Congressional advocates of the latest health care reform
proposal claim that it will not cost ordinary Americans more--the
costs will be borne by "the rich" and by employers. After all, both
the House and the Senate versions require employers who do not
provide health benefits to pay higher taxes.
But the Congressional Budget Office (CBO) recently reported what
economists have long known: Regardless of who is formally required
to pay, the burden of these taxes and costs will ultimately fall
primarily on employees through lower wages. An employer mandate
does not give workers without health insurance something for
nothing but rather forces them to purchase it out of their wages
whether they like it or not--and no matter how low those wages are.
Congressional rhetoric to the contrary, much of the burden of
paying for an employer mandate will fall on ordinary Americans, and
lower-income workers will be hit the hardest.
Both the House and Senate drafts of health care reform include
so-called "employer mandates" or "pay or play" provisions. These
mandates require employers to pay higher taxes if (a) they do not
offer health insurance, or (b) they offer it but have employees who
decline it and instead use the government system.
The Senate version requires employers to pay $750 a year for
each full-time employee without health coverage. The House version
goes further, requiring most employers who do not provide health
benefits (or whose employees decline it) to pay a penalty of 8
percent of their payroll. It has even been proposed that employers
whose employees enroll in Medicaid may be required to pay this
The ostensible purpose of such a tax penalty is to discourage
employers from dropping workers onto the taxpayer-subsidized
government plan. The tax will pay a portion of the public's costs
when employees use the new government system instead of
employer-sponsored insurance. However, the actual result will be
lower pay and job losses, especially for low-income workers.
Costs Paid by Employees, Not
Advocates of an employer mandate claim that employers and "the
rich" will bear the burden of health coverage. However, the CBO
recently reported that ordinary workers--not their employers--will
ultimately bear the full cost of any reforms that make health
insurance more expensive for employers.
Although workers do not physically write a check for their
health benefits, their employers write a smaller check to them
every payday. Workers pay for health benefits through lower wages.
As the CBO explains:
Although employers directly pay most of the costs of their
workers' health insurance, the available evidence indicates that
active workers--as a group--ultimately bear those costs. Employers'
payments for health insurance are one form of compensation, along
with wages, pension contributions, and other benefits. 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. Employers who offer
to pay for health insurance thus pay less in wages and other forms
of compensation than they otherwise would, keeping total
compensation about the same. ...
[I]f employers who did not offer insurance were required to pay
a fee, employees' wages and other forms of compensation would
generally decline by the amount of that fee from what they would
otherwise have been.
Employers do not have limitless funds to dole out according to
their own generosity. They must pay for all benefits and wages out
of revenue received from customers; therefore they must decide how
many employees to hire, and what to pay, based on the total cost of
having that employee (and that employee's productivity). It does
not matter from the employer's point of view how compensation is
divided between wages, benefits, and payroll or other taxes.
If Congress makes health coverage more expensive for employers,
or requires new payroll taxes, employers will be forced to cut
wages to make up the difference. Even if the law stated (as the
House bill does) that employers could not cut pay directly
to make up for the cost of health care, they will ultimately,
somehow have to do just that.
For example, they could give smaller raises (too small to keep
pace with inflation), less frequent promotions, lower starting pay
to new employees, and/or wage cuts due to "the recession" until
their total costs of employing a worker had fallen by nearly the
same amount as the employer mandate imposed by Congress.
No Free Lunch
An employer mandate does not give workers without health
coverage a "free lunch": They will not be able to keep their
current wages and benefits and have health care added to it at
their employers' expense. Instead, the proposed laws would
effectively force them to purchase health insurance and therefore
spend less on other goods. Some workers will prefer this
arrangement, but many others will not. In essence, the Congress
would be telling the poor: "If you now have to choose between food
and health insurance, you no longer have that choice--from now on
you have to buy the health insurance."
Wage Cuts for Low-Income Workers
These wage reductions will most seriously affect low-income
workers. Most higher-income earners already have health benefits
and so will not experience any wage cuts as long as their health
insurance meets the new federal requirements.
The employer mandate's burden would primarily fall on
lower-income and less-skilled workers who do not currently have
health coverage. The House version would force these workers to
take the equivalent of an 8 percent pay cut--amounting to $1,600 a
year for a full-time worker earning $10 an hour.
Job Losses for Low-Income Workers
On July 24, the federal minimum wage will rise to $7.25 an hour.
Employers cannot legally take the full cost of the employer mandate
penalty out of the paychecks of anyone earning close to this
minimum. Thus, paying $7.25 an hour plus the health care tax will
make unskilled workers even more expensive to hire. So, as the CBO
points out, their employers will respond by laying them off or
hiring fewer of them in the first place:
[A] play-or-pay provision would reduce the hiring of low-wage
workers, whose wages could not fall by the full cost of health
insurance or a substantial play-or-pay fee if they were close to
the minimum wage.
Health care reform is supposed to help vulnerable workers. But
the House's approach to health care reform will cost many of them
Tax Increases on Ordinary Workers
President Obama promised not to raise taxes on workers earning
less than $250,000 a year, and supporters of an employer mandate
claim that they will not make low- and middle-income workers bear
the burden of paying for it. The focus on the surcharge on those
earning over a million dollars a year reinforces this
However, low-income workers will bear much of the cost, paying
higher taxes indirectly through reduced wages. The House bill
imposes what is effectively an 8 percent surtax that applies only
to workers who do not already have health insurance, most of whom
are already in the lower-income strata and can least afford to pay
James Sherk is Bradley Fellow in Labor Policy
and Robert A.
Book, Ph.D., is Senior Research Fellow in Health Economics in
the Center for Data Analysis at The Heritage Foundation.
Congressional Budget Office, "Effects of
Changes to the Health Insurance System on Labor Markets," July 13,
2009, at http://cbo.gov/doc.cfm?index=10435 (July
America's Affordable Health Choices Act of
2009, H.R. 3200, 111th Cong., 1st Sess., draft of July 14, 2009, p.
147, lines 14-19.
Jonathan Gruber, "The Incidence of Mandated
Maternity Benefits," American Economic Review, June 1994,
Vol. 84, No. 3, pp. 622-641.
"Effects of Changes to the Health Insurance System on Labor
Markets," p. 4.