Who Will Pay For “Play-Or-Pay”?

Members of Congress and lobbyists for employers have been concerned about the potential effects on employers of the House and Senate’s “play-or-pay” provisions. But, if several recent studies are to be believed, it is workers who ultimately will pay to play.

The House and Senate bills each include the following “assessments” or “penalties” on employers that do not offer their workers health insurance:

• House—Effective Jan. 1, 2013, employers with annual payrolls exceeding $750,000 would be assessed a tax of 8% of their payroll.. Employers with an annual payroll of less than $500,000 are exempt and the “penalty” grows at 2% increments for payrolls between $500,000 and $750,000.

• Senate—Effective Jan. 1, 2014, employers that have at least one full-time worker who receives a tax credit for health insurance obtained through a health insurance exchange would have to pay a tax of either $750 for each full-time employee or $3,000 for each full-time employee who is receiving the tax credit. Employers with 50 or fewer employees are exempt.

Although these assessments on employers are labeled as “penalties” on employers, it is workers who most likely will pay for the “penalty” through reduced wages, contended Bradley Herring and Mark V. Pauly, professors at the Johns Hopkins University Bloomberg School of Public Health and at the University of Pennsylvania Wharton School’s Health Care Systems Department, respectively.

They further argued in the article, “Play-or-Pay: Insurance Reforms for Employers—Confusion and Inequity,” that those health care reform provisions not only would not address existing inequities, but that they also “could add further inequities to our system.” The article was published in the January 6 New England Journal of Medicine. Mr. Herring and Mr. Pauly pointed out that workers would prefer “play” over “pay” as their wages rose because the higher the worker’s income, the greater the tax preferences for employer-provided health insurance, while the tax subsidy to purchase health insurance through the exchange decreases and eventually would not be available.

“Empirical economic research has provided strong evidence that there is an implicit tradeoff between cash wages and health insurance benefits…workers actually pay for the cost of their employers’ contributions to their health insurance by receiving wages below what they would have received had not employer health insurance been offered,” according to a report prepared by the Urban Institute and released at the end of last year. “The lower wages of small-firm workers imply that they are far less able to pay for health insurance through wage reductions; consequently, their employers are less likely to offer them such benefits.”

The report, “What Would Health Care Reform Mean for Small Employers and Their Workers?,” also concludes that neither of the two bills’ tax provisions would impose “substantial new financial burdens on small businesses.”

With respect to the health reform funding scheme, the House’s 5.4% surcharge on families with incomes over $1 million and individuals with incomes over $500,000, analyses by the joint Urban Institute-Brookings Institution Tax Policy Center (TPC) found that just 0.2% of all tax “units” and 0.9% of tax “units with business income potentially would be affected should the surtax become effective, as proposed, in 2011. Those figures would rise to 0.5% of all tax units and 1.6% of all tax units with business income in 2019. The Senate proposal to increase the Medicare hospital insurance (HI or Part A) tax, potentially would apply to 1.5% of all tax units and 3.4% of all tax units with business income in 2013, the proposed first year of implementation, and to 2.4% of all tax units and 5.1% of all tax units with business income in 2019.

For all practical purposes, the proposed tax assessment/penalty that would be imposed on employers that do not offer health insurance to their employees would affect very few employers, the Urban Institute researchers concluded based on available data. According to Census Bureau data on U.S. businesses, 87% of the more than six million firms in the U.S. in 2006 had annual payrolls below $500,000 and that proportion would increase by 2013. These small firms would face no tax assessment (or penalty) for not providing health insurance to their workers.

Another 4% of businesses in 2006 had annual payrolls that fell between $500,000 and $750,000, and would have been subject to a reduced tax assessment, had it been in place in 2006. The 9% of firms with payrolls exceeding $750,000 (the very largest firms), in 2006 and who would have been subject to the full tax assessment had it been in place, represented 77% of total employment that year. Because the larger firms typically offer health insurance anyway, they would not face a tax assessment for not offering health insurance.

So, what’s to worry?