Myth # 5: Employers that don’t provide health insurance should be forced to.

Employer payments for employee health insurance are just another form of worker compensation. The more an employer pays for health insurance, the less it will be able to pay its workers in the form of take-home pay and other benefits. From an economic standpoint, there is nothing controversial about these statements. Yet there is a common belief in political circles that government can require employers to pay more for health insurance and that such payments will somehow come out of employers’ coffers without affecting their employees’ disposable income. Alas, it doesn’t work that way. Any way you slice it, it all comes out of the employees’ pockets.

In a 2004 article in Health Affairs, Uwe Reinhardt, Peter Hussey, and Gerard Anderson lay out a scenario of a firm able to pay its workers total yearly compensation of $35,000 each, including $8,800 (25%) for health insurance and the remaining $26,200 (75%) for take-home pay (I’m ignoring taxes and other benefits for the sake of simplicity). They further assume 4% annual compensation increases and 10% health insurance inflation. By the tenth year, a worker will be earning total compensation of nearly $50,000, of which almost $21,000 (42%) will be required for health insurance premiums, leaving $29,000 (58%) for take-home pay. Despite insurance costs taking a progressively bigger bite out of total compensation each year, the worker still sees higher take-home pay, albeit by progressively lower percentages each year. The big problem, however, arises in the eleventh year. That’s when health insurance cost increases will exceed total compensation increases, forcing the employer to choose either to reduce worker’s take-home pay, to lose money as a firm, or to reduce or drop health benefits altogether.

Workers of all collar colors are notoriously reticent to accept reductions in take-home pay, and employers are equally resistant to losing money and ultimately not being able to hire any employees at all. That is why we don’t have to wait 10 years to see employers--particularly small ones--dropping health insurance. Many are, in effect, already in their 11^th year. That’s why we see only 60% of all employers offering health benefits in 2007, down from 69% in 2000. It’s much worse for small employers, with 45% offering such benefits in 2007 versus 57% in 2000.

These firms, faced now with the realities embodied in Prof. Reinhardt’s scenario, are rationally deciding they’re better off just paying out to their employees the money they previously spent on health benefits, and letting them figure out how to buy insurance on their own in the individual market. In most states, such individual insurance is frequently affordable for the young and healthy—albeit with more expensive after-tax consumer dollars. The problem is that older workers may have difficulty affording it and those with serious medical conditions can’t get it at any price.

In attempting to fix this problem and to force employers to continue to provide health insurance, the federal government and various states are now proposing or imposing mandates both for employers to contribute a minimum percentage of total worker compensation toward health benefits and for employees to be required to purchase health insurance. Massachusetts is the current poster child for this concept.

An important lesson from Prof. Reinhardt’s employer scenario is that any such mandate is nothing more than an enforced diversion of worker compensation for a government-favored use—in this case, the support of a bloated, inefficient, inflationary health care system that, fully half the time, fails to provide good care. It is a burden placed squarely on the shoulders of workers under the more politically attractive guise of an employer requirement.

Most employer mandate proposals would require employers to pay a certain percentage of total employee payroll for health insurance. Thus, employer contributions to worker health insurance would now increase only at the same rate as overall compensation increases, while insurance premiums themselves would continue to rise at two or three times that rate. That would leave employees to pay all of the difference directly in the form of increased payroll deductions that will now necessarily rise even faster than the medical inflation rate. If we apply such a mandate to the above example of the worker earning $35,000, his employer’s payment for health care costs would now go up only by 4% each year, while the employee’s share would increase by 12%--higher than the 10% health care inflation rate itself. Thus, what initially appears to be a state-imposed burden on employers is actually a form of government-imposed relief that removes from the employer any further concern about health care inflation. Employers can now, with government assistance, pass off that worry entirely to their employees, but without giving them any means to deal with the problem. The math is simple for anyone with a calculator, something apparently in short supply in some politician’s offices.

It is critical to recognize that such mandates do nothing to reduce the high rate of health care inflation or to assure high quality care. Those are artifacts of forces that are unaffected by reducing the number of uninsured. In fact, any increased demand resulting from more people with insurance could actually worsen inflationary pressures.

Nonetheless, mandates can help employees in two ways—albeit extremely inefficiently. First, they assure that at least a part of employee compensation—the part used to pay insurance premiums--will be sheltered from taxes, an advantage that is lost for employees faced with buying their own insurance in the individual market. Second, they allow employees to get insurance at group rates that are sometimes—but not always--more favorable than those available with individual insurance. There are much simpler ways to achieve these advantages, and with the added benefits of offering universal health insurance, improving quality, reducing medical inflation, and dramatically improving disease prevention. Employer mandates won’t get us there.

Copyright 2008 by Stephen S. S. Hyde. All rights reserved. Quotation of excerpts permitted with attribution.