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Terminating private health insurance: inadequate counterincentives edition
[California] businesses with 10 or more workers that choose not to offer [health insurance] coverage would be required to pay 4 percent of their total Social Security wages to a state fund that would be created to subsidize the purchase of coverage by the working uninsured.
...The plan...would also require doctors to pay 2 percent and hospitals 4 percent of their revenues to help cover higher reimbursements for those who treat patients enrolled in Medi-Cal, the state’s Medicaid program.
Here is the full story. I can't imagine that the state of California has the fiscal wherewithal to deal with the inevitable results of these incentives.
Posted by Tyler Cowen on January 9, 2007 at 10:53 AM in Medicine | Permalink
Comments
I predict a tremendous number of small businesses firing employees to get below the 10 number, and then re-hiring them as "Independent Contractors" for exactly the same wage
Posted by: lannychiu at Jan 9, 2007 11:07:51 AM
Hmm. How is a tax on hospitals going to pay for insurance, when the tax is completely passed on to insurers? I don't get that one at all. Next California will impose a tax on teachers' income, in order to fund increases in teacher salaries.
Posted by: DK at Jan 9, 2007 11:35:57 AM
Part of the Massachusetts universal-coverage plan (which I believe kicks in fully in July) requires employers above a certain size who do not offer health insurance to pay some fine (I think per-employee) to the state care pool. This fine is absurdly small when compared to the actual cost of health insurance for employers -- not even on the same order of magnitude. I am curious to see how this will play out.
Posted by: Andromeda at Jan 9, 2007 11:37:23 AM
DK,
While that strikes me as silly too, I suspect what was left out of the story is that the reimbursement increase is greater than 4%, so it is essentially a redistribution from doctors/hospitals that don't treat Medi-Cal patients to doctors/hospitals that do. They are, in essence, trying to eliminate the incentive to not treat Medi-Cal patients.
Posted by: Jim Clay at Jan 9, 2007 11:50:32 AM
lannychiu,
Good call.
Posted by: Jim Clay at Jan 9, 2007 11:51:20 AM
Physicians and hospitals are already subsidizing the uninsured, in
the "cost-shifting" system encouraged by the feds for the past 40 years.
(In the original scenario, private insurers were to overpay to compensate
for underpayment by Medicare and Medicaid, over the years this has shifted largely
to pinning charity care onto hospitals and docs by mandating treatment -
e.g., the EMTALA regs).
So this is a formalization of what the feds wanted, excpet now the state is
taking responsibility for the process, which could be a noble experiment
or could be an absolute disaster.
Time will tell.
Posted by: save_the_rustbelt at Jan 9, 2007 11:56:37 AM
Companies not offering health insurance tend to have low paid workers. They will take the 4% offer rather than buying insurance.
As for taxing hospitals and doctors, why not tax nurses and pharmacies too?
If the state is going to do this then the tax should be put upon health insurance company revenues or by income tax. The costs of the poor should be spread across the largest base.
Posted by: K at Jan 9, 2007 12:49:47 PM
I especially liked this part: The proposal would prohibit insurance companies from denying coverage to people because of their age or health status. They would also be required to put 85 percent of their profits directly into health care services.
What does that last part mean? I don't really know, but reasonable guesses would
result in it either being so onerous that the big insurers will stop doing
business in the state, or else so gameable as to be meaningless.
As for the cost shifting to the hospitals and doctors, they'll just raise their
prices so that their customers share the pain. Given that demand for healthcare is
fairly inelastic I predict that they will be largely successful in offloading the
impast, which means that the losers will be healthcare consumers who aren't
beneficiaries of this new largesse.
The government of CA will also lose, I predict. I don't see any sign that they've
accounted for a response to these incentives, so their budget projections are
very likely to be far too optimistic.
Lastly I wonder how many businesses that currently offer health insurance will
now choose to stop doing so. They can re-employ their high-wage employees as
contractors (as suggested above) while retaining the lower-paid at new, higher
wages, and still have money left over to pay the 4% tax. The workers shouldn't
mind too much since they'll be covered under this plan.
Posted by: bbartlog at Jan 9, 2007 1:00:43 PM
There was a piece on this on NPR yesterday. Why can't major policies like this be picked apart for all to see? Also, do Arnold's advisers take these sort of objections into consideration, and just up the price to overcome? I can't believe they are just naive.
Posted by: Chi at Jan 9, 2007 1:32:45 PM
The incentives as described here, both for MA and CA, seem designed to push most employees into the state insurance pool. Maybe that's the goal. More and more employers decide to terminate coverage (insurance gets more expensive each year, and it would be easy for health care "reform" in a state to make it much more expensive), pay the extra money to go into the state pool, and let their employees join it. The state pool becomes the de facto statewide insurance plan, with only a small fraction of wealthy people and extremely valuable employees maintaining private insurance.
Is there some reason this is unrealistic? I'll admit I haven't studied health care economics much.
Posted by: albatross at Jan 9, 2007 2:25:24 PM
"The incentives as described here, both for MA and CA, seem designed to push most employees into the state insurance pool."
Maybe I'm on glue, but that's the only incentive (or disincentive if you want to look at it that way) in this plan. I must be missing somethng big rather stupidly, so please, someone tell me what I am overlooking.
Posted by: Brian at Jan 9, 2007 2:46:55 PM
The worst part of these "universal health insurance" proposals is the legislative engrainment of the link between employers and health insurance. What does ones job have to do with health "insurance"? It's such an arbitrary link. Non-rational people are frustrating! Ahhhh!!!!!
Posted by: Christopher Monnier at Jan 9, 2007 2:52:43 PM
Isn't this a multi-round game? Isn't a new tax much harder to implement than a rate adjustment on an existing tax?
It strikes me that both MA and CA have the right strategy -- "penetration price" to get into the market, then adjust
price to reach an equilibrium level of customers. They also need to get a critical mass of the voting public to be a part
of the scheme quickly for it to survive.
Also, a year from now they will have much more information about the slope of the demand curve.
Posted by: Phil at Jan 9, 2007 3:01:28 PM
lannychiu and Jim Clay,
Not a good call. Not at all. Independent contractors and employees are not interchangeable in many situations. It would be extremely foolish in many circumstances to attempt to reclassify employees as independent contractors, since this would not only cause problems with whatever California agency is going to enforce these rules regarding health insurance, but also would cause problems with the IRS.
With an independent contractor, you only have only the right to control only the result of the work done but not the means and methods of accomplishing the result. A lot of employers want or need to exercise much more supervision over those they hire.
Actually, the distinction here between employee and independent contractor can become fuzzy at the margins. The difference between an independent contractor is determined by many factors. Needless to say, those factors mean that many workers cannot be classified as independent contractors. Employers already have tax incentives to re-classify their workers as independent contractors. However, they often don't do it because they can't do it.
Finally, it should be noted that this legislation in California can be adjusted to cover independent contractors in some situations as well.
To get an idea of how difficult it can be to reclassify employees as independent contractors, feel free to skim the factors listed below:
From I.R.S. Revenue Ruling 87-41
1. A worker who is required to comply with a business's instructions about when, where, and how he or she is to work is ordinarily an employee, not an independent contractor
2. A business that trains a worker by requiring an experienced employee to work with the worker, by corresponding with the worker, by requiring the worker to attend meetings, or by using other methods, indicates that the person or persons for whom the services are performed want the services performed in a particular method or manner. This implies that they are employees, not an independent contractors.
3. When the success or continuation of the business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business. And of course, more control indicates an employee, rather than an independent contractor.
4. If the services must be rendered personally by the worker, presumably the employer for whom the services are performed are interested in the methods used to accomplish the work as well as in the results. The worker is more likely to be an employee.
5. If the business for whom the services are performed hire, supervise, and pay assistants for the worker, this indicates the worker is an employee.
6. A continuing relationship between the worker and the business for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals.
7. The establishment of set hours of work by the person or persons for whom the services are performed is a factor suggesting that the worker is an employee, not an independent contractor.
8. If the worker must devote substantially full-time to
the business for whom the services are performed, the business has control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work, the worker is likely to be an employee. An independent contractor on the other hand, is free to work when and for whom he or she chooses.
9. If the work is performed on the premises of the business that factor suggests control over the worker, especially if the work could be done elsewhere. However, this fact by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require that employees perform such services on the employer's premises. Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required.
10. If a worker must perform services in the order or sequence set by the business for whom the services are performed, the worker is more likely to be an employee, not an independent contractor.
11. A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed indicates a degree of control, which in turn increases the probability they are an employee.
12. Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on § straight commission generally indicates that the worker is an independent contractor.
13. If the business for whom the services are performed ordinarily pay the worker's business and/or traveling expenses, the worker is ordinarily an employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the worker's business activities.
14. The fact that the person or persons for whom the services are performed furnish significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship.
15. If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees, that factor tends to indicate that the worker is an independent contractor. On the other hand, lack of investment in facilities indicates dependence on the business for whom the services are performed and, accordingly, the existence of an employer-employee relationship.
16. A worker who can realize a profit or suffer a loss as a result of the worker's services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the worker who cannot is an employee. See Rev. Rul. 70-309. For example, if the worker is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the worker is an independent contractor. The risk that a worker will not receive payment for his or her services, however, is common to both independent contractors and employees and thus does not constitute a sufficient economic risK to support treatment as an independent contractor.
17. If a worker performs more than de minimis services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent contractor. However, a worker who performs services for more than one person may be an employee of each of the persons, especially where such persons are part of the same service arrangement.
18. The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.
19. The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the worker to obey the employer's instructions. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifications.
20. If the worker has the right to end his or her relationship with the person for whom the services are performed at any time he or she wishes without incurring liability, that factor indicates an employer- employee relationship.
Posted by: Ragerz at Jan 9, 2007 3:34:52 PM
Christopher:
"Non-rational people are frustrating! Ahhhh!!!!!"
But it is not rational to be frustrated. So, this means that you are not-rational. Which means that, logically, you must be frustrated with yourself for being frustrated with non-rational people.
Posted by: Ragerz at Jan 9, 2007 3:37:27 PM
Health care and jobs are rationally linked. Most grad schools give health care (albeit not always excellent) to students, because a sick grad student can't TA, research, or graduate and become successful.
My father stays at his job in part because of the excellent offer of health care. He already takes days off of work to travel to help my grandmother see doctors, etc. Concievably, his work (or work reliability) would be impacted if his family were in less good health.
Different jobs require different levels of health and health security, so it makes sense to tie, no?
Posted by: chi at Jan 9, 2007 3:58:50 PM
Ragerz
What makes the first sentence of your last post true?
Like most forms of regulations and interventions this will ultimately be an enormous failure. Prices will rise, taxes will rise, the budget will expand, and a bad situation will become much much worse. And every player in the game will do their darndest to shit the costs on to someone else. Employers onto consumers, the legislature onto taxpayers, doctors onto the legislature and consumers back onto the legislature. This ought to be fun to watch this program fail. Nothing like watching politicians doing INSANE things in the name of "social cohesion" and "shared responsibility."
Posted by: John Pertz at Jan 9, 2007 4:05:33 PM
Another reason it might make sense to tie is that insurance companies have no reason to assume that all the employees that work for a particular company have health problems. In contrast, in the insurance market for private individuals, those that seek health insurance are much more likely to have pre-existing conditions.
Posted by: Ragerz at Jan 9, 2007 4:07:41 PM
Ragerz,
While I certainly understand the government's motivation in preventing such gaming of the system, I am still confident that the percentage of employees working as "independent contractors" will rise, in some form or fashion, as a result of the legislation (if it passes).
When substantial sums of money are on the line, people tend to become very creative and persistent.
Posted by: Jim Clay at Jan 9, 2007 4:27:32 PM
I think this is wonderful. Health insurance needs to be available for all. In a recent article appearing in the latest issue of eMaxhealth Health Insurance (http://www.emaxhealth.com/72/) it says clealy that the public wants the US congress also to focuse on Health Insurance and Health care costs as well.
Posted by: Clasian at Jan 9, 2007 5:08:28 PM
I'm not 100% rational. That'd be boring.
But I try to make rational decisions. The argument that healthcare should be tied to ones employer because ones employer benefits from non-sick workers is not completely unfounded, but it's not rock-solid. My employer would benefit from me having a well-maintained, safe, and well-insured car to drive to and from work. Why shouldn't they [be forced to] provide me one? My employer would benefit from me being more educated. Why shouldn't they [be forced to] provide me with more education?
I'm not against employers offering healthcare (or company cars or tuition reimubursement). But I'm against the government mandating that they provide such things. My employer doesn't have the responsibility to take care of my health; if they do, what does that say about my automony as an individual!?
I just don't see how we can give up responsibility without giving up liberty.
Posted by: Christopher Monnier at Jan 9, 2007 5:34:59 PM
@Clasian
I agree with you in full that the american people want congress to do something about health care costs and coverage. They would also like congress to do anything that would lower the price for any good. People want to pay as little as possible for any good.
Now what we really need congress to focus on is univeral Aston Martin coverage, or at least somesort of subsidy to lower the cost.
The American public on average understands very little about the topic. To impliment the amerage american's wishes would be about as smart as following a blind man on a tour of the grand canyon.
Posted by: Carl Marks at Jan 9, 2007 6:55:48 PM
John Pertz asks:
"What makes the first sentence of your last post true?"
I think he refers to the point the sentence where I write: "But it is not rational to be frustrated."
Let me qualify. Under some, less restrictive definitions of rationality, emotion can be part of rationality. However, under a more strict definition, emotion or feeling cannot be any part of rationality. I was using the more strict definition. Clearly, frustration is based on emotion, not logic.
Posted by: Ragerz at Jan 9, 2007 10:48:20 PM
As a programmer, I see a lot of companies gaming the contractor vs employee distinction. Most of the available jobs are for very short term contracts (used to be 3+ months, now 1-3 week diratopm contracts). The documentation is written to appear to follow the IRS guidelines above, yet the actual work conditions are similar to employees, just with no duration nor benefits. So when you hear "we can't get workers" what you're really hearing is "we can't get workers at conditions and wages we are willing to pay."
Posted by: Peter at Jan 9, 2007 11:25:32 PM
Peter,
Did these companies allow these contract programmers to work from home, or did they make them come onto the company premises? Were these workers paid by the job, or by the hour? Did the company make the programmers use company computers, or are the programmers allowed to use their own computers? Were the programmers given sufficient lattitude in terms of how the went about the programming task, or were the heavily supervised?
It could be that some of these people have a legitimate claims against these companies. Employers are obligated to pay half of their employees FICA taxes. But not for independent contractors. So, if these companies were not following the law, these workers are entitled to have half their FICA taxes paid by these companies. Also, the IRS will slap them with a hefty fine.
It is possible to make anonymous tips to the IRS...
Posted by: Ragerz at Jan 10, 2007 1:37:46 AM
