“I’ve been ‘unofficially’ told by the H.R. manager of my employer,” wrote RG from Los Angeles, “that it will be cheaper for them to take the penalty than to continue insuring us.” RG’s question — whether it was true that “many, many companies will start dumping health insurance benefits” — was one of several we fielded last week about how the new health care reform law would affect small businesses. And though this query came from an employee, not an owner, of a large company, not a small one, clearly many entrepreneurs are also worried that they’ll have to abandon group coverage.
But as we’ve reported before (here and here), health policy analysts have told The Agenda that this massive dumping scenario is pretty unlikely. The fact is that most businesses that provide insurance for employees will continue to do so.
The concern arises from a misunderstanding about who actually pays the employer penalty. The term is something of a misnomer, economists say, because it is the workers who ultimately bear the penalty’s cost. As the nonpartisan Congressional Budget Office put it in an issue brief published last July (emphasis added), “Firms decide how much labor to employ on the basis of the total cost of compensation and choose the composition of that compensation on the basis of what their workers generally prefer.”
“Every increase in your health care benefits package is a decrease in your dollar wages or other compensation — it’s almost a one-to-one relationship,” added Robert Moffit, an analyst at the Heritage Foundation, a conservative think tank, in September when we first approached the topic. Conversely, then, any decrease in the health benefits package is an increase in other compensation, like cash wages, because employers can seldom cut compensation in a competitive labor market.
So the calculation that a small-business owner (or any employer, really) that offers insurance must make is not whether paying the penalty costs* less than providing coverage. Rather, it is whether paying the penalty on top of the wage increase necessary for the employee to buy coverage on the individual market is cheaper than providing employees with company coverage. But even that is not quite the total equation: because the company’s contribution toward insurance coverage is not taxable income for the employee, the value of that exclusion to the employee must also be added to the mix. (For an employee in the 25 percent tax bracket whose company pays 80 percent of the premium cost, say, that’s at least an additional one-fifth of the cost of coverage.)
Now, for a company deciding whether to dump coverage, here comes the hard part. (And you thought the last paragraph was the hard part?) Beginning in 2014, health insurance reform will provide inducements for poor and some middle-class families to gain coverage. Medicaid will be available to people making a third more than the federal poverty level. Those making up to four times the poverty level will get tax credits to defray the premium expense. At the same time, the individual mandate will require everyone to buy insurance or face a penalty.
