Regulated Compensation

There is a difference between the House and Senate health reform bills I didn’t highlight in my earlier rundown. The House version of the employer mandate requires employers to pay a certain percentage of health insurance premiums: 72.5% for individuals and 65% for families. The Senate has no such requirement, though the Senate’s penalty on employers kicks in if offered coverage is not affordable (i.e. the share of premiums are higher than 9.8% of income for an employee).

To an economist, there’s something funny about these minimum required employer contributions. What actually matters is not how much an employee must pay but what that employee’s total compensation is. Economists generally believe that whatever compensation that an employer provides in the form of an insurance premium contribution (or any other benefit for that matter) is actually paid for by the employee in the form of lower wages. If there is such a one-to-one trade off across components of compensation then it does not matter what proportion is paid by whom. In fact the employee pays it all no matter what the breakdown.

What really matters then is the total premium. Therefore, neither House nor Senate versions of the employer contribution rule make any sense. Instead they ought to impose a rule that pertains to the total premium. For instance, if the total premium (corresponding to the actuarial value of a standard plan) is above some fraction of income then the employer is penalized somehow. Provided that penalty itself is not taken out of wages (and that is a concern) then this type of penalty might have the effect of motivating employers to seek out lower (actuarially standardized) premium insurance products.

As it stands, both House and Senate versions essentially regulate the structure of employee compensation. The House version does so explicitly and Senate’s is a little more indirect. Neither focus on what matters, total premium. That’s rather odd given the objectives of reform.

Later: The Cadillac tax is triggered by high total premium but it isn’t directly related to affordability because income isn’t a criterion.

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