The health care reform legislation known as the "Baucus plan"
will demand that firms with 50 or more employees offer health
insurance coverage or pay an assessment fee to subsidize the cost
of individual employee coverage through a State Health Insurance
Exchange. This proposal essentially imposes a mandate on firms with
50 or more employees, which will dramatically affect companies'
per-employee costs and their allocation of labor.
The Baucus Plan
The Baucus plan outlines a small-firm refundable tax credit,
which would apply to all firms with 25 or fewer employees --
although the full amount of this credit would apply only to firms
with 10 or fewer employees. The small firm tax credit in this
particular proposal is phased out for firms larger than 10
employees (and not exceeding 25 employees) with either a 6 percent
reduction in the tax credit for every additional employee above the
10-employee threshold or a 5 percent reduction in the tax credit
for each $1,000 increase of average wages for those employers with
average wages between $20,000 and $40,000.[1]
Additionally, the Baucus plan includes an assessment penalty on
firms with more than 50 employees that do not currently offer
health coverage.[2]The Baucus plan defines this penalty as a
flat amount equal to the national average subsidy multiplied by the
number of employees receiving an "affordability waiver," or a
capped amount of $400 multiplied by the total number of employees
at the firm. The flat amount is abstractly documented in the
proposed Baucus legislation, but it will be "set by the Secretary
of HHS and published in a schedule each year."[3] This amount will
likely to be set at thousands of dollars.
Burden on Medium-Sized Firms
Any potential health care reform legislation that punitively
adds costs to employers will dramatically affect the way these
firms treat their labor force. A company's decision not to offer
health care will not be driven by a desire to deny its employees'
coverage. Rather, it will be the result of the fact that, for many
companies, it is too costly to offer health benefits in addition to
current wage and other compensation. For example, if a firm with 49
employees decides to expand by one employee, then the potential
marginal cost of the 50th employee could be $20,000--a capped
amount of $400 multiplied by 50, the new number of employees at the
firm -- plus other costs of hiring this employee.
Moreover, the estimated share of average annual change in cost
per employee as a share of per-employee compensation will rise by 5
percent on average for firms currently not offering health
insurance coverage and 2.5 percent for those firms that currently
do offer coverage. For all medium-sized firms, the estimated annual
change in cost per employee as a share of per-employee compensation
will be 4.6 percent for those currently not providing health
insurance coverage and 2.2 percent for those that do currently
offer health insurance.[4]
These firms will likely not be able to absorb this increase in
cost of providing health insurance coverage (or paying the
assessment penalty); thus, this cost increase will be passed on to
employees in the form of reduced wages, increased insurance
cost-sharing, discontinued hiring, or loss of employment.[5]Some
firms, instead of hiring an additional employee, will simply
increase hours for current employees. These increased costs could
also result in a large number of employers contracting low-skilled
and low-income labor or hiring a greater share of non-permanent
(part-time or full-time) employees.
Implications for Small Firms
The Baucus plan's implications for small firms are not as
dramatic as those illustrated for medium-sized firms--aside from
reducing the incentive to expand. For instance, there is not a
mechanism in the Baucus plan that requires small firms to offer
health insurance coverage to their employees. As a result, under
the Baucus plan, many small firms -- perhaps most -- either will
decide to not offer coverage or drop coverage if they currently
offer it. Subsequently, employees will have to procure coverage
through the proposed State Health Insurance Exchanges.
Medium-Sized Firms under Fire
Overall, the estimated effects of the Baucus plan on
medium-sized firms are quite substantial and, in addition to the
added cost burden on medium-sized firms, could create a strong
disincentive for small firms to expand to 50 or more employees.
Firms ranging in size from 50 to 75 employees will be the hardest
hit, and all medium-sized firms will likely see an increase in
average costs per employees as a result of the Baucus plan.
John L. Ligon is a Research Assistant
in the Center for Data Analysis at The Heritage Foundation.
Methodology
The Heritage Foundation's calculation of the average annual
costs per employee uses data from the U.S. Small Business
Administration 2006 Statistics of U.S. Businesses and Non-Employer
Statistics data set, the Robert Woods Johnson Foundation 1997
Employer Health Insurance Survey, and the 2006 Kaiser Family
Foundation/Health Education and Research Trust Employer Health
Benefits Survey. An estimation of average annual costs per employee
change was constructed using aggregated data on firm/industry-level
employment and payroll data weighting the distribution (based on
firm size) by a premium per employee weight and a cost per employee
weight (accounting for additional benefit compensation to
employees).
The following assumptions are made in the cost calculations used
to estimate the average annual change in costs per employee:
First, the proposed Baucus plan reforms on small-firm refundable
tax credits and the employer penalty for firms with 50 or more
employees will be fully implemented between
2013 and 2014.
Second, the estimated coverage distribution (i.e., number of
workers offered as well as those who take up insurance) is the same
from the baseline scenario to the policy implementation scenario
and that the employer tax penalty is $400 for firms with 50-199
employees and slides for the remainder of the distribution (firms
with 200 or more employees).
Third, there will be a potential tax incentive for some firms to
offer coverage that had not previously offered it. Thus, the
assumption is that some firms will change their coverage
decisions.
Fourth, the share of firms that decide to offer coverage (as
well as subsequent take-up rates) will decline as firm size
increases, particularly for firms with 25-49 employees.
Last, these calculations assume that for firms with 49 or fewer
employees that currently do offer health insurance coverage, a
share will decide to drop coverage, and the greatest share of firms
dropping coverage will be those with 25-49 employees.