The Perils of Play or Not Pay

Remember those heady days with a newly-elected Democratic President and solid Democratic majorities in both houses of Congress, when it seemed that national health care reform was just around the corner? Remember how, after the face-off between the liberals who wanted a single-payer system and the conservatives who wanted as little change as possible, the centrists took command? Remember the early 1990s, and play-or-pay as the magical way to universal coverage?

So you do remember play-or-pay? Be careful about admitting it. After the failure of the Clinton plan and the collapse of similar state reforms in Washington and Massachusetts, a mere mention of the term would cause political eyes to roll, while its inclusion in any reform plan was enough to kill the proposal dead, dead, dead.

Reformers have learned their lesson. There was no talk of play-or-pay in the debate leading up to Massachusetts’ reform legislation, even though employers of more than ten workers are required to make a “fair and reasonable” contribution to their employees’ coverage, or pay a “fair share” contribution into an insurance pool. (More on Massachusetts later.)

Current plans for national reform have gone one better, skipping almost entirely over the issue of employer contributions. Take a look at what might be called the BOD plan: Senator Baucus’ recent Finance Committee paper, President Obama’s campaign proposal, and Secretary -designate Daschle’s book “Critical.”

BOD proposes both carrots and sticks to achieve something close to universal coverage. Employers are offered the ability to enroll employees via an “insurance exchange,” possibly based on FEHBP, while both employees and employers are offered tax credits to partially offset their premium payments. At the same time, some form of individual mandate is imposed (except in the Obama version), most likely via an income tax penalty imposed on those without insurance.

The casual reader of “Critical” or Senator Baucus’ paper or President Obama’s campaign promises may be forgiven for thinking BOD would allow employers to enroll workers in a tax-subsidized “exchange” with no employer contribution, the equivalent in health care financing of virgin birth.  It’s necessary to search long and hard to find clues that employers would actually have to make some payments. 

In the 220 pages of “Critical,” there’s just half a sentence on page 166 that suggests that employers might be required to provide some funding. Senator Baucus’ paper takes a more subtle tack, proposing tax credits for employers paying for coverage through the “exchange,” in effect a tax on those who don’t, while President Obama’s campaign proposal offers an odd mix of mandated payments for large employers and tax credits for small ones. Like it or not, BOD is a play-or-pay plan.

This isn’t necessarily bad in itself. BOD’s emphasis on retaining an employer-based system, combined with its individual mandate and open entry to an “exchange,” means that essentially all employers must contribute somehow to coverage. (A proposal to give some employers a free ride at the expense of others would create instant opposition.) Unfortunately, there are two big and interrelated problems with the BOD approach; one is “crowd-out,” the other is financing.

“Crowd -out” is the inevitable result when it is less expensive for employers not to offer coverage than to do so.  If it costs less to pay a nominal amount into an insurance pool or a penalty for non-coverage, all but the most philanthropic or union-shackled employers will eventually do so.  Massachusetts, where employers have only to make a $295 “fair share” contribution, demonstrates this; small group enrollment is decreasing in spite of the individual and employer mandates. This isn’t too surprising; Massachusetts employers offering coverage now face the double whammy of increased employee take-up, a result of the individual mandate, and the recession. Hawaii, with an ERISA-exempted employer mandate, provides another example. Despite the mandate, fewer than seventy percent of the state’s under-65 population have employer insurance.  In a classic business reaction to government regulation of year one compliance, year two avoidance, year three contempt, many Hawaii employers have sidestepped the mandate by using “contract workers” or part-timers.

Financing is a BOD problem in itself, and even more so because of the potential crowd-out effect. With only minimal payment requirements imposed on employers, it’s going to be hugely expensive to provide premium subsidies to lower-income individuals. Eighty percent of the nation’s reported 47 million uninsured are in families with income below 300 percent of FPL, and presumably would be eligible either for Medicaid/SCHIP or for a premium subsidy. “Critical” co-author Jeanne Lambrew has proposed that no-one should pay more than five to seven percent of income on insurance, suggesting that the total subsidy costs (including Medicaid/SCHIP) would be more than $100 billion. However, this figure does not include subsidies for lower-income individuals who currently have some coverage; these additional subsidy costs, especially if there is significant crowd-out, could easily double or triple the $100 billion estimate.

Worse still, Massachusetts’ experience indicates that the CPS uninsured estimates may be low. Recent data show that the total of those who gained coverage as a result of reform plus those still uninsured is forty percent above the CPS figure (which helps to explain why Massachusetts’ reform costs are so much higher than projected).  If this is typical of most states, there are some very unpleasant funding surprises in store.

These cost estimates highlight another problem of what looks increasingly like “play-or-not-pay.”  The hundreds of billions of dollars in premium subsidies must be funded somehow. If funding is not to come from the subsidized workers’ employers, it is going to have to be raised through other taxes, meaning that those workers who do have employer coverage will be paying twice over; first in the form of premium-substituted wages, and second in the form of taxes, a scenario that will accelerate crowd-out even faster.It doesn’t take an economist to see that “play-or-not-pay” results in an inherently unstable system that will crumble as soon as it’s built. Unfortunately, the alternative of real play-or-pay, in which the non-players are assessed the costs of their employee coverage, is equally infeasible. The only uncertainty is whether NFIB members will riot in the streets or merely lynch the nearest health care reformer. And, for once, they would have some justification: increasing small businesses’ payroll-related expenses by a quarter or more in the middle of a recession would be an economic disaster. The fact is, play-or-pay, no matter what level of “pay,” doesn’t work.

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