The Obamacare mandate for large employers kicks in this year and for smaller employers it kicks in next year. But an increasing number of economists – both on the right and the left -- are saying that mandated health insurance benefits at the work place are a bad idea. Are they right?
One reason this question is so difficult to even discuss is that such reputable publications as the Journal of the American Medical Association – which is supposed to be a scientific journal—publishes commentary that completely ignores the most basic findings of the science of economics.
Let’s go to the basics. Corporations are not people. They don’t feel pain. They don’t feel pleasure. In court they are treated as a person, but everyone understands this is a “legal fiction.” If you tax a corporation you are taxing a relationship. The burden of the tax ultimately falls on real people. If you regulate a corporation the burden falls on real people. If you subsidize a corporation, the benefits are realized by real people. This isn’t really economics. It’s just logic.
Yet, courtesy of a pointer from Aaron Carroll, this is a defense of the employer mandate that appeared in a recent commentary in JAMA:
“The core value undergirding the shared responsibility principle is the realization that all of the major stakeholders of the health care system must contribute something if comprehensive health care reform is to be accomplished. Stated differently, making the ACA work requires a measure of responsibility from consumers, hospitals, physicians, insurance companies, drug makers, medical device makers, home health agencies, labor, and—because of section 1513—large employers.”
In fact there are only three real stakeholders cited in the paragraph above: consumers, workers (labor) and physicians. Every other entity is a pass through organization. If you tax insurance companies for example, the ultimate burden of the tax doesn’t fall on some entity called “insurance company.” It falls on consumers (in the form of higher premiums) or employees (in the form of lower wages and benefits) or on shareholders (in the form of lower returns).
For that reason, the quoted passage is not reasoned analysis. It is sloppy rhetoric --- the kind of rhetoric that one expects to hear from politicians, especially politicians on the left. One reason such rhetoric survives, 200 years after Adam Smith, is that economists don’t always know where the burden falls – especially in the case of a tax on a specific industry, such as insurance companies or device manufacturers.
However, there are two things that are fairly well established: (1) payroll taxes fall on workers and are a dollar-for-dollar substitute for employee compensation and (2) employee benefits – whether mandated or not -- are a dollar-for-dollar substitute for wages.
Both findings have been verified by years of academic research and the second finding implies something that isn’t even controversial among economists: mandated employee benefits tend to be 100 percent paid for by workers themselves in the form of lower wages and fewer non-mandated benefits. For example:
- A study by Jonathan Gruber (sometimes called the “architect of Obamacare”) and Alan Krueger concludes that the costs of worker’s compensation insurance are largely shifted to employees in the form of lower wages and predicts that the same will be true of mandated health insurance.
- In a study of mandated maternity benefits, Gruber concludes that the cost is largely borne by the very workers the law is designed to help.
- In a study of the Massachusetts employer mandate (on which the Obamacare mandate is modeled) Jonathan Kolstad and Amanda Kowalski “find a compensating differential for the full cost of health insurance; individuals who receive [employer-provided health insurance] receive wages that are lower by approximately the amount their employer spends.”
If employees bear the full costs of an employer mandate, this implies there really is no difference between an employer mandate and an individual mandate. That is, requiring employers to provide a benefit is (as a first approximation) no different than requiring the employees to buy the benefit themselves.
So why have an employer mandate at all? The most obvious reason is deceptiveness on the part of politicians. If workers don’t understand economics very well, and if publications like JAMA are just as bad as the demagogues, politicians can get away with pretending they have created something for nothing. Workers get a benefit. And no one appears to be bearing the cost of that benefit.
Unfortunately, employer mandates have adverse consequences and this is especially true of the Obamacare mandate. Someone making $10 an hour say, can go into the (Obamacare) exchange and get a subsidy worth more than 90 percent of the cost of the insurance. Yet if the employer is required to provide the insurance, there is no help from the federal government other than the long standing ability of employers to buy insurance with pre-tax dollars. For this employee that means avoiding the payroll tax.
Let’s say that the second lowest-cost Silver Plan for a family is selling for $12,500. If the family is buying in the exchange, they can expect a subsidy of $11,625. If the insurance has to be provided at work, that same family will face a burden of approximately $10,588.
This is why so many employers are converting workers to part-time status, turning to contract workers and other outsourcing rather than hiring new workers and taking advantage of numerous loopholes. As I explained in the Wall Street Journal, low-wage workers can end up with skimpy insurance – or no insurance at all – and have no opportunity to get insurance in the exchange.
The employer mandate, therefore, is disrupting the labor market, distributing government help in an arbitrary and unfair way and harming many of the very people the law was intended to help.
Let’s get rid of it.
