«THE ECONOMICS OF EMPLOYER VERSUS INDIVIDUAL MANDATES by Alan B. Krueger and Uwe E. Reinhardt Prologue: America’s belief in solving large problems ...»
by Alan B. Krueger and Uwe E. Reinhardt
Prologue: America’s belief in solving large problems through
private/ public collaboration has not guaranteed a solution to
President Clinton’s quest for universal health insurance cover-
age. The administration’s proposed requirement that all employ- ers provide their workers with health insurance coverage has been attacked by the small-business community and most Re- publicans as too regulatory for the American appetite. The ad- ministration’s plan also would require that unemployed and self- employed persons be subjected to a coverage mandate. In this paper economists Alan Krueger and Uwe Reinhurdt argue: “If policymakers wish all Americans to have portable health insur- ance coverage, they must mandate that coverage.... Absent a mandate, millions of American families would simply choose to remain uninsured.” Krueger and Reinhardt, both of whom are professors of economics at Princeton University, discuss the fi- nancing of health care, explaining how most practitioners of their discipline view a mandate on employers to provide health insurance to their workers. Krueger is the Bendheim Professor of Economics and Public Affairs at Princeton’s Woodrow Wilson School. He is coeditor of the Journal of Economic Per- spectives and has published widely on labor market issues. He received his doctorate in economics from Harvard. Reinhurdt is a well-known figure in health policy circles in the United States and abroad. A born teacher and a naturalized American, Reinhardt spent his early years in Germany, but he took his uni- versity training in Canada and at Yale University, from which he earned a doctorate in economics. Reinhurdt has eclectic intel- lectual tastes. While a strong believer in markets, he also recog- nizes Canada’s tax-financed health care system and Germany’s social insurance scheme as approaches that provide their popula- tions equitable protection against the uncertain nature of illness.
ECONOMICS OF MANDATES 35Abstract: This paper reviews the economic implications of employer and individual health insurance mandates. Although the cost of meeting an employer mandate is nominally paid by employers, in the long run much of the cost may be shifted backward to employees in the form of lower wages. We also compare the consequences of hypothetical employer and individual health insurance mandates for families with different income levels. Depending on their structure, an employer mandate may be more or less progressive than an individual mandate.
C urrent efforts to reform the American health care system have two major objectives. First, all Americans are to have adequate health insurance coverage, a goal commonly defined as universal coverage.
Second, the delivery of health care is to be rearranged to make it more efficient; that is, the appropriate health care, and only the appropriate care, is to be given to patients at the lowest feasible cost.
Both of these objectives are to be achieved by rearranging the way American health care is financed. When exasperated commentators lament that our current debate on health reform is “all about money,” they are literally correct, but they miss the mark. A restructuring of our vast health care delivery system cannot be achieved through direct government edict in this country. That restructuring will be sought as a natural response to the new financial incentives inherent in a rearranged flow of money.
That flow of money can be broken down into two major streams. First, money must be collected into one or several privately or publicly administered insurance funds. Second, money must be disbursed from those collective insurance funds to the providers of health care. The first facet is generally referred to as the financing of health care. The second embraces the issues of reimbursement and cost control.
This paper focuses on the financing of health care. We begin our discussion with some remarks on certain basic facts of life regarding health care financing-facts that are widely perceived as troublesome and often avoided. In the next section we explore in some depth the economist’s
standard view of one highly controversial method of financing health care:
a mandate upon employers to procure health insurance for their employees and their dependents. Next we present several simulations that compare the effects of a hypothetical employer mandate with a hypothetical individual mandate on U.S. households. Finally, we recommend a compromise between an employer and an individual mandate: premiums calculated as a flat percentage levy on the gross wages of the individual employee but collected at the nexus of the payroll.
Facts Of Life In Health Care Financing Politicians contemplating the reform of our health care system cannot run away from certain basic facts of life that are so obvious that they seem 36 HEALTH AFFAIRS | Spring (II) 1994 regularly forgotten: (1) Every penny of financing for health care ultimately must be extracted from private households. Government and business are mere intermediaries in this flow. (2) If there is to be universal health insurance coverage, substantial additional transfers of funds must be made from households in the upper half of the nation’s income distribution to households in the lower half. (3) To achieve truly universal health insurance coverage, households must be mandated to procure that coverage or employers must be mandated to procure it on behalf of households.
Extracting money from households. The transfer of money from private households to the providers of health care can be achieved by three distinct methods, which span the set of feasible approaches.
Under the first approach, individual households purchase individual insurance policies directly from private insurance carriers or seek individual coverage through group policies procured by some private association, possibly with the support of public subsidies. Less than 10 percent of the nonelderly U.S. population currently procures private health insurance this 1 way, so far without any public subsidy whatsoever. In fact, nowhere in the world is this the predominant mode of health care financing.
Under the second approach, government taxes private households and funnels these taxes to an insurance fund. This approach is favored in Canada and in many European countries. But even in the United States more than 42 percent of all national health spending now follows this route, covering some sixty-three million Americans, or 25 percent of the population. This public system includes Medicare for the elderly, Medicaid for the poor, the purely socialized health systems of the Department of Veterans Affairs, and sundry delivery systems of the Public Health Service.
Finally, under the third approach, private and public employers procure insurance coverage from private or public insurance carriers. This employment-based approach is the backbone of the social insurance systems of Europe, Latin America, and Asia, where the employer’s participation in health care financing has long been mandatory. In the United States about 71 percent of the nonelderly population obtains insurance coverage by this indirect route, although not so far on a mandatory basis nor in a way that makes the insurance portable (as it is under social insurance). Of course, when employers finance health care, they always recoup their outlays, dollar for dollar, either in the form of higher prices for consumption goods or through reductions in take-home pay to employees, or both. It follows that an outright mandate on business to act as this sort of pumping station indirectly imposes fiscal levies on private households as well. The empirical question, to be explored further in this paper, is which households are made to bear what share of the burden.
If one surveyed economists on the question of which of these three ECONOMICS OF MANDATES 37 approaches to financing health care makes the most sense from the viewpoint of economic theory, the winner undoubtedly would be the first approach, the one actually chosen by less than 10 percent of the American population. As a matter of principle, economists advocate arrangements under which consumers, producers, and politicians make decisions based on incentives that meet two criteria: (1) the incentives are distorted as little as possible by taxation, and (2) the parties involved are as aware of the incentives as they can possibly be. It follows from this principle that individual households should purchase their own health insurance using their after-tax income and that families with insufficient means to purchase coverage on their own be subsidized by highly visible, tax-financed public subsidies that reflect the general public’s charitable sentiments.
Subsidizing poor households. Unfortunately, the public subsidies required to help poor households buy coverage would not be trivial. A typical health insurance policy now costs around $2,200 for an individual and close to $5,000 for a family of four or more, even if purchased at community-rated premiums established for large groups of insured people. As the distribution of family income in the United States indicates, possibly as many as 20 percent of American households-and certainly the bottom 15 percentwould have great difficulty absorbing such a premium in their relatively meager budget (Exhibit 1).
Just where one sets the threshold at which public assistance needs to be given is, of course, a purely subjective matter. It lies at the heart of our current debate on health policy. Commenting on Rep. Jim Cooper’s (DTN) well-known reform plan, for example, The New York Times recently
opined in its lead editorial:
He [Congressman Cooper] would provide subsidies for families earning twice the povertyline income or less to buy insurance through cooperatives. But that could still mean a family earning $30,000 would have to buy a $5,000 policy on its own. Mr. Cooper calls that 2 universal access; we call it merciless.
The New York Times’s notion of “merciful” health reform implies that the health insurance coverage of close to the entire bottom half of the U.S income distribution be partially or fully subsidized by the upper half. The total flow of such subsidies could easily exceed $100 billion, depending upon the generosity of the benefit package covered by the insurance, the degree of cost control imposed on providers, and the precise cutoff line for the subsidies. Of course, many such cross-subsidies are already being made by our current health system, albeit in a pattern that does not fit any known social ethic. These subsidies flow helter-skelter, in all directions.
The twenty-nine million low-income Americans enrolled in Medicaid evidently are beneficiaries of a top-to-bottom income redistribution. So are many low-income elderly Americans enrolled in both Medicare and Medicaid. But there are also many well-to-do elderly who extract from Medicare much more than they deposited in it during their work years and who now find themselves the happy recipients of billions of dollars in outright charity 3 from below. To these subsidized, well-to-do elderly should be added the lucky millions of high-income employees whose companies purchase for them health insurance out of pretax income. This is a tax shelter known to bestow the bulk of the implied “tax expenditure” on the upper-income groups. To families in low tax brackets, this tax shelter means only a handful of dollars; to families in the upper-income groups, it can mean $2,000 tax savings toward the purchase of health insurance. According to estimates by Lewin-VHI, in 1991 fully 26 percent of the $70 billion or so in taxes avoided through this shelter went to families earning $75,000 or 4 more, and only 6 percent to families earning $20,000 or less.
One of the common arguments against health reform is that this country simply cannot “afford” to subsidize with public funds further millions of uninsured low-income Americans. Those who make this argument, however, must somehow come to grips with the fact that for years Congress has funneled to the upper levels of the income distribution more funds in outright subsidies or tax expenditures than it would take to subsidize generously the insurance coverage of all low-income uninsured Americans. Thus, the proposition that we just cannot “afford” to fold all of the uninsured quickly into mainstream American health insurance is unconvincing. A more accurate statement would be that America’s middle and upper classes are not now willing to redistribute any more funds to lower-income groups, although the better-off have no objections to a myriad of hidden crossECONOMICS OF MANDATES 39 subsidies among themselves, or even from middle- to upper-income groups.
The need to mandate health coverage. If policymakers wish all Americans to have portable health insurance coverage, they must mandate that coverage. This is the third basic fact of life in health care reform. Absent a mandate, millions of American families would simply choose to remain uninsured, even if they could afford to buy insurance with some subsidies and some belt tightening. A strategy to remain uninsured is not completely reckless, because this nation already has a more or less universal catastrophic health insurance system: the hospital emergency rooms that are obligated to treat all comers, and the hospitals attached to these emergency rooms. Although this safety net is neither perfect nor comfortable, its existence is an open invitation to free riding in health care.