Employer Mandates

1. Introduction

Pay-or-play employer mandates – which require businesses to either provide health insurance directly or pay into a state fund to cover their workers – goes back more than thirty years. In 1974, Hawaii passed the “Prepaid Health Care Act” which requires nearly all employers to provide health coverage to their employees who work more than 20 hours per week for four consecutive weeks. In the thirty years since its passage, however, there have been only a handful of attempts by other states to pass similar legislation, perhaps out of concern about violating the Federal government’s Employee Retirement Income Security Act (“ERISA”), which superseded all state laws related to employee benefits.

The most noteworthy recent attempt at pay-or-play legislation was in California in 2003. In the days leading up to the recall election in 2003, then-Governor Gray Davis signed the “Health Insurance Act of 2003” (“HIA”, also known as Senate Bill 2 or SB-2). HIA required businesses with 200 or more employees to provide health insurance to all employees, as well as their dependents, starting on January 1, 2006. It also required businesses with 50 to 199 employees to provide insurance to all workers, but not their dependents, starting January 1, 2007. And if the state of California passed a tax credit, businesses with between 20 to 49 employees would also be required to meet the requirements for individual workers. HIA did more than simply require coverage, however. It mandated that firms pay the vast majority of premiums for a minimum-mandated-quality plan. In all cases, the firm was responsible for 80 percent of the premiums for the single/family plan (for firms with 200 or more employees) or 80 percent of the premiums for a single plan (for firms with 50 to 199 employees). The tax credit meant that firms with 20 to 49 employees effectively were responsible for 64 percent of premiums rather than 80 percent. This proposal, signed into law, was scheduled to start in 2006, but opponents of the mandate put a referendum on the ballot for the November 2004 election. Proposition 72, defeated by a narrow 51 percent to 49 percent margin, repealed HIA.

Despite its narrow defeat in California in 2004, pay-or-play employer mandates continue to be a relevant policy option in many states, and even some localities. According to the National Restaurant Association’s web site, thirteen pay-or-play mandates were proposed during 2005. Although most were defeated or tabled, many pieces of legislation are expected to reemerge in 2006. In Massachusetts, for example, the House recently passed by a 131-22 margin legislation which imposes a payroll tax on firms with 11 or more employees, and then allows firms to credit health care expenditures against the payroll tax. Although different from California’s legislation, this payroll tax (and the credit against it for health care expenditures) is very much an employer pay-or-play mandate. The Massachusetts Senate passed a competing bill that did not include such a payroll tax, but the compromise bill that goes to the Governor very well could. Other serious attempts in 2005 – that for now appear stalled – occurred in Washington and New York. In both cases, many of the actual legislative provisions appear to be motivated by California’s HIA. For example, “The Working New Yorkers Health Insurance Act,” introduced in February 2005, had language that was nearly identical to HIA, but with different cut-off thresholds by firm size.

Even more recently, the idea of employer mandates has trickled down from the state-level to the city-level. In November 2005, San Francisco Supervisor Tom Ammiano introduced legislation requiring San Francisco businesses with 20 or more employees to provide health coverage. Although voters in San Francisco overwhelmingly supported Proposition 72, only four of eleven members of the Board of Supervisors are currently supporting the measure, and Mayor Gavin Newsom has expressed reservations about the legislation.

Even in the wake of Proposition 72’s defeat in California, the prospect of pay-or-play mandates continues to be discussed. Health Access California, in a policy brief in April 2005, states “The closeness of the vote (for Proposition 72) means that the idea will continue to be advanced, as the need will only become more urgent.” Their first recommendation in expanding employer health insurance is to “Support new versions of SB 2/Proposition 72 to secure the employer-based coverage on which 19 million Californians rely, and to extend it to some or all of the 80% of the uninsured that are in working families.”[1]

The remainder of the paper is arranged as follows. Section 2 examines some of the claims that were made during the debate about California’s Proposition 72. Although many of the claims are technically correct, they are also quite misleading. Section 3 discusses findings based on my previous work. In Yelowitz (2003, 2004), I found that the cost to businesses would have been quite high in the short-term, and that a considerable portion of this increased cost would have been a shifting of financial responsibility from workers to firms. In total, I found that the increased cost to business would have been close to $12 billion (assuming no tax credit was enacted), and that the previously uninsured were responsible for roughly 30 percent of the cost.

Section 4 explores some of the economic effects from pay-or-play mandates. When faced with higher mandated costs – such as the costs that HIA would have entailed – firms face a variety of economic options. Some involve traditional labor market adjustments – reducing real wages, laying off workers or cutting back work hours, eliminating other fringe benefits, or substituting capital for labor. Others involve “non-traditional” adjustments that are largely driven by the nuances of the actual HIA legislation; for example, if a firm consolidated part-time workers into full-time workers, it might be able to get under one of the costly thresholds of 20-, 50- or 200-workers. In addition to these labor market adjustments, there is also the possibility that firms could relocate at least some of their operations outside of the state, or in the extreme, be forced to shut down because their profits become losses. Finally, firms may simply accept lower profits or be able to pass some of the costs onto consumers in the form of higher prices. Convincing empirical evidence exists on some, but not all, of these avenues of adjustment.

Section 5 offers suggestions for policymakers who may consider pay-or-play in the future. The goal is to take the key economic motivation for covering the uninsured – the fact that the uncompensated care they use creates an expensive burden on the insured passed on through higher premiums – and combine that with some of the findings on economic responses. An employer mandate for workers-only that consisted of a high deductible and covered catastrophic costs, along with significantly more statutory cost-sharing on the part of employees, could substantially reduce total costs as well as at least some of the negative labor market adjustments. Moreover, recent work in behavioral economics suggests a great deal of “inertia” in decision making; it is possible that by allowing individuals to “opt-out” of the health insurance mandate, such a mandate would respect freedom of choice – an idea that has been called “paternal libertarianism.” Given the evidence in other contexts (related to 401k participation), it is likely that such an “opt-out” employer mandate would still reduce the uninsured quite substantially.