The Economics of 'Pay-or-Play' Mandates

With over 46 million non-elderly Americans currently lacking health insurance coverage, many policy makers are calling for reforms to reduce the ranks of the uninsured. One popular option is the "pay-or-play" mandate, in which employers are required to either provide health insurance for their employees or pay a penalty to offset costs the government incurs to provide health care for the uninsured. Massachusetts' recently enacted health care reform includes a small financial penalty for employers who do not provide insurance, while other states such as California are contemplating larger penalties.

Proponents of these mandates argue that they could significantly reduce the ranks of the uninsured, since the vast majority of the unin-sured-over 70 percent, according to a recent Kaiser Family Foundation study-are in families with at least one full-time worker. Many of these are low-income families, suggesting that mandates may be a useful mechanism for providing insurance for the working poor.

One concern about pay-or-play mandates, however, is that they may have a negative effect on employment, particularly for low-income workers. Most economists believe that employers will respond to the mandate by passing the cost of insurance on to workers in the form of reduced wages, and that workers will be willing to accept this as long as they value the insurance. But in the case of workers at or near the minimum wage, wages will not be able to fall to offset the cost of insurance. Employers thus may respond by laying workers off if the work-ers' total compensation (wages plus insurance) exceeds their productive value to the firm.

The costs and benefits of pay-or-play mandates are evaluated in two new papers by NBER researchers. In "Employer Health Insurance Mandates and the Risk of Unemployment," (NBER Working Paper 13528), Katherine Baicker and Helen Levy estimate the potential job loss from health insurance mandates.

Several factors affect the extent to which an employer mandate will cause unemployment. The first is the cost of the insurance, which will depend on the specifics of the mandate - for example, whether the insurance must cover prescription drugs and what share of premiums employers must pay. The second is how much of the cost of coverage will be passed on to workers via lower wages-as noted above, the consensus is that workers generally bear the full cost. The third is how many uninsured workers have earnings so close to the minimum wage that their wages cannot be reduced enough to offset the cost of the new coverage, and how employers respond to the implied increase in compensation for these workers.

To conduct their analysis, the authors use data from the March Current Population Survey and the Medical Expenditure Panel Survey for 2000 through 2006. The former provides information on employment, demographics, and insurance coverage for a large sample of respondents, while the latter is used to calculate the cost of insurance.

The authors find that 15 percent of full-time workers (those working 20 or more hours per week) have no health insurance coverage. The share of workers who are not offered insurance by their employer may actually be higher or lower than this, since some workers decline coverage and end up uninsured while others are not offered coverage but obtain it from another source. Relative to their insured counterparts, uninsured workers are more likely to be high-school dropouts, members of a minority racial or ethnic group, under age 35, and unmarried.

The authors calculate the average cost of a health insurance plan to be about $9,000 for family coverage during their sample period, or $3.66 per hour for a full-time worker. Assuming that a mandate required employers to provide coverage similar to the average plan and to pay 80 percent of premiums, wages would need to fall by $3 per hour to fully offset the cost of the mandate.

The authors estimate that one-third of all uninsured workers, or 5.5 million U.S. private sector workers, have earnings within $3 of the minimum wage. How many of these workers are likely to lose their jobs as the result of a pay-or-play mandate? The authors first calculate the implied increase in compensation required by the mandate for each worker-for example, the wage of a worker earning $6 per hour can fall by 85 cents to the $5.15 federal minimum wage, so the rest of the cost of insurance would be an increase in compensation. Next, assuming that a ten percent increase in compensation results in a one percent decrease in employment (a fairly conservative estimate, based on ex-isting studies of the minimum wage), the authors estimate that the implied increase in compensation resulting from the mandate would cause 224,000 workers to lose their jobs. The affected workers would be disproportionately low-education, minority, and female.

The authors conclude "the risk of unemployment should be a crucial component in the evaluation of both the effectiveness of these poli-cies in reducing the number of uninsured and their broader effects on the well-being of low-wage workers."

In "Who Gets What from Employer Pay or Play Mandates?" (NBER Working Paper 13578), Richard Burkhauser and Kosali Simon take a closer look at how effective health insurance mandates might be in providing health insurance for the working poor.

The authors use the 2005 Current Population Survey for their analysis. They consider the effect of a mandate requiring firms to provide health insurance if the firm has 25 or more employees and if the employee earns less than $15 per hour. This mandate is similar to one that was proposed recently in New York State.

The authors' first key finding is the mandate would still leave more than half (54 percent) of uninsured workers without coverage. The results are similar (46 percent) for workers in the poorest families, those with family income below the poverty line. The primary reason for the relatively modest effect of the mandate is that many uninsured workers (at all family income levels) are employed at small firms, making them exempt from the mandate.

A second key finding is that many of those who will gain coverage from the mandate are not poor-for example, the authors estimate that fewer than half of newly insured workers are in families with income less than twice the poverty line. This is the case even though the mandate only applies to relatively low-wage workers (those earning less than $15 per hour). This finding highlights the fact that many low-wage workers are not in low-income families.

A third key finding is that a significant number of workers who would be affected by a mandate already received health insurance as a dependent on a family member's policy, thus the mandate exposes them to the risk of unemployment without changing their health insurance status.

Overall, the authors conclude that pay-or-play mandates of the type they examine are "a blunt instrument for providing health insurance for the working poor," since many poor uninsured workers would not gain coverage and many of those who would gain coverage are not poor.

Both papers were presented at a Cornell University Symposium on Health Care Reform, "The Economics of 'Pay-or-Play' Mandates," which was funded by a grant from the Employment Policies Institute.