Labor Market Effects of the Massachusetts Health Insurance Reform

The Patient Protection and Affordable Care Act (PPACA), passed in 2010 and recently upheld by the U.S Supreme Court, is the most profound change to health policy in the United States since the introduction of Medicare and Medicare in 1965. The PPACA is similar in many ways to the Massachusetts health reform law, which was implemented starting in 2006. As such, the Massachusetts experience can provide some guidance as to the likely effects of the national law.

In earlier work, NBER researchers Jonathan Kolstad and Amanda Kowalski have shown that the Massachusetts reform led to higher levels of insurance coverage, as well as decreases in inpatient hospital admissions for some preventable conditions and from the emergency room, consistent with greater provision of preventative care outside of hospitals. In their latest study, Mandate-Based Health Reform and the Labor Market: Evidence from the Massachusetts Reform (NBER Working Paper 17933) they examine another critical question -- the effect of the reform on the labor market.

The PPACA and the Massachusetts reform share three key provisions to expand coverage: a mandate that employers offer coverage or pay a penalty, a mandate that individuals obtain coverage or pay a penalty, and expansions in publicly-subsidized coverage. The reforms also call for the establishment of health insurance "exchanges" to ensure that individuals without access to employer-sponsored health insurance (ESHI) can obtain coverage.

Economists have long understood that the cost of a benefit mandate, such as a requirement to provide health insurance, is likely to be passed on to the worker in the form of lower wages, so long as workers value the benefit and wages can adjust freely. In this study, the authors calculate the "compensating differential for ESHI" -- that is, the change in wages associated with gaining ESHI. While past studies on mandated benefits have typically examined how an incremental mandate -- for example, to provide coverage for pregnancy-related expenses -- affects wages, the Massachusetts reform offers a unique opportunity to explore what share of the full cost of health insurance is passed on to workers, using reform-induced transitions into and out of ESHI.

The analysis makes use of the 2004 panel of the Survey of Income and Program Participation, which followed participants from late 2003 through the end of 2007. As the Massachusetts reform began to be implemented in July 2006 and was fully implemented by July 2007, the authors are able to observe the labor market outcome of survey participants before, during, and after implementation of the law. Their sample includes over 90,000 workers, including over 2,500 in Massachusetts. In their empirical analysis, the authors use the experience of other states to control for other factors that might have affected wages over this period and pay close attention to the possibility of differential trends in Massachusetts versus the rest of the country.

The paper's central finding is that there is a substantial compensating differential for ESHI. Full-time workers who gained coverage as a result of the reform earned $6,055 less per year relative to what their wages would have been had they not gained ESHI. This value represents nearly the entire average cost of their health insurance to their employers.

Building on this estimate, the authors estimate the welfare impact of the labor market distortion induced by health reform. They estimate that individuals who gained coverage through their employers valued approximately 76 cents of every dollar that their employers spent on their coverage. As the authors note, "because individuals valued ESHI, mandate-based health reform in Massachusetts resulted in significantly less distortion to the labor market than it would have otherwise." Contrasting the effect of the reform with a hypothetical wage tax to pay for health insurance, they estimate that the distortion to the labor market would have been more than 20 times as large under the tax.

The authors conclude, "Our results suggest that mandate-based reform has the potential to be a very efficient approach for expanding health insurance coverage nationally."

The authors acknowledge funding from the National Institute on Aging (grant P30-AG012810) and the Wharton Dean's Research Fund.