The Hidden Effects of the Public Option

Author’s note: For the purposes of this discussion, the term “health insurance” will refer to all health care plans.  True health insurance is nearly impossible to find.  Most people actually have “health maintenance.”  For expediency, the term “health insurance” will cover all health care plans.

One of the most important aspects of economics is the concept of incentive:  Give people an incentive to do something, and by and large they will do it.  Give them an incentive to not do something, and generally people will not do that thing.  This concept has ruled the interaction of creatures since the first multi-celled organisms began eating each other to survive:  The organisms that developed the sense to get away from the carnivore creatures survived, and the rest were consumed.  Incentives can be both positive and negative:  Positive incentives encourage us to do something.  The sweetness of an apple encourages us to eat it, while the oily, three-leafed appearance of some plants tells us to stay away!

Prescription DrugsThis concept of incentive drives us in our everyday lives:  We avoid committing crimes for fear of punishment and work jobs for the incentive of salaries so that we can obtain the necessities and comforts of life.  We wait to shop until products are on sale or rebates are being offered.  Incentives drive the actions of individuals and, in aggregate, entire societies.

This concept of incentive is one of the important factors to consider when examining the health care “reform” proposals.  One of the most talked-about but least understood parts of these proposals is the requirement of employers to offer health insurance to their employees, or to pay a penalty to help fund the government-offered “public option” plan.  Let us examine the effect of this one aspect of the current health “reform” proposals.

Some time ago, I received a statement in the mail.  This statement encompased my total compensation received from my employer at the time, including my published salary, benefits including health insurance and 401(k) and FICA taxes.  In total my benefits increased my total compenasation to 126% of my established salary.  Six percent consisted of bonuses paid for the company’s performance that year.  Another 7.5% was my company’s contribution to my FICA taxes, which fund Social Security and Medicare.  The remaining 12.5% included sick leave, life insurance, AD&D, travel and my company’s contribution to my health insurance plan.

Without going into detail, let me say that by far, I was at the low-end of employer contributions as a percentage of my salary.  In other words, the majority of employees’ company health insurance contributions certainly constituted a far larger percentage of their salaries than did mine.  The aggregate statistic of June 2009 for employee health insurance contribution was 7.8% of salaries is heavily skewed by the higher-salary employees who also receive this benefit.  With some companies, the lowest-skilled, lowest-paid employees could receive 12-15% of their base pay in employer-funded health insurance compensation.

This is where the proposed health reform plan fails on the concept of incentive: With a surcharge on salaries for companies that do not offer health insurance, those companies with large numbers of unskilled, low-wage workers have a strong financial incentive to drop such plans.  This includes retail enterprises, restaurants, warehousing and shipping, light manufacturing and any other business where the majority of employees have few skills and low wages.

Let us consider the ramifications of the proposed reform bill, H.R. 3200.  It proposes an 8% surcharge on companies that do not offer health insurance to help fund a “public option” plan.  On the surface, this seems like a good incentive:  The average company pays just 7.8% of base salary for its contribution to health insurance.  An 8% penalty seems to be an incentive for companies to offer health insurance.  Most companies would rather pay the average 7.8% of salaries than 8%, so those that do not already offer such plans will begin offering them.


No.  In fact, the penalty will have the opposite effect.  First, all businesses have already set aside a certain amount of their yearly budget for labor.  If the companies that do not already offer health plans are forced to offer health insurance, these companies will be forced to cut labor costs elsewhere.  The easiest, most likely place to cut is head count:  They will lay-off employees to cut total costs.

Second, many companies average health insurance costs far higher than 7.8% of labor costs.  As discussed above, companies and individuals with higher average compensation skew this statistic.  Companies with volumes of unskilled, low-wage labor can have insurance costs as high as 12-15%.  These companies will actually have a strong incentive to drop their employees from a company-sponsored health insurance plan.

Retail enterprises are likely to be one of the major beneficiary groups of such a program.  Dropping health insurance, forcing employees onto the “public option” while exchanging health insurance plans for a lower-cost “penalty” allows these businesses to lower their labor costs without reducing head-count.  It is no wonder Wal-Mart has endorsed this plan!

Essentially, the “penalty” is not a penalty at all:  It is an incentive for businesses that utilize large amounts of unskilled labor to drop their insurance plans, forcing millions of people who cannot afford to buy private health insurance onto the government-offered “public option.”

UK NHS HospitalThe result of this is catastrophic: Instead of covering the roughly 12 million legal residents who do not have insurance and do not already qualify for other programs, the “public option” will be forced to cover many millions more.  Instead of most people keeping their health coverage and a few million more being added to the “public option,” the result will be tens of millions of people dropped from their employer-sponsored plans and added to the government rolls.

Consider the ramifications of major retailers dropping their health insurance plans in favor of the 8% penalty:

In 2007, 21 million people (14.4% of employed persons) worked in wholesale and retail trade and 11 million more (7.5%) are employed in leisure and hospitality (Statisitc Abstract Table 600), which are among the largest consumers of unskilled labor.  These companies are less likely to offer employer-sponsored health insurance.  If just 10% of these workers were forced onto the “public option,” 3.2 million people would be added to its rolls, forcing its costs to grow by several billion dollars per year.  This number represents just two major segments of our economy that total just 22% of our labor force.

Apply this line of reasoning across the labor force, the consequences for a the health insurance penalty are dire.  The incentive for many busiensses to drop their employer-sponsored health insurance plans will be too great a siren call to resist, costing taxpayers billions, perhaps trillions of dollars in the long run.

Cross-posted at Seeking Liberty.