Massachusetts Evades Employer Mandates: Lessons for Other States?

INTRODUCTION Jonathan Gruber's article deals primarily with the political and economic issues posed and resolved by the health insurance reform recently adopted in Massachusetts, which gives only a tiny role to employer mandates. For good reasons, some of them special to Massachusetts, Gruber follows the form of the state plan in giving only small consideration to employer mandates to pay for workers' insurance; he pays much more serious attention to state design and control of insurance options and state determination of financing and subsidy distributions. In my remarks I will to some extent reverse the relative weights by discussing and commenting briefly on design and financing but then discuss at some more length "the dog that almost did not bark" in Massachusetts: pay or play employer mandates and their economic and political implications for other states. Some Preliminaries Before I turn to the question of employer mandates, I want to express some concern about two of the points made in Gruber's article, one an obiter dictum that nevertheless raises an important issue about the net benefits of employment-based coverage as it is usually offered, and the other that links that issue to a key feature of the Massachusetts plan, an organization called the "Connector" that collects and assembles a variety of state-approved insurance options for employers and individuals seeking coverage. Gruber mentions (p. 453) the low 1.3 percent administrative cost reported for universal coverage in Canada and suggests that there might be some merit in the single-payer road not taken in Massachusetts. (A comparable figure for U.S. Medicare, of about 2 percent, is also often cited.) And, indeed, one of the key factors determining the desirabfiity of a set of insurance options is the insurer administrative costs and profits that might occur. As others have noted, there are some statistical and definitional objections to imagining that the very low administrative loading percentage reported for the Canadian plan could be exhibited by arrangements like those in Massachusetts that rely on private insurance for administration. One might note, for example, that the costs of the research and design efforts, which are included in private costs, are largely overlooked in the government's budgets. Research done directly by staff or debates in the federal and provincial legislatures about health insurance, have a cost that should be included. The more serious costs that a tax-financed single-payer system avoids are the high selling and billing costs that accompany voluntary plans that display great variety in the form and type of coverage. The great bulk of the cost of single-payer coverage comes from involuntary taxes. Collecting taxes is generally much less costly than persuading workers or employers to part with premiums, but this apparent advantage conceals a much larger cost. Because practical taxation links agents' tax liabilities to a tax base (wage earnings plus other income) that can be altered by individual choices about how much to work and how to receive income, they generate what economists call an "excess burden": a loss in the value of total economic activity traceable to the distorted incentives. To be sure, it is the overall pattern of taxes and redistribution imposed by government at all levels, which determines the marginal excess burden, but if a publicly provided health benefit were to be financed by increases in taxes following the usual distributional pattern (rather than uniform lump sum head tax add-ons), moving nearly a trillion dollars of national health care spending from the private to the public sector would generate a substantial distortion cost. This cost is estimated empirically to be at least 25 percent of total collection at prevailing tax rates in the United States, and probably would be similar in Canada. Obviously, this hidden but real cost of transferring financing from private payment to government taxation swamps any savings from lower explicit insurer administrative costs. …