriting conditions. These core conditions prevent insurance companies from creating different pricing models based on actual health of the individual. They consist of nine core principles, the first eight of which conflict with the ninth.
1. a prohibition of preexisting condition exclusions or other discrimination based on health status.
2. “fair” health insurance premiums through extensive legislative and regulatory controls of the underwriting process.
3 guaranteed availability of coverage for all, so that insurers cannot deny issuance of insurance.
4. guaranteed renewability of coverage.
5. prohibiting discrimination against individual participants and beneficiaries based on health status.
6. non-discrimination in health care.
7. comprehensive health insurance coverage, so that coverage provides substantial benefits.
8. a prohibition on excessive waiting periods.
9. freedom to opt-out of the Federal health employment law.
Mandatory Health Insurance for All Americans. Beginning in 2014, all U.S. individuals will be required to be covered by health insurance, or they will have to pay a tax penalty. In general, the new law mandates healthcare coverage, either individually (through an Exchange or other permitted, regulated insurance program) or through an employer’s program. Individuals who are employed must pay for their own coverage if the employer does not. As a result, individuals will gravitate to employers who offer employer sponsored health plans. Section 5000A(a) of the Act requires that each “applicable individual” shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual who is an applicable individual, is covered under minimum essential coverage for such month. Failure to be insured will result in a tax liability (called a “penalty” but payable under the tax code) of up to 300% of $750 (plus cost of living adjustments) per year. Section 5000A(c). Spouses are jointly and severally liable, as are taxpayers responsible for their dependents under Section 5000A(b).
Illusory Freedom of Business to Opt Out. The Act expressly permits everyone to opt out, but it does not appear to override the universal mandate for “applicable individuals” to be covered by conforming healthcare insurance. Section 1555 states the “opt-out” principle in terms of opting out of a health insurance program created under ObamaCare.
No individual, company, business, nonprofit entity, or health insurance issuer offering group or individual health insurance coverage shall be required to participate in any Federal health insurance program created under this Act (or any amendments made by this Act), or in any Federal health insurance program expanded by this Act (or any such amendments), and there shall be no penalty or fine imposed upon any such issuer for choosing not to participate in such programs.
This option is illusory and contradictory with the penalty provisions.
Actual Freedom to Opt Out: Applying Territorial Limitations of Universal Healthcare. ObamaCare creates a new territorial limitation on the universal mandate of minimum-standard healthcare coverage. Like minimum wage laws and the Fair Labor Standards Act (which ObamaCare amends), the new ObamaCare legislation does not apply to services rendered outside the U.S.A. The universal healthcare insurance mandate of ObamaCare cannot not apply outside the United States. For purposes of mandatory coverage, the Act covers all “applicable individuals.” But the definition excludes
Peripatetic Employees: Social Security and Retirement Benefits. The United States has entered into certain treaties with other countries for the reciprocal recognition of entitlement to social security benefits for nationals of one country who work in another. The normal work period for entitlement is five years. For the U.S.-India convention, the wait is 10 years, long after the expiration of the 6-year maximum for an H1-B visa.
Discrimination against Knowledge Workers (“Discrimination based on Salary”). ObamaCare does not allow employers to discriminate in favor of a group of persons based on based on the total hourly or annual salary of the employee or otherwise establish eligibility rules that have the effect of discriminating in favor of higher wage employees under Section 2716. Of course, discrimination against highly-compensated employees is permitted, allowing plan sponsors to impose “contribution requirements for enrollment in the plan or coverage that provide for the payment by employees with lower hourly or annual compensation of a lower dollar or percentage contribution than the payment required of similarly situated employees with a higher hourly or annual compensation.” In effect, nothing prevents an employer for charging more to highly paid employees for the same health coverage. Id.
Medical Tourism for Cosmetic Surgery. Section 9017 of the Act establishes a new 5% excise tax on cosmetic surgery, which is defined as any medical procedure that is “not necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.” The tax is imposed on the patient, but the surgeon must pay it if he or she fails to collect and pay the tax at the time of the surgery. The tax applies retroactively to all procedures performed on or after January 1, 2010. While a 5% tax might not make a difference for wealthy persons, it certainly will promote medical tourism to India, Brazil and other foreign high-tech medical destinations.
Trade Regulation Supports Offshoring. The current international trade regulatory regime does not stand in the way of enterprises moving jobs around to obtain skills anywhere. Nothing in the WTO agreements requires foreign countries to match similar labor entitlements. Nothing in the WTO agreements allows the U.S. to impose an import tariff on the work product of foreign labor, since that would discriminate on the basis of country of origin. In the field of trade in goods, the WTO (and before it, GATT) applies long-standing solutions of countervailing duties to offset foreign governmental export subsidies and anti-dumping duties to prevent predatory foreign pricing. Such solutions simply do not function in a service-based global economy. In short, the WTO regime supports offshoring.
Impact of ObamaCare on Globalization and Offshore Outsourcing.
P.S. See the Bierce & Kenerson, P.C. webinar, December 9, 2010, on the “Global Sweat-Equity Business.”
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