Weighing the Cost of Health Care Reform

Ken Jacobs
The Sacramento Bee

Californians want health care reform. All the recent polls agree. As Gov. Schwarzenegger and the Legislature negotiate for a health care reform compromise, one major sticking point is on what should be asked of employers. This is not simply a matter of trading off employer contributions against other sources of funding; it is central to the success or failure of health care reform.

Under the bill passed last month by the state Legislature, Assembly Bill 8, employers, individuals, health care providers and the public would all share the costs for increased health care coverage. The public would subsidize coverage for low- and moderate-income families. Employers would be required to spend 7.5 percent of payroll on their employees’ health care or pay those funds into a state health care pool. Individuals in the new health care pool would be required to contribute to the cost of their premium on a sliding scale based on income.

A vocal segment of the business community is arguing that a 7.5 percent minimum health care spending requirement will hurt businesses’ bottom line and eliminate jobs in California. Others, such as Safeway President and CEO Steve Burd, have criticized the governor’s proposal of a 4 percent fee for not asking enough of businesses that do not provide health care to their workers.

The average business in California already spends about 8 percent of its payroll on health care benefits. Since many businesses only cover a portion of their employees, the cost increases to an average of 11.2 percent for each employee covered. This means that most California businesses that provide coverage are already spending more than the 7.5 percent that would be required under AB 8.

The level of the employer fee is central to the viability of the reform plan. If the amount required of businesses dips too low, employers are likely to drop coverage for workers who would now be eligible for state subsidies. If the worker would have coverage anyway, the employer gains no benefit from paying for it. This phenomenon is generally known as “crowd-out.”

Job-based coverage is already eroding in California and nationally. The share of Californians who have coverage through an employer fell 7 percentage points in the past seven years. The fewer employers who provide coverage, the greater the cost to the state for subsidizing care for the workers who enroll in the state health care pool. The employer fee creates a more level playing field among employers, reducing the competitive advantage for firms that do not provide coverage.

In contrast to AB 8, the governor’s proposal provides no direct benefit to employees if an employer chooses to pay into the health care pool. It is difficult to see why any employer would choose to contribute to the pool rather than changing their health spending to meet the requirement; this point was highlighted in two recent appeals court rulings on similar laws in New York and Maryland.

Instead of paying into the pool, employers could easily meet the 4 percent spending requirement by increasing coverage for management and top employees. While employers may be required to offer coverage equally to their work force, many currently use waiting periods, restrictions on part-time workers and high deductible or premium costs to limit who is able or willing to accept coverage. Fewer employers paying into the health care pool would mean more of the pool costs would have to be paid by the taxpayers.

The main argument against the higher employer-spending requirement in AB 8 is that it would have a negative impact on business in the state. Research at the University of California, Berkeley’s Center for Labor Research and Education found otherwise. The study, “Health Coverage Proposals in California: Impact on Businesses,” released in July, found that taken as a whole, AB 8 can be expected to have positive net impact on California’s economy.

Researchers found that the long-term impact of the 7.5 percent minimum health care spending requirement would be similar to a modest increase in the minimum wage, with most California businesses experiencing little or no net change in business operating costs after a short adjustment period. The study concludes that within two to three years, California businesses’ total operating costs would increase only one-tenth of 1 percent.

Research on the minimum wage suggests that labor cost increases on this scale are unlikely to cause measurable job loss. Last October, more than 650 economists, including five Nobel Prize winners, signed a statement noting that, “The weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment.”

Unlike a minimum wage increase, the proposed health care reform would bring in more than a billion dollars in new federal matching funds into the state, according to an analysis by MIT economist Jonathan Gruber. Pretax health care contributions would reduce the federal tax burden of employees and employers by a similar amount. The new federal funding can be expected to spur labor demand in the health care sector. Additionally expanded health coverage can be expected to decrease absenteeism and exits from the labor force due to disability, with resulting increases in productivity and earnings.

The health care pool proposed in AB 8 would provide small businesses an affordable health care option for their employees, which they do not currently have. In fact, a recent poll by Small Business Majority Found that 47 percent of small businesses’ owners surveyed supported the proposed requirement that employers spend 7.5 percent of payroll on health care services, while 33 percent opposed. Small business owners had similar levels of support for the governor’s plan.

Another important benefit for businesses is an expected reduction in health care premium costs if health care reform is adopted. Any expansion of health coverage would reduce the hidden cost of uncompensated care that we all pay through our premiums to cover the costs of the uninsured.

Meanwhile, as the public and our elected representatives debate health care reform, it’s critical that we not lose sight of the big picture. More than 6.5 million Californians had no health insurance of any sort, for all or part of the last year. The cost of health insurance, to businesses and employees, keeps going up, while the benefits keep shrinking. The numbers make it clear: The cost to Californians of doing nothing now far exceeds the cost of health care reform.