Small employers are fretting over the possibility that they may be coerced into providing health care insurance to their employees. They say that the recently unveiled House health care reform bill, which requires most employers to provide health care insurance or pay a payroll tax, will kill jobs.
Under the House bill, nearly every American will be required to have health care coverage. Employers with payrolls exceeding $400,000 would have to provide coverage or pay an 8% payroll tax. Employers with payrolls between $250,000 and $400,000 a year would pay a smaller tax, and those less than $250,000 would be exempt.
Small employers that do not provide insurance say that it is too expensive. For a small business in New Jeresy, the average cost per employee in 2006 was $7,561. The cost of health care premiums in the state rose nearly five times faster than wages this decade. Premiums in New Jersey rose 71%, while earnings increased just 15% between 2000 and 2007.
Thus, the employer mandate will clearly increase the costs of small business in New Jersey. Since they mostly provide goods and services in the local economy, they can cut back on employment but not that much, because they still need employees to provide the service. They will have to raise prices and pass it onto customers. In short, its probably going to be cheaper to pay the 8% tax than to provide health insurance.
But what about the small employers that currently provide health insurance? They are footing the bill for the employers who do not provide insurance in the form of higher premiums. Likewise, they will continue to subsidize the employer that chooses to pay the tax. So for them, the big unintended consequence of the mandate is to create an incentive to discontinue providing insurance and shift the burden onto employees and taxpayers. Here’s why:
Currently, employer-provided health care is completely voluntary. While 96% of employers with 50 or more employees provide health insurance, only about half of small employers provide health insurance. For about one in eight of the over one million uninsured in New Jersey, at least one person in the family works.
Of the small employers that provide health insurance, many continue to pass the costs of higher premiums onto employees in the form of bigger deductibles and co-pays. The result is that employees are declining or dropping insurance because it is increasingly unaffordable.
Advocates of the health care mandate are taking a big leap of faith that small employers will not cut back or drop coverage entirely. They believe that the competition for talented employees and avoidance of the payroll tax will keep small employers in the health care game. To be sure, for small knowledge-intensive firms, where talent is scarce, health care benefits will be a big attraction. But for many small employers who rely on workers with modest skills being paid modest wages, the increasing costs of health care may cause them to sit out, or get out, of the health care business altogether and simply pay the tax, particularly with the assurance that every employee is required to get coverage elsewhere, subsidized by the government if necessary.
As small employers decide to cut or cancel coverage, the employers who continue to provide coverage will continue picking up the tab for those who do not, just as they do now. Their premiums will continue to go up, forcing more employers to get out of the game.
So, in the short term, it would be rational for employers to not provide health care insurance in the first place, or cancel coverage if they already provide it, and pay the 8% payroll tax. Of course, this would simply shift the cost onto workers, consumers and taxpayers who would need to help pay for the subsidies necessary to keep individual policies affordable. In short, the health care mandate will ultimately shift the costs of health care insurance onto the same workers who can’t afford it now, consumers who are struggling to pay down debt, and onto the already burdened taxpayer.
