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5500 Preparer's Manual for 2012 Plan Years

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CCH® BENEFITS — 01/21/10

Employer “Pay-Or-Play” Requirements In Health Care Reform Bills Portend Inequitable Results For Workers

from Spencer’s Benefits Reports: The Senate and House health care reform proposals’ employer “pay-or play” requirements actually portend inequitable economic effects on workers, according to a recent analysis by two medical economists and researchers published in the January 6 New England Journal of Medicine.

The House and Senate bills each include the following “assessments” or “penalties” on employers that do not offer their workers health insurance:

Although these assessments on employers are labeled as “penalties” on employers, it is workers who most likely will pay for the “penalty” through reduced wages, contended Bradley Herring and Mark V. Pauly, professors at the Johns Hopkins University Bloomberg School of Public Health and at the University of Pennsylvania Wharton School’s Health Care Systems Department, respectively.

They further argued in the article, Play-or-Pay: Insurance Reforms for Employers—Confusion and Inequity, that those health care reform provisions not only would not address existing inequities, but that they also “could add further inequities to our system.” Mr. Herring and Mr. Pauly pointed out that workers would prefer “play” over “pay” as their wages rose because the higher the worker’s income, the greater the tax preferences for employer-provided health insurance, while the tax subsidy to purchase health insurance through the exchange decreases and eventually would not be available.

The economists projected that, since the employer-paid tax would be based on total employer payroll, companies paying low wages would elect to “pay” rather than “play,” while companies paying high wages would elect to provide insurance.

“Low-wage workers in a high-wage company would be worse off than low-wage workers with identical productivity in a low-wage company,” Mr. Herring and Mr. Pauly explained. “For instance, a single worker earning $21,660—200% of the federal poverty level for an individual&madsh;would receive a net subsidy of $3,574 through the exchange if he or she were employed at a low-wage company choosing to ‘pay’ but would get a subsidy (a tax exemption) of only $1,887 if employed at a high-wage company choosing to ‘play.’ The $1,687 difference represents about 32% of the premium and 8% of the worker’s income. For low-wage workers who are currently uninsured, such a difference might have a substantial effect on compliance with a mandate to obtain insurance.”

There also are inequities among high-wage workers depending on whether they were employed at a low-wage company that opted to pay the penalty (and thus lower wages) or at a high-wage company that provided insurance (which effectively results in a much higher tax “subsidy”), the economists noted. They provided the following example: “a worker earning $43,320—400% of the federal poverty level for an individual—would have to pay $866 (2% of payroll) in lower wages if he or she were employed at a low-wage company that opted to pay a tax penalty, but would effectively receive a subsidy of $2,407 if he or she were employed at a high-wage company that opted to provide insurance. The difference is about 63% of the premium and 8% of income. Moreover, although the House bill specifies that premiums for people at 400% of the poverty level would be capped at 12% of income, they would actually amount to 14% after the 2% payroll assessment was added.”

They added, “Policymakers expressing a desire to help ‘small business’ seem to ignore the fact that benefits go to people, not companies, and that variations in payroll taxes primarily affect workers, not business owners.” Their “ideal” solution to the inequity resulting from the two health care reform bills would be to base the subsidy for private insurance for all workers only on a worker’s total family income. Acknowledging that their “ideal” solution might be considered “too radical,” Mr. Herring and Mr. Pauly suggested the following “modest changes” to the health care reform legislation:

  1. “widen the scope of subsidies for low-income Americans in order to improve horizontal equity, making more low-wage workers eligible for the same subsidy regardless of where they work; and
  2. cap the tax exclusion for employment-based insurance, perhaps for policies with high actuarial value, for higher-income workers, or both.”

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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