New Penalty Reduces Income, Job Growth
The following article is from the new report from Senator Tom Coburn, M.D. and Senator John Barrasso, M.D., titled "Grim Diagnosis : A check-up on the federal health law". (press release) Thus far, we have posted both the report and sections of the report. This article illustrates the employer mandate to provide health care or face stiff fines. What impact will this have on the marketplace? Read on...
Related: Hundreds of thousands will lose their jobs
( see full report with footnote references to content here Bytes )
Many Americans are aware of the controversial “individual mandate” in the health care overhaul. But an equally problematic provision is that one that fines businesses who do not provide government approved health insurance to their employees.
Sections 1513 and 1003 of health care bills that passed Congress created new penalties for businesses that do not offer health insurance to their employers. While proponents insist this is not a mandate because businesses are penalized but not required to offer coverage, in function this requirement is a defacto “employer mandate.”
Beginning in 2014, businesses with more than 50 employees will be fined $2,000 per employee if they do not provide government approved health insurance for their employees.
This intervention in the labor market creates a permanent disincentive against business growth. If a 50-employee small business that did not offer health insurance wanted to expand by merely adding one new employee, they would become subject to the employer requirements of the law. So it is actually in the business’ interest not to hire an additional employee, lest they be hit with thousands of dollars in fines. For a fraction of that money, the business could hire a part-time employee or independent contractors to perform tasks, rather than grow the business by adding an employee.
Businesses and Employees Concerned about Employer Provision
Sadly, this employer provision hurts low-income, minority workers the most. Dr. Kate Baicker found in a study that one-third of “uninsured workers earn within $3 of the minimum wage, putting them at risk of unemployment if their employers were required to offer insurance.…” Even worse, “workers who would lose their jobs are disproportionately likely to be high school dropouts, minority, and female.… Thus, among the uninsured, those with the least education face the highest risk of losing their jobs under employer mandates.”
In a letter last year, more than 1,500 business and pro-business organizations told Congress “this provision will kill many jobs.” Earlier this year, the National Federation of Independent Businesses (NFIB) arrived at a similar conclusion. “Economic research has shown time and again that mandates are a ‘one-two punch’ where the cost is first borne by the employer, but is ultimately paid by the employee – through job loss and lower wages.” In May, NFIB said that small businesses across the country are gravely concerned “the health care law will devastate their business and their ability to create jobs.”
The employer provision means businesses either reduce jobs and wages or just stop offering health coverage. Many businesses have already begun questioning whether or not it makes financial sense under the new law for them to even continue to offer health insurance. In August, the hamburger chain White Castle announced that changes to health insurance in health overhaul will consume “roughly 55 percent of its yearly net income after 2014.” This massive hit to the company’s business model may make it hard for the company – which employs more than 10,000 individuals across the country – to keep its doors open.
Other restaurant chains are weighing their options as well. The “entire restaurant industry will have trouble dealing with costs the bill imposes in 2014, including a $2,000-per-worker penalty,” according to the National Council of Chain Restaurants. One such example is George Ebinger, the owner of several International House of Pancakes restaurants. Ebinger anticipates he will increase prices and perhaps layoff employees to generate the $220,000 he expects will be needed to cover the cost of the penalty.
Many retailers, who employ thousands of entry-level and part-time employees, are facing a similar dilemma in calculating the trade-offs between coverage for employees and costs to their business. The new health overhaul is so complex that the National Retail Federation (NRF) created a “Health Mandate Cost Calculator” to assist employers in evaluating the landscape of choices they face. The business group says its member companies are concerned about the “job-killing mandates on employers” under the new law. In analyzing the employer provision, a representative of the business group admitted, “We do worry about this discouraging employment, particularly when employment hasn't taken off.”
Nonpartisan Experts Agree on Negative Impact of Employer Provision
The cost of health insurance remains the primary concern for most companies. According to the Congressional Research Service, less than half of small businesses offer health coverage and these employers cite the cost of health care as their primary reason for not offering coverage. Unfortunately, the defacto employer mandate not only penalizes businesses that do not purchase expensive health coverage, it creates damaging distortions in the labor market that will lead to lower wages and fewer jobs.
This is the conclusion reached by nonpartisan experts, and even one of the President’s former advisors.
The Congressional Budget Office concluded that “employers’ decisions to hire workers will also be affected in some cases by the health care legislation.” CBO specifically noted:
“Employers with 50 or more employees will be required to pay a penalty if they do not offer insurance or if the insurance they offer does not meet certain criteria and at least one of their workers receives a subsidy from an exchange. Those penalties, whose amounts are based on the number of full-time workers in the firm, will, over time, generally be passed on to workers through reductions in wages or other forms of compensation. However, firms generally cannot reduce workers’ wages below the minimum wage, which will probably cause some employers to respond by hiring fewer low-wage workers. Alternatively, because firms are penalized only if their full-time employees receive subsidies from exchanges, some firms may instead hire more part-time or seasonal employees.”
The employer provision will lower wages and lead to less jobs because workers, not businesses, ultimately feel the impact of taxes and fines. The Congressional Budget Office also found that an employer penalty “would impose a new cost on employers” which will be passed on to employees. “Employers who chose to pay the fee rather than offer health benefits would be likely to offset at least some of those costs by paying lower wages or employing fewer people.”
A member of the Congressional Budget Office's panel of health advisers, Dr. Kate Baicker, agrees. Her research found that “when it is not possible to reduce wages, employers may respond in other ways: employment can be reduced for workers whose wages cannot be lowered, outsourcing and reliance on temp agencies may increase, and workers can be moved into part-time jobs where mandates do not apply.”
Experts at the Congressional Research Service (CRS) expect the same outcomes as well. “Economic theory suggests the penalty should ultimately be passed through [as] lower wages [to an employee]. But, “if firms cannot pass on the cost in lower wages, the higher cost of workers may lead firms to reduce output and the number of workers” Unfortunately, CRS estimates that about one in five employees work for a business that could be negatively impacted by the new employer penalty.
Even the former director of the Office of Management and Budget, Peter Orzag, has said that increased costs to employers will be passed on to employees as reduced pay. While serving as director of the Congressional Budget Office, Mr. Orzag said that “the economic evidence is overwhelming, the theory is overwhelming, that when your firm pays for your health insurance you actually pay through reduced take-home pay. The firm is not giving that to you for free. Your other wages or what have you are reduced as a result. I don’t think most workers realize that.”
It is not difficult to see why the employer community is deeply concerned. Health care costs continue to climb. An employer penalty will reduce wages and jobs. It is clear that sections 1513 and 1003 of the health care overhaul will lead to lower wages and fewer jobs.
FULL REPORT :A Grim Diagnosis: A check-up on the federal health law
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