CT Blue

Not only is Max Baucus’s Health Care Bill a massive subsidy for the insurance companies, it is a massive attack on the poor, almost guaranteed to make the poor poorer in many and sundry ways.

Today, Ezra Klein highlights a provision that he, probably justifiably, asserts is the stupidest proposal in the history of man:

Baucus’s bill retains the noxious “free rider” provision on employers. Rather than a simple employer mandate that forces every employer over a certain size to provide health-care insurance or pay a small fee, the free rider approach penalizes employers for hiring low-income workers who are eligible for subsidies.
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The penalty itself is a bit confusing, and if anything, even worse than one might imagine: The employer will pay the lesser of A) the average subsidy in the exchange times the number of subsidized workers or B) $400 times the total number of workers. Two examples should clarify this:

Baucus Corp has 100 employees and does not offer health-care coverage. Thirty of the employees receive subsidies on the exchange. The average subsidy that year is $5,000. Baucus Corp woulds pay $400 times 100 employees, as $40,000 is less than $150,000 ($5,000 times 30 employees). Each of those low-income employees is costing Baucus Corp $1,333 more than an employee who didn’t need subsidies.

Now imagine that Baucus Corp. only has five employees who need subsidies, and the average subsidy that year is $5,000. In that scenario, Baucus Corp would pay $25,000 rather than $40,000, because $25,000 is less than $40,000. Each low-income worker now costs Baucus Corp. $5,000 more than a worker who doesn’t need subsidies.

So in the scenario where Baucus Corp. has a lot of low-income workers, they cost a huge amount overall because they’re multiplied against the total number of workers. In the scenario where Baucus Corp. has a few low-income workers, they cost a huge amountindividually because they’re multiplied against the average subsidy cost. No matter how you look at it, the policy makes it profitable for employers to discriminate against hiring low-income workers.

Klein’s overall point is valid, though he doesn’t really explain it well. The cost per subsidized worker is not really the issue. The issue is the overall cost to the employer for all workers. If his rendition of the statutory formula is correct, then an employer has a clear incentive to not offer health care and not hire subsidized workers if the employer can avoid it. But many employers will not avoid hiring such workers, because the fine is capped at a certain point (basically once you exceed one subsidized worker out of twelve).

Say I run a corporation called MacRonalds. I don’t want to offer health insurance. I also don’t want to pay the fine. If I hire middle class teenagers who have health insurance through Mom and Dad, then I can avoid paying any fine, if none of them are receiving a subsidy, because zero times $5,000.00 is zero. Now, suppose I run a corporation called Bal-Mart, and I hire workers who are all eligible for the subsidy. The government is subsidizing them at $5,000.00 a person, but my fine is only $400.00 a piece, so long as more than about 1 in every twelve workers is eligible for the subsidy. Why should I pay for Health Care at thousands of dollars a year if it only costs me $400.00 an employee to shift the burden to the taxpayer? So the bill piles on perverse incentives. For those who can do it, avoid hiring subsidized workers all together. In Klein’s example, the employer is better off if it keeps the total number of subsidized workers under 8. For those who can’t keep their numbers down that far, because they pay so little, hire plenty and your “fine” is a bargain as opposed to actually paying for Health Care, and anyway, if you’re Bal-Mart, you can recover the extra cost by keeping pay down and making your employees work overtime for free. Meanwhile, of course, the actual employees will all be legally required to go out and get crappy health insurance with those insufficient taxpayer subsidies. Another perversity inherent in the formula: Employers who have large proportions of non-subsidized workers are probably benefiting from the fact that other employers are doing the right thing, and providing insurance for the spouses or parents of those workers. Responsible employers will be essentially subsidizing those that provide no benefits. The bill promotes a race to the bottom for employee benefits.

So far as I know, there is currently no law that forbids an employer from discriminating against a potential employee based on family income. It is ordinarily not a criteria an employer would tend to use. This bill creates an incentive to use it, and even if it outlaws such discrimination, it will be impossible to effectively enforce.

Of course, this is yet another example of why the employer based system makes no sense at all. This system can be gamed, and for the honest employer it presents a record keeping nightmare. But, since all sensible systems were taken off the table from the start, we are left with these absurd proposals intended to preserve and sustain, and allegedly improve, a private system that is fatally flawed.

It would seem elementary that legislators should take a look at any proposed system and ask themselves: how would I game this if I were subject to it? In this case, if I were an employer, how would I behave in response to this. Can anyone believe these fines would encourage a Bal-Mart to insure its workers, when it costs next to nothing to pay the fine? As Klein suggests, the perverse incentives would be abolished, or certainly minimized, if Baucus had simply provided for a substantial fine for each uncovered worker, rather than providing for discount pricing once the proportion of subsidized workers grows large enough.