Free Rider: Not Just Bad, Confusing!

Along with other bloggers, I have been trying to understand pieces of the Senate Finance Committee’s health reform bill. In particular, I now have my head around the free rider provision.

According to my reading of the Chairman’s Mark of the Senate Finance bill, Ezra Klein summarized the penalty language perfectly. As he wrote if an employer doesn’t offer insurance then it “will pay the lesser of A) the average subsidy in the exchange times the number of subsidized workers or B) $400 times the total number of workers.” [Bold emphasis mine.]

The important point here is that in either case–A or B–the penalty has nothing whatsoever to do with the the specific subsidy to which an individual worker is entitled. It is not even related to whether that worker has single or family coverage. (See also pages 31-32 of the Chairman’s Mark.)

However, Klein and Robert Greenstein/Judith Solomon claim that the free rider provision provides a disincentive to hire workers who would require family as opposed to individual coverage. Klein says “it particularly discriminates against low-income parents” and Greenstein/Solomon say it will make it more difficult for “parents with children to be hired because the proposal would require employers subject to the requirement to pay much larger sums.”

Where are Klein and Greenstein/Solomon getting these ideas? Not from the Chairman’s Mark. Greenstein and Solomon apparently have some additional information not included in the Chairman’s Mark. In footnote 2 of their recent Center for Budget and Policy Priorities paper on the issue they write

The Baucus plan released today does not clarify whether there would be one amount that employers would be charged for all full-time workers who receive subsidies, irrespective of whether an employee’s subsidy is for individual or family coverage, or whether employers would be charged the average subsidy for individual coverage for employees getting that type of subsidy and the average subsidy for familycoverage for employees receiving that type of subsidy. We are informed that the Baucus plan takes the latter approach.

So, that’s a very bad idea. If the free rider provision becomes law I hope it is the Chairman’s Mark version that Klein summarized that prevails and not the one Greenstein and Solomon believe Baucus intends. The Chairman’s Mark version does not have the perverse incentive to prefer the hiring of single workers while the version Greenstein and Solomon believe Baucus prefers would.

While on this topic, I want to patch up a point I raised in my prior post on the free rider provision. I wrote that employers have no financial incentive to pay higher wages to avoid the penalty because the subsidy trends down with increasing income. This is correct reasoning but the premise is wrong.

What is relevant is not the subsidy but the penalty. And, as described above, that is not tied to the specific worker subsidy but is a fixed amount related to either the average subsidy in the state’s exchange or $400 (or possibly differing by family or individual coverage). That is, the penalty doesn’t trend down with a worker’s income. It either doesn’t change at all (as could happen under case B, second paragraph above) or it drops from a fixed amount to zero once the worker’s family income is high enough (case A).

So, if an employer can raise a worker’s wage such that the worker’s family income is so high that the worker is no longer subsidy eligible, the employer might avoid the penalty. It will only be cost effective for the employer to try this if it doesn’t have to raise the wage too much (by no more than the state average subsidy). Of course the best way for an employer to avoid the penalty is to hire a worker from a higher income family while offering the same low wage.

I’ve agreed with policy wonks all along that the free rider provision is a bad idea. Only now do I think I fully understand why.

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