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SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF SACRAMENTO
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JACK LEWIN, M.D. and VICKI BERMUDEZ, R.N.,
Petitioners,
v.
KEVIN SHELLEY, in his official capacity as Secretary of State of the State of California;
Respondent.
GEOFF BRANDT, in his official capacity as State Printer; ALLAN ZAREMBERG; SANDRA CARSTEN; JAMES G. KNIGHT, M.D.; THOMAS LaGRELIUS, M.D.; GLORIA RIOS and JON COUPAL,
Real Parties in Interest. ______________________________________ |
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Case No. 04 CS 01003
DECLARATION OF AARON YELOWITZ, PH.D.
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I, Aaron Yelowitz, Ph.D., being first duly sworn, declare as follows:
1. I make this declaration of my own knowledge and, if called as a witness, could testify competently hereto.
2. I am currently an Associate Professor in the Department of Economics at the University of Kentucky. Prior to my arrival at University of Kentucky in 2001, I was an Assistant Professor in the Department of Economics at the University of California, Los Angeles. I conducted research on California’s Health Insurance Act of 2003 (the “HIA”), which is now on the ballot as Proposition 72. The research was sponsored and published by the Employment Policies Institute, a non-profit research organization dedicated to studying public policy issues surrounding employment growth. The study, “The Cost of California’s Health Insurance Act of 2003” was published in October 2003 (hereafter, “Yelowitz, 2003”), and a true and correct copy is available at http://gatton.uky.edu/faculty/yelowitz/Yelowitz-sb2.pdf.
3. I am also a joint faculty member in the Martin School of Public Policy and Administration at the University of Kentucky and the economics department liaison for the UK Center for Poverty Research. I am a Research Associate at the National Bureau of Economic Research (“NBER”), a Faculty Affiliate for the Joint Center on Poverty Research (“JCPR”), and a Research Associate at the Institute for Research on Poverty (“IRP”). I serve as an associate editor for the Journal of Public Economics. My scholarly work on health economics has appeared in The Quarterly Journal of Economics, Journal of Political Economy, Journal of Health Economics, Journal of Human Resources, Journal of Public Economics, and Economic Inquiry. I have published chapters concerning health insurance in peer-reviewed, edited volumes for Russell Sage and the W.E. Upjohn Institute for Employment Research. I received my doctorate in economics from the Massachusetts Institute of Technology in 1994, and my bachelor’s degree in business and economics from the University of California, Santa Barbara in 1990. A copy of my full curriculum vitae is attached as Exhibit A to this declaration, and a true and correct copy is also available at http://gatton.uky.edu/faculty/yelowitz/cv.pdf.
4. I have received funding from the Association for Public Policy and Management, the Economic Research Initiative for the Uninsured, the National Academy of Science, Employment Policies Institute, Social Security Administration, the Joint Center for Poverty Research, and the U.S. Department of Agriculture. I have taught graduate classes on public economics and health economics, and undergraduate classes on labor economics, public economics, and poverty and welfare programs.
5. On the basis of my work in Yelowitz (2003), I have concluded that California's Health Insurance Act of 2003 (the “HIA” – appearing on the ballot as Proposition 72) is an extremely costly mandate on employers to provide health coverage for their employees and dependents. In that study, which uses information from the calendar year 2001, I computed the costs of the HIA under several different scenarios. Assuming that the state of California provides a tax credit to firms with 20-49 employees, the HIA would apply to all employers with more than 20 employees and requires employers to either provide private health coverage or pay a fee into a state fund providing insurance. My study estimated that the HIA will cost California employers nearly $11.4 billion dollars annually, based on premium costs in 2001. As is discussed in the Employment Policies Institute’s report, this cost estimate likely understates the true costs because of a variety of conservative assumptions. A true and correct copy of the study is attached to this declaration as Exhibit B hereto.
6. The study employed a rigorous analysis of data from a number of sources, including the March 2002 Current Population Survey (“CPS”) Annual Demographic Survey, administered by the Bureau of Labor Statistics and the Census Bureau. This survey provides health insurance estimates for the 2001 calendar year. At the time I was conducting my study, the March 2002 data was the most recent version available. The study also relied on data from the state’s Employment Development Department and the 1977 National Medical Expenditure Survey (“NMCES”). A description of data sources and methodology is contained in the body of the report and the report’s appendix.
7. The CPS is recognized as a credible and widely respected survey. It is a monthly survey of about 50,000 households conducted by the Bureau of the Census for the Bureau of Labor Statistics. The survey has been conducted for more than 50 years (see http://www.bls.census.gov/cps/overmain.htm). The sample is scientifically selected to represent the civilian noninstitutional population. The Census Bureau states that the CPS sample provides estimates for the nation as a whole and serves as part of model-based estimates for individual states and other geographic areas.
8. The CPS is useful as a source of estimates of the insured and uninsured populations at the state level. According to the Census Bureau, the March CPS is perhaps the most widely used source of data on health insurance coverage in the United States (http://www.census.gov/hhes/hlthins/hlthinsintro.html). It is the official source of estimates used to allocate federal funding to states for the State Children's Health Insurance Program (SCHIP), which amounted to $3.7 billion in Federal Fiscal Year 2002. The March CPS provides reliable estimates of the net change in the number of uninsured people from one year to the next, but does not allow researchers to explore the dynamics of health insurance coverage.
9. The Census Bureau also states that CPS data are used by government policymakers and legislators as important indicators of our nation’s economic situation and for planning and evaluating many government programs. They are also used by the press, students, academics, and the general public. For example, the Census Bureau found that 43.6 million Americans were uninsured in 2002, a widely cited statistic. The Census Bureau reported that in 2001 calendar year, more than 6.7 million Californians were uninsured out of a population of approximately 34.5 million, for an uninsurance rate of 19.5 percent (see http://www.census.gov/hhes/hlthins/historic/hihistt4.html). These numbers were derived by the Census Bureau from the CPS.
10. During the entire span of my career as an economist over the last decade, I have used the CPS in my research. My publications in The Quarterly Journal of Economics, Journal of Health Economics, Journal of Human Resources, and Economic Inquiry all relied extensively on the CPS.
11. The estimates of coverage and costs contained in Yelowitz (2003) are significantly higher than other publicly released estimates, including the September 2003 estimate by the Los Angeles County Economic Development Corporation (“LAEDC”), because other estimates appear to ignore several categories of individuals. These groups include employees currently receiving government insurance (such as Medicaid, Medicare, or Champus) or choosing to pay for their own non-employer based coverage -- groups specifically covered under the HIA. Moreover, the HIA requires employers to pay for at least 80 percent of the premiums for a single or family plan (depending on firm size). Many employers pay far less than this percentage, and their costs will go up as a result of the mandate. Excluding these large categories of people, and assuming that all employer-provided insurance will meet the rich mandated benefits of the “play” portion of the HIA significantly understates the true cost and impact of this mandate.
12. In his description of the California Health Insurance Survey (CHIS) analysis from 2001, E. Richard Brown notes that “We used this information to develop direct estimates for the number of uninsured workers and dependents who would be affected by the passage of SB 2, based on the stipulations of the bill itself. The analysis included uninsured people who: are ages 18-64; work for an employer for wages; work at least 23 hours per week (roughly 100 hours per month); and have been employed in the same position for at least 3 months. Persons with any insurance were not included.” (“Declaration of E. Richard Brown, Ph.D. in support of the petition for writ of mandate”, page 4, lines 22-27). From what I can infer from Brown’s declaration alone (which is all that I have from his study at this juncture), his statement appears to imply that those with government and privately purchased health insurance are not included in his cost estimates. It also appears to imply that an insured worker with single coverage and uninsured children at a large firm would not be counted in terms of employer costs, even though SB 2 clearly intends for the large employer to provide coverage for such children. It also appears to imply that an employee currently covered under a family plan where the employer pays less than 80 percent of the premiums is not counted as a cost. By screening on workers under the age of 65, Brown apparently ignores the wasteful, redundant mandated costs for older workers who already have Medicare coverage. As discussed in the previous paragraph, these kinds of omissions will tend to significantly understate the cost to firms and their employees from the mandate.
13. My study reveals that the total cost to employers of the SB-2 mandate is $9.96 billion if it covers only firms with 50 or more employees, and is $11.36 billion if it covers firms with 20 or more employees (Yelowitz 2003, Table 5, p. 6). For the larger mandate, $4.56 billion is spent on the uninsured. This represents approximately 40 percent of newly mandated cost. An additional $4.39 billion is spent on raising the employer’s premium-sharing percentage to 80 percent threshold for those with more modest employer coverage or covering dependents. My study also finds that there are significant costs to employers from the state of California “shifting” those with government health insurance onto the employers, as intended by the HIA. The newly mandated cost for firms from those with government insurance (Medicaid, Medicare, or Champus) exceeds $1 billion.
14. Another important cost issue is how to treat corporate income tax deductions for the expenses of the mandate. In a critique of the Los Angeles County Economic Development Corporation (LAEDC) study, Gerald F. Kominski notes that “The second major mistake in the LAEDC study that I corrected for was the failure to take into account the tax consequences of providing health insurance mandated under Proposition 72. On average, California employers receive a combined federal/state tax benefit of approximately 44% (35% federal corporate tax rate, 8.84% state corporate tax rate) for the costs of providing health care insurance for their employees. … I multiplied the employers’ total by 56%.” (“Declaration of Gerald F. Kominski, Ph.D. in support of the petition for writ of mandate”, page 2 lines 26-27 and page 3 lines 1-7).
15. From what I can infer from Kominski’s declaration alone (which is all that I have at this juncture), his application of the 44% marginal tax rate to all California employers is inaccurate. Thus, the procedure by which Kominski downweights the LAEDC costs appears to be incorrect. The Center on Budget and Policy Priorities (CBPP) recently published an informative paper that illustrates the true reach (or lack of reach) of the corporate income tax. See http://www.cbpp.org/10-16-03tax.pdf. The CBPP report states on page 4 that of the 27 million businesses that filed tax returns in 2000, only 2.2 million (or about 8 percent) were subject to the corporate income tax. The CBPP also clears up the perception that the statutory federal rate of 35% is the most appropriate number. On page 6, the report states: “The corporate income tax rate is typically thought to be 35 percent. The reality is more complicated. The 35 percent rate is the highest statutory corporate rate; lower levels of corporate income are taxed at lower rates. The first $50,000 of taxable corporate income faces a 15 percent tax rate, and the next $25,000 is subject to a 25 percent rate. From $75,000 to $10 million of taxable profits, corporations pay a 34 percent rate. For taxable income above $10 million, the rate is 35 percent. These lower graduated rates phase out for corporations with larger incomes.” The CBPP cites a study that shows the corporate income tax rate has averaged 26.3 percent for non-financial corporations, or about one-quarter lower than the 35 percent statutory rate. Finally, the CBPP study notes that “C” corporations are subject to the corporate income tax, but the profits of businesses other than “C” corporations are subject to the individual rather than the corporate income tax. The number of “C” corporations peaked at 2.6 million in 1986, and has declined since then. At the same time, there has been rapid growth in another type of corporation, known as “S” corporations. “S” corporations do not pay corporate income tax, but rather pass through profits to their shareholders, who in turn include this business income on their individual income tax returns. From my understanding of Kominski’s declaration, to arrive at his cost estimate he must assume that all corporations are “C” corporations with more than $10 million in profits per year. If any corporations are either “S” corporations or have annual profits less than $10 million, then Kominski overstates the benefits of corporate tax deductibility.
16. All of the numbers from Yelowitz (2003) rely on health coverage and health premium data from 2001. It is widely recognized that premiums have increased dramatically over the past three years, and will likely increase even more prior to the implementation date of the SB 2 mandate in 2006. According to the Kaiser Family Foundation, health insurance premiums in California grew by 15.8% in 2003, 13.4% in 2002, and 10% in 2001. (See http://www.kff.org/statepolicy/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=32778 , Chart #7, p. 21). Because none of the widely available, current studies account for the dramatic premium increases in recent years, all of them provide outdated underestimates of the cost impact of SB-2 to employers.
17. It is impossible to arrive at a precise calculation of the impact of the HIA (Proposition 72) because of the number of key, unknown variables that will come into play if the law takes effect. As explained in Yelowitz (2003), some of the provisions of the law leave a great deal of room for interpretation or are simply unknown. For sake of brevity, I will only highlight two of those points here. Perhaps most importantly, it is not known what the annual fee per employee will be. Moreover, the legislation gives the state the power to determine what is covered by the state plan against which private coverage is measured. If employers provide “inadequate” coverage, they will be forced to find other coverage or have their workers covered by the state plan. In my analysis, I assume that the generosity of the state’s plan (and the fee) is equivalent to the expense of the median health insurance plan. With the current ambiguity in the law, I believe this is the most reasonable assumption to make at this time.
18. In addition, the legislation does not make clear whether the additional subsidy for low income workers uses individual earnings or family income in computing eligibility for the subsidy. Given the administrative difficulties for employers to find out about other family income sources, I assume that the subsidy is triggered by individual earnings. As a result, there are a substantial number of well-off families that receive this subsidy, where the employer is then forced to pay even more than 80 percent of the premiums. In Table 7 (Yelowitz 2003, p. 9), I find that 159,020 people receive this “poverty subsidy” who actually reside in families with more than $100,000 in annual income. I also find that 325,860 people in families with more than $75,000 in annual income receive this subsidy, and 711,952 people in families with more than $50,000 in annual income.
19. My reading of the literature indicates that none of the existing studies account for potential behavioral responses on the part of employers. Whenever possible, profit-maximizing employers will react to HIA by shifting costs onto employees in the form of lower wages, and a number of credible, peer-reviewed studies suggest this is likely. In this case, the employee rather than the employer bears the cost of the mandate. In the case of the least skilled workers, however, wage shifting is simply not an option. In my study, the CPS data show that employers will be unable to shift the cost of the mandate onto 550,000 employees. These employees are at risk of losing their jobs, either through labor force cuts or competition from more experienced workers attracted by the new benefits.
20. In conclusion, based on my analysis of available data, I believe the cost to employers from the HIA will be in excess of $11 billion and will certainly exceed previously published cost estimates of $7 billion. The fact that the premium data used in my analysis are now several years dated only reinforces this conclusion.
This declaration is made under penalty of perjury under the laws of the State of California. This declaration is executed at Lexington, Kentucky, on the date set out below.
Dated: July 30, 2004.
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Aaron Yelowitz, Ph.D.