The Cost of California
Aaron S. Yelowitz
University
of Kentucky
October 2003
Overview
This legislation dramatically
alters
HIA institutes an individual
mandate for coverage whereby individuals working at firms with more than 20
employees are required to have personal health insurance. HIA mandates employers provide coverage for
individuals already receiving benefits through government sponsored insurance
programs such as Medicaid, Medicare, and Champus/Tricare. In doing so, the bill vastly expands its
reach to the over one million individuals in
HIA Provisions
Under the legislation, employers are required to either provide health care or pay into a state fund. In the event that an employer chooses to “play” (and offer health insurance) they must offer the minimum benefit as specified by the Knox-Keene act of 1975. This coverage must also include a prescription drug benefit plan. Currently, many employers offer a supplement to employees that qualify for government insurance. Under HIA, the provision of this supplement does not count as “playing” and employers must provide full health coverage to recipients regardless of their insurance status or employee desire.[i]
In the event that an employer chooses to “pay,” the employer is responsible for paying 80% of a fee established by the Managed Risk Medical Insurance Board (MRMIB). Employers with 20-49 employees will only be responsible for individual coverage in the event that a tax credit is passed accounting for 20% of the net cost of providing insurance. Firms with 50-199 employees will be responsible for providing individual insurance. Large employers (200+ employees) are required to pay for family coverage for all of their employees.
Employees only qualify as enrollees (those eligible for mandated benefits) if they work 100 hours a month for three months. Those who meet this work requirement, and are employed at firms of an appropriate size, are required to pay 20% of the cost of coverage. HIA allows employers to deduct this payment from their employees’ paychecks.
In firms required to pay individual care, enrollee contributions for individuals whose wages are less than 200% of the poverty line, or $17,180, are capped at 5% of wages. For firms that are required to offer family coverage, enrollee contributions are capped at 5% of wages for employees earning less than 200% of the poverty live for a family of three, $29,260. As it is written, HIA, counts only individual earnings, as opposed to family income or full-time equivalent earnings at various wage rates towards this poverty determination.[ii]
Employees who qualify for full medical insurance through government programs and are currently working at least 100 hours per month are classified as enrollees and are mandated to pay for coverage under HIA. Enrollees may voluntarily provide, to MRMIB, the information necessary to determine eligibility for Medi-Cal or the Healthy Families Program (HFP). In the event that an enrollee is determined to be eligible for these benefits, or is currently receiving the benefit, their enrollee contribution is refunded.[iii] The employer contribution, however, is not refunded and is used to pay the state’s contribution under the matching funds portion of Medicaid.[iv] In the event that the enrollee is receiving Medicare or Champus/Tricare coverage, the enrollee is also provided coverage either through the employer’s private plan or a contribution to the state fund. Any supplements to government insurance programs would have to be offered in addition to this mandate coverage.
Insurance Coverage in California
According to data from the
Current Population Survey (CPS) administered by the Bureau of Labor Statistics
and the Census Bureau,
Over 56% of Californians currently have insurance solely through their employers or private coverage. Nearly 6 million Californians receive their medical insurance coverage solely through Medicare, Medicaid or Champus.
Uninsured Californians
Over 1.4 million of the adult uninsured and 2.8 million of all uninsured reported working 0 hours per week in 2001. This includes the over 1.6 million uninsured not in the labor force and over 460,000 who report being unemployed. Nearly another 500,000 of the working uninsured fail to qualify for coverage under HIA due to inadequate work effort. In addition, over 900,000 of the 2.3 million who report working 40 hours per week do not receive benefits from HIA due to tenure of firm size requirements. Of those who work 52 weeks, over half will not receive insurance due to firm size or their respective work effort.
Supporters of HIA often claim that the average uninsured Californian is living in a family in poverty. In reality, the average family income for the uninsured is over $42,000 a year. Furthermore, over 900,000 of the uninsured families have income greater than $75,000 and over 550,000 have a family income greater than $100,000 per year.
Only 48% of the uninsured have a high school diploma compared to nearly 60% of the insured population. The uninsured are also disproportionately male with 52% of the uninsured and only 49% of the insured being male.
The primary motivation for providing insurance through the labor market results from the favorable tax treatment of fringe benefits such as health care. The benefits of this treatment vary depending on the respective marginal tax rates of recipients. Obviously, people with higher income tax burdens enjoy greater benefits. According to data from the March 2002 CPS, the vast majority of the uninsured are either in the lowest tax bracket or pay no income taxes. Due to the fact that uninsured do not receive a significant benefit from employer provided coverage, the lack of insurance at these levels may simply reveal a preference for cash wages over fringe benefits.
The descriptive statistics above show that multitude of reasons why the labor market is an inefficient means of addressing the problem of uninsured Californians. On the whole, the uninsured have weak labor force attachment and fail to qualify for coverage under HIA. In addition, the uninsured are younger and wealthier than they are portrayed. Finally, these individuals are unable to take advantage of the tax benefit normally associated with employer provided insurance.
HIA Coverage
Estimates of coverage for HIA are taken from the CPS. Firm size categories for the CPS, however, do not correspond with the coverage limits in HIA. This report uses data from California Employment Development Department, Labor Market Information division to estimate the distribution of firms.[vi]
Californians receive insurance coverage through some combination of three sources, their employer, the government, and private non-employer insurance. For the purposes of analysis, Californians were broken down into numerous categories based on the type of coverage and level of employer contribution they received. A full listing of these categories is contained in Appendix A. Table X provides a summary of these results.
While proponents of HIA frequently state it is a bill designed to provide coverage to employees whose employers provide no insurance, a more careful reading of the legislation shows the actual coverage is significantly broader.
In total, over 17 million Californians are covered by HIA requirements. Only 3.7 million of these individuals currently receive fully funded health insurance from their employers. Assuming the employer is providing an acceptable level of coverage to be classified as “playing,” it can be said with certainty that this category, and only this category, is entirely unaffected by the HIA mandate.[vii]
Over 9 million Californians currently receive health coverage from their employer but are forced to pay a portion of the premium, with over 400,000 of these employees paying the entire cost of coverage. Many of these workers will require additional coverage to meet the minimum standards under HIA in terms of both cost and quality of coverage.
Previously uninsured individuals make up a minority of those employees who are affected by this legislation. Under HIA, only 2.3 million individuals who previously had no insurance receive new coverage. This means that over 65% of currently uninsured individuals will still have no health coverage as a result of HIA. Even if one excludes employees who previously received limited benefits (coverage below the level acceptable to be considered “playing”), employees without insurance account for only 52% of those affected by the legislation.
Over 1.6 million individuals who currently have non-employer health coverage will receive additional coverage as a result of the legislation. These individuals include the nearly 600,000 working Californians that choose to purchase private coverage and the over 1 million Californians currently receiving coverage through government programs.
Estimated Cost of Coverage
The imputed value of employer
contributions, contained in the March 2002 CPS, was utilized to estimate the
cost of providing coverage in
In the case where employees currently receive employer-based coverage and pay no premium, the estimated change in cost is $0. In the case, however, where employees pay a portion of their premium, it would be unrealistic to assume the employer pays at least 80% of the cost. Doing so dramatically underestimates the actual cost of the meeting the “play” portion of the HIA mandate. To determine the cost of coverage when employers only pay a portion of the premium, the difference between the imputed value of the employer contribution and 80% of the estimated cost of coverage was calculated (in cases where the imputed value of the employer contribution was higher the estimated increased cost was $0). This estimated increase in cost does not include the increased costs employers face to bring their current plans (including cases where the employer pays the entire premium) up to the minimum level of coverage to be considered “playing.”
In the case of no current employer based coverage (either uninsured or government insurance only) or cases where the employer does not contribute to their employees premium, 80% of the median imputed value of current employer contributions is used to estimate the cost of these employers either “paying” or “playing” under the HIA mandate.
HIA Costs
It is estimate that HIA will cost employers between $9.9 and $11.3 billion. The difference between these two figures is based on whether or not an additional tax credit is passed for firms with between 20 and 49 employees. This credit, which would account for 20% of the net cost to these employers, expands the coverage of HIA to all businesses with more than 20 employees. In the absence of this credit, only businesses with more than 50 employees are included in the cost estimate ($9.9 billion). Table X provides a breakdown of the cost by current coverage category.
Even in the case when the largest number of uninsured receive new coverage (when firms with 20+ employees are included) this coverage breaks down to nearly $5,000 per newly covered individual. Over 60% of the costs associated with this bill involve providing insurance to individuals who already have it. For every dollar spent under HIA, only 40 cents benefit the uninsured.
Government Insurance
The estimates of coverage above are significantly higher than other publicly released estimates. The largest source of difference is the inclusion of individuals who currently receive their insurance solely through government programs. HIA requires that companies now bear the burden of providing insurance to these individuals.
Currently, nearly 6 million Californians receive full insurance through Medicare, Medicaid and Champus/Tricare. Of these, over 1 million are affected by the HIA mandate due to their work effort, tenure, or the size of the firm where they work.
Enrollees are given the option of
providing the necessary information to MRMIB in order to determine eligibility
of either Medi-Cal or HFP. Eligible
enrollees will be enrolled in these Medicaid programs and refunded their 20%
enrollee contribution. Employer
contributions will be used to pay the state’s portion of the matching funds for
Medicaid. In this way, HIA amounts to a
$710 million tax on employers to fund Medicaid.
In addition to Medicaid
recipients, enrollees who qualify for Medicare and Champus/Tricare will now
receive additional coverage from their employer. Due to the fact that these programs are
funded solely through federal dollars, the state government will see no cost
savings. Private businesses, however,
will supplement Medicare and Champus/Tricare with nearly $400 million.
Currently, many Medicare and Champus/Tricare eligible employees receive supplemental coverage through their employer. This coverage provides vital benefits such as vision care, dental services, and prescription drugs. Under HIA, the provision of the supplemental benefits will not qualify an employer as “playing.” Instead, employers will be forced to provide $400 million of coverage to individuals who already have insurance. As a result, few employers will retain the incentive to continue to provide this supplemental coverage.
Children and Medicaid
A large portion of the uninsured
in
In
Poorly Targeted
HIA contains a subsidy for poor and low-income families. This subsidy caps the maximum enrollee contribution at 5% of wage when wages are below 200% of the federal poverty line (based on a family of three when employees are making a contribution for family coverage and the individual level when making a contribution for individual coverage).
HIA defines wages as individual earnings, not family income. This creates an extremely poorly targeted subsidy that provides a significant benefit to families with incomes well above 200% of their respective poverty line.
CPS data shows that over 2.8 million individuals will qualify for this subsidy based on their individual earnings. Based on family income, a more accurate indicator of poverty status, only 980,000 individuals qualify for the subsidy. Basing the subsidy off of family income will be practically difficult, due to the fact that employers cannot ask their employees their income level.
Currently, the subsidy does not even take into account the full-time full-year equivalent income, but rather simple earnings. This means employees working less than full-time will qualify based on their total earnings. If the subsidy were better targeted to even this minimum standard, only 2.5 million people would receive it.
Table X shows that nearly 160,000 individuals receiving this subsidy have over 100,000 in family income and over 700,000 have an income greater than $50,000. In total, over 43% of subsidy recipients have a family income that is greater than 200% of their respective poverty level.
Due to the high level of confusion regarding the implementation of this subsidy, these numbers are not factored into the total cost discussed above. It is clear, however, that the inefficient construction of this subsidy will lead to even larger amounts of waste under HIA.
Effect on Employment
The results above are a static estimate of the costs resulting from HIA. They do not consider any behavioral responses from either employers or employees as a result of the mandate. In reality, we would expect a host of responses, particularly from employers adjusting to the new business environment.
While there has not been a great deal of literature on the effect of mandated benefits, some studies do reveal potential responses to a mandate of this nature. Gruber (1994) estimated the effect of mandated maternity benefits on labor markets.[ix] It revealed that employers will attempt to shift the cost of mandates onto employers whenever possible. It can be expected that the response of employers will be similar under HIA.
Employers of low-wage workers,
however, will be unable to shift the full burden of HIA costs onto their
employers. CPS data shows that wage
shifting is constrained for nearly 550,000 employees due to the
In studying the affect on increases in mandated wage levels, Neumark (1995) found that current employees were often displaced by higher skill individuals attracted by higher wages.[x] Lang (1995) found wage hikes shift “employment towards teenagers and students… [T]he competition from [these] higher quality workers makes low-skill workers worse off.”[xi]
Other studies have found that the price increase resulting from a minimum wage results in a regressive implicit sales tax. MaCurdy and MacIntyre (2001) states, “when minimum wage increases are paid for by higher prices, … prices rise in a way that implies a burden more regressive [i.e., taking a larger fraction from the poor] than a sales tax.”[xii]
It is clear that further work is
needed to estimate the effect of HIA on low-skill employment in
Conclusion
Overall, HIA represents an
extremely costly and inefficient attempt to provide health coverage to the
uninsured in
Appendix A
