Cost and Coverage: The Impact of Implementing Various State Health Care Reform Proposals Nationally. Payroll Tax with Automatic Public Program Coverage

06/01/2008

In order to have a significant impact on the uninsured, the penalty needs to be high enough to generate a significant amount of revenue that can be used to subsidize alternative coverage for employees of firms paying the tax.  These employees could be enrolled in alternative programs such as a publicly administered insurance program or a state benefit plan.  Typically, employer mandate penalties of this magnitude are implemented in the form of payroll taxes.  

For this analysis, three different payroll taxes are applied: 6%, 8%, and 10%.  Employers with 11 or more workers would be required to offer coverage and pay at least 75% of the premium, or else pay the payroll tax.  Coverage must be offered to employees working 100 or more hours per month.  Workers would be required to take the employer offer unless they have creditable coverage from another source, and workers of firms who pay the tax are automatically enrolled into a new publicly administered heath insurance program.  No subsidies are provided to employees for their share of the premium.

Coverage impact.  With a payroll tax penalty between 6 and 10%, an employer mandate would result in a net reduction of the uninsured of 20.2 million (Figure 7).  The reduction in the uninsured does not vary despite the range of the tax because the model assumes that all employees of firms with 11 or more workers are required to take coverage if offered and workers in firms that pay the penalty are automatically enrolled in the publicly administered program.  This holds the number of newly covered individuals constant, but as the payroll tax increases the number of people gaining coverage through the publicly administered program decreases and the number gaining coverage with ESI increases.  This is because it is assumed that the lower the payroll tax, the more likely firms would be to pay the tax instead of offering private coverage, while the higher the tax the more likely they would be to offer private coverage. 

As indicated in Figure 7, with a 6% payroll tax, 66.4 million people would be covered in the publicly administered program, including 14.3 million previously uninsured, while 115.9 million workers would have ESI coverage, including 5.9 million previously uninsured.    With an 8% payroll tax, 37.1 million people would be covered in the publicly administered program, including 10.6 million previously uninsured, while 145.2 million people would have ESI coverage, including 9.6 million previously uninsured.  Finally, with a 10% payroll tax only 21.7 million people would be covered in the publicly administered program, including 8.1 million previously uninsured, while 160.6 million would have ESI coverage, including 12.1 million previously uninsured.

  6% Payroll Tax 8% Payroll Tax 10% Payroll Tax
Figure 7. Changes in Enrollment under an Employer Mandate with Various Payroll Tax Assessments (in millions)
Number of People Covered Under Public Program 66.4 37.1 21.7
Previously Uninsured 14.3 10.6 8.1
Previously Non-Group 2.3 1.5 1.1
Previously ESI Coverage 49.8 25.0 12.5
Number of People Covered by Employer 115.9 145.2 160.6
Previously Uninsured 5.9 9.6 12.1
Previously Non-Group 1.8 2.6 3.1
Previously ESI Coverage 108.2 133.0 145.4
Number of People Effected by Employer Decision 
Insuring Firms - Continue to Offer 115.2 143.1 157.4
Insuring Firms - Pay Tax 56.9 29.0 14.7
Previously Non-Insuring - Offer Coverage 0.7 2.1 3.2
Previously Non-Insuring - Pay Tax 9.5 8.1 7.0
Net Reduction in Uninsured 20.2 20.2 20.2
Source: Lewin Group estimates using the Health Benefits simulation model (HBSM)

Cost impact.  Overall, the net public cost of the program decreases as the payroll tax penalty for the mandate increases.  With a 6% payroll tax, the net public program cost totals $165.1 billion, while the net public cost with a 10% payroll tax is only $57.2 billion (Figure 8).  Net Federal costs for administering the public insurance program are reduced by employer and employee premiums, and range from $176.2 billion with a 6% payroll tax to $63.4 billion with a 10% payroll tax.  State and local governments achieve savings as the result of increase tax revenues as employers pass on some of their savings to employees in the form of higher wages.

Overall, employers would see a reduction in spending with a 6% or 8% payroll tax.  Firms that currently offer would see a reduction in health spending by electing to pay the payroll tax instead of administering a health insurance benefit that far outweigh the cost of the payroll tax; these savings would offset the costs incurred by newly offering firms, resulting in overall savings for employers.  The lower the payroll tax, the higher the savings achieved for employers.  With a 6% payroll tax, employer spending overall would decrease by $98.6 billion; it would decrease by $20.5 billion with an 8% payroll tax.  However, with a 10% payroll tax, employers would be spending an additional $10.2 billion overall because savings achieved by currently insuring firms would not offset spending by newly insuring firms.

Previously uncompensated care costs would decrease by between $9.9 and $13.1 billion.

  6% Payroll Tax 8% Payroll Tax 10% Payroll Tax
Figure 8. Summary of Public Program and Employer Costs under an Employer Mandate with Various Payroll Tax Assessments (in billions)
Net Public Costs $165.1 $88.4 $57.2
Spending by Program
Federal Government Costs $176.2 $96.3 $63.4
  Public Program Benefits & Admin. $332.9 $191.8 $122.0
  Employer & Employee Premiums ($124.6) ($86.4) ($58.3)
  Tax Revenue Loss/(Gain) Due to Wage Effects ($32.1) ($9.1) ($0.3)
State and Local Government Costs ($11.1) ($7.9) ($6.2)
  Other State and Local Programs ($7.6) ($6.8) ($6.0)
  Tax Revenue Loss/(Gain) Due to Wage Effects ($3.5) ($1.1) ($0.2)
Change in Spending for Employers a/
Change in Spending for Employers ($98.6) ($20.5) $10.2
  Currently Insuring Firms ($114.2) ($40.8) ($12.6)
  Previously Non-Insuring Firms $15.6 $20.3 $22.8
Uncompensated Care
Net Reduction in Uncompensated Care ($13.1) ($10.6) ($9.9)

a/ Includes public and private employers. 

Source: Lewin Group estimates using the Health Benefits simulation model (HBSM).

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